Our nonprofit runs an annual “Trunk Party” through which we give graduating high school seniors, who will be living on campus in the fall, 20 essential items (from bedding to notebooks) they will need for college life. Because many schools are considering virtual classes in the fall, instead of gifting items, we would like to award monetary gifts like a book scholarship. We saw that the IRS has procedures around scholarships specifically and want to know what the limitations are around other types of monetary rewards like a book scholarship?
The IRS requires advanced approval for scholarship programs run by private foundation, primarily requiring a sufficient pool of potential recipients to qualify as an indefinite charitable class, and selection based on non-discriminatory objective criteria, such as grades and/or need, by an independent committee. Family members of the selection committee or of “disqualified persons” with respect to the foundation should not be granted scholarships.
A public charity does not have to get its procedures approved in advance (although a newly formed group seeking exemption will have to set out its procedures on its Form 1023 application for recognition of exemption), but it should utilize the same principles in making its selection. Hopefully you have appropriate procedures in place for what you have been doing until now.
I assume you are also aware that not all forms of “scholarships” are exempt from income tax for the recipient. A scholarship grant is excludable from income under section 117 of the Tax Code if it is for payment of tuition and fees at an educational institution and/or books, supplies and equipment required for courses at the institution. It sounds like some of your 20 essential items might not qualify for such exclusion, although money for books for required courses probably would.
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