Public charities in the United States are exempted from federal income taxes and can receive tax-deductible donations. At the same time, these foundations are subject to many restrictions under the U.S. federal tax rules, including a prohibition against investing amounts in a manner outside the scope of their tax-exempt purpose. Tax law requires charitable foundations in the United States to distribute at least 5% of their assets each year. A private foundation is subject to an initial tax equal to 10% of the amount invested in such a manner as to jeopardize the carrying out of any of its exempt purposes. The tax is imposed by 26 USCS § 4944(a)(1). An exemption to this rule is Program-related investments (“PRIs”) and the exemption is granted by 26 USCS § 4944(c). PRIs will not be considered as investments which jeopardize the carrying out of exempt purposes, even when that investment would otherwise be classified as a jeopardy investment.
PRIs help foundations to make investments to accomplish an exempt purpose. In order to qualify as a PRI, the following criteria are to be met: (1) should be primarily made to accomplish a charitable, scientific, literary, religious or educational purpose and that significantly furthers the accomplishment of the Foundation’s exempt activities, (2) the significant purpose should not be production of income or appreciation of property, and (3) it should not be used directly or indirectly to accomplish any political or legislative purposes. Foundations make distributions primarily in the form of grants or donations. PRIs are gaining popularity and foundations are largely investing in PRIs. PRIs are normally structured as interest-free or below-market loans, loan participations or guarantees, mission-related deposits, recoverable grants, asset purchases, letters of credit and equity investments and are normally used to support community revitalization, low-income housing projects, microfinance, historic preservation, social services, education and other charitable causes.
There is no legal requirement that PRIs can be made only to public charities. Foundations are free to make PRIs in both nonprofit and for-profit entities as long as the criteria are met. Unlike grants, PRIs may be repaid and foundations can get return on its investment. Any returns received from the investment from PRIs are not counted as profit and such returns should be reinvested in other charitable activities within the same year. PRIs have the potential to bring growth to the available funds and thereby widen the scope of charitable activities of a foundation.
Sources:
Council on Foundations
Program-Related Investment Promotion Act of 2008
The Olin Group
IRS Resources
