Program-Related Investments: The Recordkeeping Foundations Get Wrong
A trustee raises an idea. Instead of another grant to the community health clinic the foundation has supported for years, what if the foundation made a low-interest loan to help the clinic expand? When the loan is repaid, that money could go right back to work for the mission.
The room likes it. And it’s a good idea.
However, the moment that loan goes out, the foundation’s finance team has a new kind of asset to track. It isn’t a grant. It isn’t an ordinary investment. It sits somewhere in between.
That in-between is exactly where the recordkeeping tends to go sideways.
First, What Is a Program-Related Investment (PRI)?
The IRS describes a program-related investment (PRI) as one in which:
The primary purpose is to accomplish one or more of the foundation’s exempt purposes,
Production of income or appreciation of property is not a significant purpose, and
Influencing legislation or political campaigns is not a purpose.
In plain English: the investment exists to advance the mission, not to make money. Earning some income along the way is fine, as long as a profit-motivated investor wouldn’t have made the same investment on the same terms.
PRIs can take the form of below-market loans, loan guarantees, or equity investments. Treasury regulations include a range of examples, expanded in 2016, showing what qualifies.
A PRI also isn’t the same as a mission-related investment. Mission-related investments come from the investment portfolio and expect market-rate returns. They’re treated like any other investment. PRIs are treated very differently.
Why PRIs Behave Differently on Your Books
They count toward your payout when they go out.
A PRI is generally included in the foundation’s qualifying distributions in the year it’s made, helping the foundation meet its 5% distribution requirement.
Repayments come back into the calculation.
This is the part that surprises boards.
When a PRI is repaid, those amounts are generally added back to the foundation’s distributable amount for the year they come in. A large loan repaid in a single year can meaningfully raise that year’s required payout.
That’s not a problem if you see it coming. It’s a real headache if you don’t.
They’re treated as charitable-use assets.
Because PRIs are held for exempt purposes, they’re generally excluded from the investment assets used to calculate the foundation’s minimum investment return.
They have their own place on the 990-PF.
Form 990-PF includes a separate summary of program-related investments, distinct from grants paid. The Form 990-PF instructions walk through what’s required.
Some PRIs Come with Grant-Style Oversight
When a PRI goes to an organization that isn’t a public charity, such as a for-profit social enterprise, the foundation generally needs to exercise expenditure responsibility.
That means a pre-investment inquiry, a written agreement, regular reports from the recipient, and reporting to the IRS.
In other words, investment-level tracking and grant-level compliance, at the same time.
A PRI Isn’t a Year-End Exercise
If there’s one idea we’d want every foundation leader to take away, it’s this:
A PRI needs to be tracked for its entire life, not just the day it’s disbursed.
Loan terms, repayment schedules, interest received, any write-downs, and the investment’s ongoing charitable purpose all need attention for as long as the PRI is outstanding.
That’s a monthly bookkeeping discipline. Reconstructing it once a year at tax time is where most of the trouble starts.
Where Foundations Can Get Caught Off Guard
Common examples include:
Recording a PRI as an ordinary investment, so it never shows up as a qualifying distribution, or gets swept into the minimum investment return calculation.
Missing the repayment add-back, leaving the foundation short on its distributable amount in a year a loan comes back.
No written record of the charitable purpose and due diligence supporting PRI treatment.
Expenditure responsibility steps that were skipped or undocumented for a PRI to a non-charitable recipient.
Incomplete 990-PF reporting because PRI activity wasn’t separated in the books.
Trustees unsure whether a PRI is “a grant” or “an investment” when reviewing financial reports.
Five Questions to Ask Before (and After) Making a PRI
1. Does each PRI have its own place in our general ledger?
Separate from grants payable and from the investment portfolio, so its activity can be followed from disbursement through repayment.
2. Is the charitable purpose documented?
The investment memo, due diligence, written agreement, and repayment schedule should live together in one file, created before the money goes out.
3. Have we built expected repayments into our payout projections?
The board should know in advance how upcoming repayments may affect future distributable amounts.
4. Does this PRI require expenditure responsibility?
Answer that before committing to any recipient that isn’t a public charity, and calendar the required reporting.
5. Can our trustees see every PRI at a glance?
A simple schedule in board materials, showing purpose, balance, status, and expected repayments, prevents a lot of confusion.
Frequently Asked Questions
Can a private foundation make a loan to a for-profit company?
Yes, if the loan qualifies as a program-related investment: its primary purpose must be charitable, and making money can’t be a significant purpose. When the recipient isn’t a public charity, the foundation generally must also exercise expenditure responsibility, including a written agreement and regular reports.
Does a program-related investment have to be repaid?
No. Many PRIs are loans the foundation expects to get back, but repayment isn’t what makes an investment a PRI. Its charitable purpose is. If collection becomes doubtful, the foundation should record and document any write-down in its books. Because PRI repayments are added back to the distributable amount, a write-down also lowers the repayments to factor into future payout calculations.
The tax code adds PRI repayments back to the distributable amount. So any part of a PRI that’s written off won’t come back as a repayment, and it won’t raise a future year’s payout.
Is a program-related investment a jeopardizing investment?
No. The Internal Revenue Code specifically provides that program-related investments are not treated as investments that jeopardize a foundation’s charitable purposes, even though they may carry more risk than a typical portfolio investment. Documenting the charitable purpose supports that treatment.
Where do program-related investments show up on Form 990-PF?
Form 990-PF includes a separate summary of program-related investments, and PRIs also count in the foundation’s qualifying distributions. Repayments generally increase the distributable amount for the year they’re received, so all three areas should tie back to your books.
Get the Records Right Before the First Dollar Goes Out
Program-related investments can stretch a foundation’s impact in ways a traditional grant can’t. The foundations that use them well aren’t necessarily the ones with the most complex structures. They’re the ones whose books keep pace with their ambition.
At BryMar CPA, our Monthly Bookkeeping service is built for exactly this kind of work. When PRIs are tracked separately every month, repayments, payout calculations, and 990-PF reporting stay current all year long. For foundations that also engage us for a financial statement review or audit, organized PRI records make those engagements smoother, too.
Connect with the BryMar team to talk through how monthly bookkeeping can support your foundation’s program-related investments.
About the Author
Sandy Martinez-Bulosan, CPA, CFE, is Co-Founder and Partner of BryMar CPA, LLP. She brings audit expertise and a Certified Fraud Examiner background to client engagements and team leadership, connecting technical guidance with the people behind the work, from nonprofit leaders to professionals just beginning their careers.
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