Now You Can Consider Mission AND Profit In Foundation Investments

Back from vacation and finally catching up. While I was gone, the IRS got all “one small step for man, one giant leap for mankind” on us. Well not a giant leap. Or even a leap. More like a “significant shuffle.” But they did publish a catch up with the rest of the investment world, which is a win.

The tax code penalizes investments made in a way that puts a foundation in jeopardy (i.e. may keep the organization from being able to fulfill its mission and/or purpose) with a pretty hefty excise tax. The tax can also extend to directors, officers and management participating in the investment. Scary. 

One exception to this is Program Related Investments (PRI’s). But here’s the rub, PRI’s are investments made with the “primary purpose” of accomplishing a foundation’s mission. The Tax Code was unclear whether investments could also be made with a “significant” purpose or expectation of producing income.

With the announcement, it’s clear foundations can look at the relationship of the investment to its charitable purpose EVEN if a significant purpose of the investment is to produce income. Looks like you can have your cake and eat it too…without worrying about your “skinny” jeans.

Bonus, that an investment offers a lower expected return than could otherwise be obtained, or doesn’t necessarily have the lowest risk, doesn’t immediately put an organization in trouble.  So long as a foundation exercises, “ordinary business care and prudence.” In other words, acts in a way that a similar organization ( same region, same budget, similar facts, etc) would.  

All this catches the Tax Code up with the UPMIFA, the current investment statute in most States. If you haven’t already, bookmark the UPMIFA on your Nook (or Amazon Fire) and give it a look. If your organization makes investments, your investment policy should reflect UPMIFA as it’s been adopted in the states the grants are made.

This really isn’t new, but with an official blessing from the IRS the hope is it may loosen the purse strings of foundations. Encouraging them to make investments in riskier, more untraditional models. Especially those organizations that may have a unique but untraditional or niche earned income model. On the flip side, it may encourage nonprofits to branch out a bit with the programming and incoming streams.


Resources


National Council of Nonprofits Sample Investment Policies

IRS Notice