Grant Eligibility Requirements: Excluding Nonprofits Without Even Trying

One of the benefits of working at the Johnson Center is the numerous interactions with nonprofits and foundations across the nation — in classes, workshops, on the phone, in meetings, and recently even in person!

Throughout the past several months, many of these conversations have reflected a desire to examine traditional donor, nonprofit, and foundation practices because “the way we’ve always done it” is a less acceptable answer each day. But from a data perspective, too often these conversations remain rooted in outdated conceptions of the scale and breadth of the sector, and major misconceptions about the size of a “typical” nonprofit.

Here are some examples of conversations that reflect this “business as usual” mentality — and perpetuate exclusionary practices without meaning to do so.

How often have you heard statements like these?

All calculations and totals in this blog post are based on the Internal Revenue Service Exempt Organization Business Master Filing as of December 2020.

Explore the most up-to-date information at IRS.gov.

Myth #1: “Finding information about a nonprofit is easy. After all, most nonprofits file a 990!”

No, they do not.

Nonprofits in the United States file one of three forms with the Internal Revenue Service (IRS) based on their financial situation, with two primary exceptions:

Organizations with annual revenue ≤ $50,000 file the Form 990-N
Organizations with annual revenue < $200,000, or with assets < $500,000, file the Form 990-EZ
Organizations with annual revenue > $200,000, or assets ≥ $500,000, file the Form-990

The exceptions? All private foundations file the IRS Form 990-PF, and some nonprofits are not required to file at all. Religious organizations — including many houses of worship — and nonprofits created by governmental entities are two of the most frequent non-filers under current requirements.

In fact, when you put all five categories together, only about one-sixth (15%) of the nation’s 1,767,461 nonprofits files an IRS Form 990. If you base your view of the nonprofit world on IRS Form 990 filers alone, you are excluding 85% of the nonprofit universe. Put another way, that’s leaving 1.5 million nonprofits off the table.

“If you base your view of the nonprofit world on IRS Form 990 filers alone, you are excluding 85% of the nonprofit universe … that’s leaving 1.5 million nonprofits off the table.”

Most nonprofits (52%) file what is commonly called the “e-postcard” return (officially known as the Form 990-N), reflecting total annual revenues of under $50,000 per year. As the name implies, there is far less information available about these numerous, but small, nonprofits compared to their larger Form 990-filing peers.

Myth #2: “Our database is really good. We’re only missing ‘a few’ organizations.”

“Can you provide us a list of the nonprofits in this area? We want to make sure we’re sending our new grant criteria to the hundreds of nonprofits in our multi-county region, not just our regular applicants and robust mailing list.”

Credit belongs to this foundation. They had a database of approximately 450 nonprofits in their community and freely admitted that it likely missed some of the universe. When they asked for the data pull, they told me they expected around 1,200 total organizations — meaning they thought their database was off by a factor of three compared to the universe. The phrase “worst-case estimate” jumped out of their email.

The actual result? They were off by a factor of 10. Including all nonprofits, the IRS records reported more than 13,700 active nonprofits in their region. Even if you knock out the non-reporting nonprofits and private foundations, that still left more than 11,900 nonprofits in the region, which is a far cry from the 1,200 they were expecting.

No matter how good you think your database is, check your total number of records against the “gospel” of nonprofits: the IRS Exempt Organizations Business Master File (“Master File”). That's how the Johnson Center populated our online data tool, Community Insight, with basic statistics for every registered nonprofit in the United States as of December 2020.

Myth #3: Age equals experience; experience equals efficacy.

“My foundation is committed to equity-focused initiatives. That’s why we require our grantees to show at least five years of programming with communities of color.”

A common variation on this is, “We require our grantees to have been in operation for at least three (or five, or seven, or 10) years.”

According to the December 2020 Master File, 25% of nonprofits are seven or fewer years old as organizations. Therefore, requiring grantees to be in business for at least seven years, let alone show at least seven years of activity in a specific programming area, automatically excludes 25% of the universe. If you require ten years of history, this automatically excludes more than one-third of all nonprofits.

The share of nonprofits at each age varies greatly by the type of nonprofit under consideration. Most nonprofits start off small, meaning they begin their lives as 990-N or 990-EZ filers, only reaching the thresholds of the Form 990 later on. Requiring seven years of life, therefore, excludes at least one-third of the smallest nonprofits (990-N filers), one-fifth of 990-EZ filers, but only 10% of 990 filers.

Other age breakdowns are included in the table below.

Percentage of Nonprofits This Age or Younger (e.g., 10% of private foundations are two years old or younger)
	5%	10%	15%	20%	25%	33%	50%	75%	90%
Private Foundations	1 Year	2 Years	3 Years	4 Years	6 Years	9 Years	17 Years	28 Years	52 Years
All Nonprofits (excluding private foundations)	2	3	4	5	7	9	19	46	66
990-N Filers	1	2	3	4	5	6	11	37	65
990-EZ Filers	3	4	6	7	8	11	19	37	59
990 Filers	5	7	9	12	15	20	28	46	69

Especially when we are talking about issues of equity, some of the most equity-focused nonprofits have been established in the last three years — precisely in response to racial justice concerns across the United States. Therefore, any age requirement likely excludes a larger share of these newly formed, extraordinarily topical, nonprofits.

Myth #4: Audits should always be a required piece of grant application/administration.

“My foundation’s board is committed to fiscal stewardship. That’s why we require all of our grantees to provide an audit as part of the application process.”

Really? All grantees?

“Well, all grantees with budgets of more than $250,000.”

Even among the largest nonprofits that file the full IRS Form 990, audits occur in a minority of all entities — and remember that only 15% of all nonprofits file a 990, so if less than half of the 990 filers have an audit, the share of 990-EZ and 990-N filers with an audit is likely to be much, much lower.

In other words, requiring an audit by definition excludes more than half of the potential grantee universe! Similar statements can be made for written whistleblower and document retention policies. In fact, only written conflict of interest policies are indicated by a majority of nonprofits.

Compounding the Exclusions

The picture gets even bleaker when a policymaker, nonprofit, or foundation combines the grant eligibility requirements above. For example, if a foundation requires prospective grantees to have an audit and be at least 5 years old — presto! — they have just excluded 57% of all nonprofits that file the 990… and likely the vast majority of all 990-EZ and 990-N filers as well.

This is not merely an academic concern. Suppose you are part of a governmental agency, in charge of distributing some of Michigan’s $10.1 billion in American Rescue Plan relief funds, or Colorado’s $5.9 billion (click here for a state-by-state breakdown of ARPA funds). You know you need to partner with nonprofits to help deliver programs and services to children, families, and unemployed adults in response to the pandemic. For economies of scale and contracting ease, you also do not want to sign agreements for less than $50,000.

So, being a wise fiscal steward, you require all potential nonprofit partners to:

have an audit,
have been in operation for at least 5 years, and
have a total budget large enough that a $50,000 award will not compose more than 25% of the organization’s total revenue.

Those criteria are perfectly reasonable, understandable, and logical. I can picture the heads nodding around the town council meeting when someone announces that this is how Rescue Act money will be distributed through a competitive process.

We know from the example above that just the first two bullets exclude 57% of all IRS 990 filers alone (or 9% of the total nonprofit universe). Adding the revenue target of $200,000 knocks out every single 990-N (52% of nonprofits) and 990-EZ (9%) filer by definition.

In total, those three criteria exclude at least 70% (9% + 52% + 9%) of all nonprofits in the United States.

It’s quite a conundrum.

How do you accurately describe, let alone keep in mind, a sector that includes everything from Elk’s clubs, to zoos, to massive hospital systems, to independent colleges?

Takeaway #1: The nonprofit sector is bigger than you think — and more hidden than you remember.

As a sector, we need to be much better with our language.

When we talk about “all nonprofits,” are we talking about the universe of nonprofits? All nonprofits that file the 990? All nonprofits that have paid staff? All operating nonprofits, excluding community and private foundations, but including both charitable and non-charitable entities? Or just all operating charities — with paid staff, volunteers only, or both?

Takeaway #2: Why do you need that?

As part of any financial process — a subcontract from a nonprofit, an RFP from a governmental agency, or a grant round from a foundation — it is (long past) time to carefully consider both whether an entity really needs that piece of information, and if so, when it makes sense to collect it (and what other information might substitute for the requirement).

PEAK Grantmaking's online community recently had a robust discussion about when in a grantmaking process foundations asked for entity financials, org charts, and audits. Some asked as part of the application, some asked as part of the award process; some swore by the request, some could not understand why those documents were useful. While there is no blanket answer, by reviewing your organization’s requirements you can get a better handle on how many nonprofits will never even get the chance to answer the question.

Only by remembering the incredible breadth of the sector can we start to make inroads to a more inclusive philanthropic response to any public challenge.

How to Exclude Nonprofits Without Even Trying: Grant Eligibility Requirements Narrow Your Pool