I just started to serve on the board of directors for a co-op and I am just full of ideas- I just need help with the details. Some of our store employees are also students. I thought it would be a good idea to give a scholarship or grant to one of our student-employees. I was thinking a once a year gift of $1000.00. How would I set this up( I have not proposed it as yet- I just trying to figure out how.) what would be a good way to decide the winner- essay, name out of a hat, board directors voting…? And, would we or the winner have to pay taxes on it- how could we make it tax free? Would we have to have a formal policy to do this annually?
Do we need to connect an outside company to do it? I would like to keep it small, easy to do, without a large initial investment. Any advice?
Since this is mainly asking for advice, I think it is better suited for IMHO.
Colibri
General Questions Moderator
If you want the money to be fungible (so students can use it at any institution), this won’t work. But if you have an institution in mind, say your local college, I’d bet the development office would be more than happy to help you do this. It’s an awesome idea, by the way. 
Here’s how we did it, and it’s rather different from your situation. During the time when our nephew was in college and med school, we loaned him $1000 a year, to be paid back with no interest when he could handle it. Our accountant said the only way we could get a tax break was it the nephew didn’t pay it back. So, we got a promissary note every year, and if he defaulted, we could write it off as a loss. He paid it all back, so we got no tax break, but we’re very happy with the results.
I am familiar with this situation from working in HR and the fact that lots of companies do, or consider doing, similar things.
Is your coop already a non-profit? I can’t think of any reason why you would have to pay extra taxes because you gave the money as a scholarship, but I am not sure it would create any additional tax deductibility either. The tax implications definitely need the advice of a tax expert in your state.
For the student, the taxability of scholarships depends on what they use the money for. Money for tuition, fees and books is generally not taxable, but if the student already has scholarships that cover those and receives additional scholarship money toward living expenses, that can be taxable. Bottom line, your organization can’t control what’s taxable to the student.
If you decide to do this, I recommend having an outside group decide the winners, and have very clear criteria. Start with the big picture vision thing–what type of students do you most want to help. But then get down to the nitty gritty. Do you care about need, merit, or both? Do you care if the student is studying something similar to your organization’s mission? Do you want to set a minimum GPA to maintain? Undergraduate only, or grad/professional school, too? Minimum amount of time they have worked for your coop? Requirement to continue working for the coop?
In a way this is a wonderful idea, but from an organizational perspective I would say never underestimate the potential for hurt feelings and attempts to manipulate the process.