New IRS Guidelines for Investments for Charitable Purposes

Internal Revenue Service September 16, 2015

On Wednesday, September 16, the Internal Revenue Service released new guidelines concerning investments for charitable purposes made by private foundations (section 4944 of the Internal Revenue Code). The guidelines were informed by the work of the National Advisory Board on Impact Investing, which Social Finance CEO Tracy Palandjian co-chaired. The National Advisory Board released its recommendations in June 2014, in its report “Private Capital, Public Good.”

Foundations have sought clarity on whether an investment that furthers its charitable purposes, but is not a PRI because a significant purpose of the investment is the production of income or the appreciation of property, is subject to tax under section 4944. The guidelines released this week provide clarity, noting that only jeopardizing investments are subject to tax under section 4944, and that “under the regulations, an investment made by a private foundation will not be considered to be a jeopardizing investment if, in making the investment, the foundation managers exercise ordinary business care and prudence (under the circumstances prevailing at the time the investment is made) in providing for the long-term and short-term financial needs of the foundation to carry out its charitable purposes.”

The updated guidelines will help facilitate investments for charitable purposes by private foundations–an important opportunity for impact investing and for the Pay for Success field. Read more here.