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Impact Investing Comparative Chart

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Impact Investing Comparative Chart

The chart below provides a brief overview of the similarities and differences among Program-Related Investments, Mission-Related Investments, and Socially Responsible Investments. 

It should be noted that this summary is necessarily oversimplified, and a foundation wishing to engage in one of these investment strategies should carefully consider the practical and tax implications. Private operating foundations, in particular, should proceed cautiously when seeking to characterize specific impact investments as PRIs or MRIs because PRIs may affect an organization’s ability to qualify as a private operating foundation. For more information, refer to our primer on impact investing and please do not hesitate to contact us if you if you have any questions about these various distinctions.

 

  Program-Related Investments Mission-Related Investments Socially Responsible Investments
Relationship of Investment to Charitable Purpose of Foundation
  1. Primary purpose of investment must significantly advance one or more charitable objectives of the organization (investment would not be made but for its relationship to the exempt purpose
  2. Production of income/ appreciation of property must not be a significant purpose
  3. Lobbying must be extremely limited (subject to particular IRS rules)
Should reflect charitable mission of the organization Investment does not need to be related to charitable mission of the organization
Financial Benefit to the Investment? Not required Yes Yes
Counts Toward 5% Annual Payout? Yes, and PRI is excluded from foundation’s assets used to calculate 5% distributions No No
Noncharitable Recipients Allowed? Yes, so long as purposes of the investment are charitable as described above Yes Yes
Reporting Must be specifically identified on 990-PF Reported with all the foundation’s other investments; no special reporting required Reported with all the foundation’s other investments; no special reporting required
Prudent Investment Standard? Need not be a prudent financial investment (exempted from prudent investor standard) Needs to be a prudent financial investment subject to state law Needs to be a prudent financial investment subject to state law
Investment income tax §4940 Excise tax on net investment income applies Excise tax on net investment income applies Excise tax on net investment income applies
Treatment of capital gains Capital gains on equity investment are taxable Capital gains on equity investment are taxable Capital gains on equity investment are taxable
Excess business holdings §4943 PRIs are not included in calculation of excess business holdings Restrictions on excess business holdings apply Restrictions on excess business holdings apply
Jeopardizing investments §4944 PRIs are exempted from jeopardizing investment rules Subject to jeopardizing investment rules Subject to jeopardizing investment rules
Taxable expenditures §4945 Rules regarding taxable expenditures apply; expenditure responsibility required Rules regarding taxable expenditures do not apply Rules regarding taxable expenditures do not apply
Self-dealing rules §4941 Self-dealing prohibitions apply Self-dealing prohibitions apply Self-dealing prohibitions apply
Unrelated business income tax rules (UBIT) UBIT rules apply, but PRIs usually avoid them by being substantially related to exempt purposes UBIT rules apply UBIT rules apply
Examples
  1. Low-interest or interest-free loans to needy students
  2. High-risk investments in nonprofit low-income housing projects
  3. Low-interest loans to small businesses owned by members of economically disadvantaged groups, where commercial funds at reasonable interest rates are not readily available
  4. Investments in businesses in low-income areas (both domestic and foreign) under a plan to improve the economy of the area by providing employment or training for unemployed residents
  5. Investments in nonprofit organizations combatting community deterioration
(examples from IRS guidance on program-related investments at https://www.irs.gov/charities-non-profits/private-foundations/program-related-investments)
  1. A foundation that has as its purpose protecting the environment makes an investment in a profitable clean energy startup
  2. A foundation that has as its purpose reducing the incidence of children’s cancer invests in profitable company producing children’s cancer drugs
  1. “Negative” screening of investments to eliminate big tobacco
  2. “Positive” screening of investments to ensure all energy companies use clean energy
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