IRS OKs Program-Related Investments for Foundations

The Obama administration has assured private foundations that they can use a wide variety of financial tools to achieve their charitable purpose.

Last week, the U.S. Treasury Department and the Internal Revenue Service finalized regulations easing the way for private foundations to make program-related investments.

PRIs are investments such as loans, loan guarantees and equity investments whose main purpose is to accomplish a foundation’s charitable aims, and not to generate financial returns.

The Bill and Melinda Gates Foundation is a major user of program-related investments, including a private equity fund that finances private-sector health care programs in Africa and a preferred equity investment for vaccine development.

PRIs are neither a grant, nor just an investment, but are in some ways like both, according to a statement by David Wilkinson, director of the White House Office of Social Innovation and Civic Participation. 

When deciding how to invest the foundation’s assets, a foundation manager can factor in how the investment’s anticipated charitable outcomes may advance the foundation’s mission in addition to the financial returns that are typically considered. 

Thus, a foundation may prudently choose to make investments that provide both a charitable and a financial return without fear of facing a tax penalty.

Some private foundations that already use PRIs treat them as part of their grantmaking budget, counting them toward the 5% annual distribution the foundation must make each year to maintain tax-favored treatment. 

Wilkinson said the new guidance “reassures foundations that a wide range of investments can qualify as PRIs and reduces the perceived need for legal counsel or IRS rulings in many cases.”