Can I process an interfund transfer between two different legal entities?

This would not be an interfund transaction.  By definition, an Interfund is a gift and grant that occurs between two funds within the same legal entity.  If your database contains agency and non-agency funds, usually the agency is not part of your legal entity and gifts between the agency and a foundation fund would be a regular gift and grant.

One way to check out your decision would be to ask yourself if the gift number and the grant number would both be reported on the same IRS 990 report. 

• If you would include the gift amount in the revenue number and would include the grant amount in the grant number OR exclude both values from the report, then this transaction is an Interfund. 
• If only one side would show up on the 990, then this isn't an Interfund, it is a regular gift or grant.