IRS Proposes New Regulations for Program-Related Investments

Program-Related-InvestmentsIt’s no secret that the economic recession brought about greater challenges for nonprofit organizations. While nonprofits struggled with losing important assets (some lost more than 20% of their assets), the need for charitable services and the funds to support these services increased significantly. As a result, nonprofits began looking for ways to essentially “do more with less”. In fact, even as we begin to see signs of economic recovery, nonprofits are increasingly searching for ways to meet the needs within their communities while at the same time protecting their important financial assets.

How Can Nonprofits Do More with Less?
Historically, the Internal Revenue Service (IRS) has provided little guidance as to what it classifies as an acceptable program-related investment. In 2012, however, the IRS and Treasury Department proposed regulations addressing program-related investments by private foundations. This was the first new guidance on program-related investments in over 40 years. The proposed regulations are intended to reduce transaction costs associated with program-related investments so as to increase the use of these types of investments.

Program-related investments are investments made to further an organization’s mission, not to necessarily increase financial gain. These investments – like grants – count towards an organization’s mandatory annual payout requirement. However, unlike grant recipients, program-related investment recipients are expected to repay the investment, oftentimes with interest. Once the funds have been paid back, private foundations can recycle the funds to other nonprofit organizations and multiply the impact.

It’s important to note that program-related investments are not intended to replace grants. They are, however, intended to further charitable missions in ways that grants cannot. They are most often used when the recipient (the nonprofit) is beginning a project that will eventually generate a good amount of revenue. For example, many private foundations give program-related investments to finance the acquisition and renovation of charter school facilities in areas that have poor performing public schools. Once students begin to enroll, the principal is paid back to the foundation. Program-related investments can also serve as a form of temporary financing when an organization is waiting to receive funds from a government grant.

The proposed regulations contain nine new examples of program-related investments. These examples are diverse in charitable purpose and contain a large variety of financial structures, such as credit enhancements and equity investments. Take a look at some of the regulation highlights:

  • Program-related investments can fund activities in foreign countries.
  • Program-related investments can address a larger variety of charitable purposes, including fostering education, promoting fine arts, preserving the environment, etc.
  • Program-related investment recipients do NOT need to be nonprofit organizations if the for-profit organization helps accomplish the foundation’s purpose.
  • Investments with high rates of return are not automatically excluded from qualifying as a program-related investment.

It’s important to talk to your CPA or nonprofit advisor about these new changes. To learn more about the specifics of the proposed regulations, click here. If you have any questions or concerns regarding the proposed changes to program-related investments, contact us today.