Program Related Investment Regulations: Impact on Public Charities

August 2016 | Article

Program-related investments (PRIs) are nothing new to the nonprofit industry; however, the IRS has spent the last few years issuing proposed regulations, reviewing comments from the community, and then issuing final regulationsThis link takes you to an external website. in April 2016.  While the underlying rules for PRIs remained unchanged, the final regulations outlined additional examples of investments with a charitable purpose that qualify as PRIs.

The rules and regulations are directed at investments made by private foundations. Public charities can also take advantage of PRIs without being subjected to the same restrictions as private foundations. While there is no formal guidance issued for public charities making PRIs, public charities should follow the private foundation regulations as a guide and best practice.

Program-Related Investments are those in which:   

  • The primary purpose is to accomplish one or more “charitable purposes.”
  • Neither the production of income nor the appreciation of property is a significant purpose of the investment.
  • The purpose of the investment does not include influencing legislation or engaging in political campaign intervention.

An investment will be considered to be made primarily to accomplish one or more charitable purposes if it significantly furthers the private foundation’s or public charity’s exempt activities and it would not have been made but for the relationship between the investment and the accomplishment of the private foundation’s or public charity’s exempt activities. 

PRIs structured as loans are attractive to both private foundations and public charities because they allow organizations to further a charitable purpose and potentially receive the principal plus return on investment back. This allows for organizations to use funds over and over creating an arguably larger impact for the community, nation or world.

PRIs may be made to nonprofits, individuals or for-profit entities as long as an exempt purpose is accomplished. In addition, PRIs may be made for an activity conducted in a foreign country that furthers an exempt purpose assuming the same activity would further an exempt purpose if carried out domestically.

PRIs come in many different forms such as loans, equity investments, or guarantees/letter of credits. PRIs have been used in affordable housing, the arts, community development, cultural organizations, historic preservation, economic development, charter schools, health clinics, childcare centers, faith-based programs, social services, sustainable agriculture, and wildlife habitats. Examples of PRIs that accomplish a charitable purpose include:

  • Providing relief to the poor and distressed through low cost housing projects;
  • Revitalization of distressed communities;
  • Lessening the burdens of U.S. government;
  • Conducting educational activities/promoting education;
  • Protecting and preserving the natural environment;
  • Supporting scientific research;
  • Loan to a business employing a large number of poor in a rural area suffering significant damage from a natural disaster;
  • Loan to the poor to start businesses in a developing country which just experienced a natural disaster;
  • Loan to a LLC purchasing coffee from poor farmers living in a developing country, to fund provision of efficient water management, crop cultivation, pest management and farm management training to poor farmers;
  • Loan to a social welfare organization conducting community art exhibitions to purchase a large exhibition space;
  • Equity investment inducing a business to develop a vaccine to prevent disease affecting the poor in developing countries;
  • Equity investment in a recycling business in a developing country which will prevent pollution and combat environmental deterioration;
  • Guarantee to induce a bank to loan to a charitable organization to construct a new facility

The nonprofit industry continues to look at alternative ways to accomplish charitable goals while remaining compliant with rules and regulations. More organizations (both private foundations and public charities) and other philanthropists are becoming intrigued by program related investing and the related success stories–the future is exciting!

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Exempt Organization Tax