Private foundations are prohibited from making investments that jeopardize the carrying out of their exempt purpose unless they’re program-related investments (PRI), which are primarily for charitable purposes. The final regulations on PRIs issued under Internal Revenue Code Section 4944 by the IRS and Treasury Department took effect April 25, 2016.
These regulations follow guidance issued by the Treasury Department in September 2015 and IRS Notice 2015-62, which states private foundations could consider the relationship between an investment and the foundation’s charitable purposes. Foundation managers aren’t required to select an investment solely because it offers a greater return, improved liquidity or lower risk.
In the regulations, a series of nine examples illustrate investments that qualify as PRI. In general, they demonstrate broad charitable goals that can be international or domestic, earn a high rate of return and take a variety of forms—including loans to individuals, guarantees and equity investments in for-profit companies. These examples are intended as illustrations of potential PRIs, but other similar fact patterns may qualify.
Examples of PRIs
- Purchase of common stock in a business enterprise that researches and develops new drugs
- Purchase of common stock in a foreign solid waste recycling company
- Entering into a below-market rate loan to the same foreign solid waste recycling company
- Extension of credit to a business operation in an economically disadvantaged area hit by a natural disaster
- Microloans to the poor in a developing country
- Loans to farmers residing in a foreign country
- Extension of credit to a social welfare organization where the proceeds would be used to promote the arts
- Facilitating the construction of a child care facility by providing a below-market interest rate and deposit agreement
- Entering into a guarantee and reimbursement arrangement to facilitate the construction of a child care facility in a low-income neighborhood
We encourage you to read the nine examples to expand your knowledge of PRIs and how they can help accomplish your mission. While these regulations specifically focus on foundations subject to IRC Sec. 4944, other grant-making entities may find this guidance helpful.
Consult your BKD advisor if you have any questions.