What Is a Program-Related Investment?

A Program-Related Investment (PRI) is a financial tool used by private foundations to advance their charitable objectives. Unlike conventional investments that prioritize financial gain, PRIs are structured to directly further the foundation’s exempt mission. This allows foundations to deploy assets to generate social impact beyond traditional grantmaking. The intent behind a PRI is to achieve charitable, educational, or scientific goals, rather than seeking a substantial financial return.

Defining Program-Related Investments

The Internal Revenue Service (IRS) establishes criteria for an investment to qualify as a Program-Related Investment. Its primary purpose must be to accomplish one or more of the foundation’s exempt purposes, such as charitable, educational, or scientific endeavors. The investment’s social or charitable impact must clearly outweigh any financial return objective; producing income or appreciating property cannot be a significant purpose. PRIs empower foundations to use financial resources as an active instrument for mission delivery, extending beyond direct grants. IRS regulations, detailed under 26 CFR 53.4944-3, ensure the investment serves a genuine charitable intent and allows foundations to engage in innovative financing that directly contributes to their philanthropic goals.

Key Characteristics of a PRI

To be recognized as a PRI, an investment must align with a foundation’s charitable mission. It cannot have a significant purpose of producing income or appreciating property; any financial return must be incidental to the primary charitable objective. This distinguishes PRIs from typical market investments where profit generation is the main driver. PRIs must not involve influencing legislation or participating in political campaigns. The investment must also avoid jeopardizing the foundation’s exempt purposes, though PRIs are generally exempt from the “jeopardizing investments” excise tax under Internal Revenue Code Section 4944. Changes in the terms of a PRI are permitted if made primarily for exempt purposes, not to significantly improve financial prospects, or for prudent protection of the foundation’s investment.

Common Examples of PRIs

Program-Related Investments encompass various financial structures supporting charitable activities. Common examples include:

Low-interest or interest-free loans to students in need, enabling access to education.
High-risk investments in nonprofit low-income housing projects, aiming to increase affordable living spaces. These investments often address gaps where commercial financing is unavailable or insufficient.
Low-interest loans to small businesses owned by economically disadvantaged groups, especially where commercial funds are not readily accessible.
Investments in businesses in low-income areas with a clear plan to improve the local economy by providing employment or training. This can include supporting community development financial institutions (CDFIs) or microfinance initiatives that provide capital to underserved populations.

How PRIs Differ from Other Foundation Investments

Program-Related Investments differ from a private foundation’s traditional investment portfolio and other impact investing approaches. Traditional investments aim to maximize financial returns to grow the foundation’s endowment and are subject to standard market risk and return expectations. In contrast, PRIs prioritize charitable impact, with financial return being secondary. Mission-Related Investments (MRIs) seek both social impact and significant financial return, typically from a foundation’s endowment. Unlike PRIs, MRIs are not an official IRS designation and do not count towards a foundation’s annual 5% minimum distribution requirement. A PRI’s defining characteristic is its primary charitable purpose, allowing it to be treated more like a grant for tax purposes.

Regulatory Oversight and Reporting

The IRS monitors Program-Related Investments to ensure private foundations comply with tax-exempt status requirements. Foundations must demonstrate PRIs are made primarily for charitable purposes and not for significant financial gain. This oversight is crucial for maintaining the foundation’s tax-exempt standing. Private foundations disclose their PRIs on IRS Form 990-PF, “Return of Private Foundation or Section 4947 Nonexempt Charitable Trust Treated as a Private Foundation.” This form includes Part VIII-B, summarizing program-related investments made during the tax year. Accurate reporting is essential to avoid penalties and ensure investments qualify toward annual payout requirements.