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.” 

The new regulations, first proposed in 2012, provide examples that illustrate how a foundation can use PRIs to advance its charitable purpose.

For one, a private foundation can make below-market-rate loans to poor people in a developing country, where conventional sources of funds are unavailable, to enable them to start a small business.

Such loans would advance the foundation’s exempt purpose — here to provide relief to the poor — and would not involve income production of property appreciation. These loans, the new regulations say, would be program-related investments.

Beyond PRIs, mission-related investment practices, whereby private foundations make prudent investments for both charitable purposes and financial returns, have gained popularity in recent year. Some foundation and impact investing leaders told the Obama administration that clarity was needed for this type of “double bottom line” investing.

In September, the Treasury Department and the IRS issued guidance, saying private foundations could make prudent mission-related investments.

“These two actions by Treasury should remove confusion and signal to the field that a foundation can use its financial assets in a variety of ways to accomplish its mission,” Wilkinson said.

“With increased comfort about using a variety of prudent financial tools, private foundations can continue to help create safe communities, strengthen schools and achieve other charitable goals that make our country a place where everyone has the opportunity to succeed.”

— Check out Few Charity Donors Look Beyond Cash Gifts: Fidelity Charitable on ThinkAdvisor.