Even though a private foundation is required to make annual distributions (usually 5% of its net asset base) in support of its mission, the vast majority of its assets must remain invested and is not otherwise available to provide support for its causes.
What can a private foundation do to increase support of its charitable mission without significantly eroding its asset base? Two options that have been available for years, but have not received much publicity, are mission-related investments (MRIs) and program-related investments (PRIs).
MRIs can be defined as expenditures made with a clear intention to support the private foundation’s mission, as well as achieving a market competitive investment return. Not limited to tax-exempt charities, MRIs can include debt or equity investments in for-profit entities that further the private foundation’s exempt purpose. Assuming that these are part of the private foundation’s mission, examples can include loans to a grocery store located in an under-served urban area, or even an equity interest in a real estate development in a blighted section of a city.
Since MRIs are investments, they are subject to prudent investor standards. They also must be included in the base on which minimum annual payouts are calculated. Additionally, MRIs are subject to most of the private foundation restrictions applicable to investments, including investment income tax, self-dealing, excess business holdings, and jeopardizing investments.
PRIs can be defined as an investment made primarily to accomplish a private foundation’s mission, and no significant purpose is the production of income or appreciation of property. PRIs can take many forms, including below-market loans, equity investments, bank deposits and guarantees. PRIs can be provided to tax-exempt and for-profit entities.
As a general rule, PRIs are treated similarly to grants for purposes of federal taxation. For example, PRIs will count towards a private foundation’s annual distribution requirement, and will not be included in the foundation’s base on which annual payouts are determined. PRIs are also specifically exempt from the jeopardizing investment restrictions. They are, however, subject to net investment income tax and self-dealing rules.
MRIs and PRIs are two different methods of allowing private foundations to increase their use of assets in further support of their missions. While MRIs are treated as investments and must meet prudent investor standards as well as be subject to various federal tax restrictions, PRIs are primarily charitable giving devices.
Even though MRIs and PRIs have been used by some private foundations as far back as the 1960s, their use up until now has not been widespread. Guidance from Congress, the courts and the IRS regarding these investments is evolving, but many questions remain unanswered. Before embarking on any type MRI or PRI, organizations should consult with tax counsel.
Gross Mendelsohn can help you determine whether a mission-related investment or program-related investment is right for your private foundation. Contact us online or call 800.899.4623.