The private foundation community has widely embraced new final regulations that were recently released by the IRS. The regulations provide foundations with updated guidance on the types of investments that qualify as program-related investments (PRIs) that won’t run the risk of excise taxes.

What Is a Program-Related Investment?

The Internal Revenue Code defines a PRI as an investment intended primarily to further a foundation’s exempt purposes, rather than to produce financial returns. To qualify as a PRI, production of income or appreciation of property can’t be a significant purpose of the investment. The determination of whether an investment qualifies as a PRI turns largely on whether the investment would not have been made except for the relationship to the foundation’s exempt purpose.

PRIs aren’t subject to the excise tax imposed on a private foundation that makes an investment that jeopardizes the carrying out of its exempt purposes. Plus, PRIs are treated as qualifying distributions when determining a private foundation’s minimum distribution requirement. They also generally aren’t considered taxable expenditures.

What’s New in the Final Regulations?

The final regulations, which took effect April 25, 2016, are the first update to the PRI rules since 1972. The 1972 regulations provided nine examples of qualifying investments and one example of an investment that doesn’t qualify. These examples have been criticized as out of date because they focus mainly on domestic investments involving economically disadvantaged individuals and deteriorated urban areas.
The new regulations include several additional examples that make clear that PRIs aren’t limited to such exempt purposes. For example, a PRI can:

• Fund activities in foreign countries if the activities would further an exempt purpose if conducted in the United States,
• Earn a high potential rate of return, or
• Include an equity position when making a loan or providing credit enhancements (for example, when a private foundation guarantees a bank loan to a social welfare organization).

The final regulations also allow private foundations to provide capital to individuals or entities that aren’t tax-exempt themselves as long as the recipients are the instruments through which the foundation accomplishes its exempt activities.

How We Can Help

With the potential options for permissible PRIs expanded, you might want to consider broadening your foundation’s investments. Our team of not-for-profit specialists can help you find investments that both further your mission and qualify for favorable tax treatment.