What Is a Program-Related Investment (PRI)?

A program-related investment, or PRI, is an investment a private foundation makes primarily to advance a charitable purpose rather than to earn a return. When the investment meets a three-part test in the Internal Revenue Code, it counts toward the foundation’s mandatory 5 percent annual distribution and sits outside the rules that penalize risky investments, while the capital itself remains recoverable rather than given away.¹

PRIs commonly take the form of below-market loans, equity stakes, or loan guarantees, and unlike traditional grants they can flow to for-profit businesses and individuals as well as to nonprofits.²

The Three-Part Test

An investment qualifies as a PRI only if it clears all three requirements. Miss one, and it is treated as an ordinary investment subject to the jeopardizing-investment rules.

The primary purpose must be to accomplish one or more of the charitable purposes described in Section 170(c)(2)(B), such as relieving poverty, advancing education, or promoting scientific research. Second, producing income or appreciation of property cannot be a significant purpose. A practical way to test this: if a profit-seeking investor would take the same deal on the same terms, the investment probably fails this prong. Third, the investment cannot have any purpose of influencing legislation or intervening in political campaigns.

The first two prongs come from the statute itself.¹ The third comes from Treasury Regulations at 26 CFR 53.4944-3, which also clarify that a recipient’s routine lobbying on matters directly affecting its business does not automatically disqualify the investment, so long as those lobbying expenses would qualify as ordinary business deductions.³

What a PRI Can Look Like

Below-market loans are the most common structure. The foundation lends capital at an interest rate well below what a commercial lender would charge, often with flexible repayment timelines that can stretch beyond 15 years. Terms no commercial lender would accept are actually helpful evidence that the foundation’s motive is charitable rather than financial.²

Equity investments give the foundation an ownership stake in a for-profit entity doing socially beneficial work. The foundation buys stock or a membership interest, expecting a below-market return.

Loan guarantees round out the toolkit. The foundation promises to cover a borrower’s debt if the borrower defaults, which lets third-party lenders extend credit they otherwise would not. The guarantee costs the foundation nothing unless the borrower fails to repay, so a limited pool of foundation capital can unlock a much larger pool of commercial financing.²

Who Can Receive a PRI

Recipient flexibility is one of the defining features of a PRI. Traditional grants generally go to 501(c)(3) organizations, but PRIs can be directed to for-profit companies, other types of nonprofits, and even individuals.² The test focuses on what the money accomplishes, not on the tax status of whoever receives it. A for-profit startup building affordable medical devices for underserved communities can receive a PRI just as readily as a nonprofit hospital.

Any private benefit flowing to a for-profit recipient must be incidental to the charitable purpose, meaning it is both a byproduct of the public benefit and small in comparison to it. A modest profit alongside a delivered charitable mission is fine; a deal whose primary beneficiary is the recipient’s shareholders is not.

When the recipient is not a 501(c)(3) public charity, the foundation must exercise expenditure responsibility. That means obtaining a signed written commitment that the funds will be used solely for the agreed charitable purpose, requiring annual reports on spending and progress, keeping the recipient’s books and records accessible, and prohibiting the use of funds for lobbying, political activity, or other nonexempt purposes.⁴ The same framework applies to PRIs directed to individuals, running through the recipient organization’s commitment.⁵

How PRIs Affect the Annual Payout

Private foundations must distribute a minimum amount each year for charitable purposes or face excise taxes under Section 4942. The distributable amount begins with 5 percent of the fair market value of the foundation’s non-charitable-use assets, adjusted for items including the 1.39 percent excise tax on net investment income.⁶

PRIs get favorable treatment in two ways. They count as qualifying distributions, so a $500,000 PRI loan satisfies $500,000 of the foundation’s annual distribution obligation just as a $500,000 grant would.⁷ And because PRIs are assets used directly in carrying out exempt purposes, they drop out of the investment asset base used to calculate the 5 percent floor, which shrinks the required distribution in future years.⁶

When a borrower repays PRI principal, the repayment gets added into the foundation’s adjusted net income and increases the distributable amount for that year.⁶ Returned dollars must be redeployed toward new charitable activities rather than absorbed back into the foundation’s general investment portfolio.

There is also a smaller edge on the investment income side. Private foundations owe an annual excise tax of 1.39 percent on net investment income.⁸ Because PRIs are classified as charitable-use assets rather than investment assets, income earned on them is generally not included in that calculation.

What Happens if the Investment Fails the Test

An investment that does not meet all three prongs falls under Section 4944 as a jeopardizing investment, and the penalties come in two tiers. The first tier is a 10 percent tax on the invested amount for each year (or partial year) of the taxable period, which runs from the date of the investment until the IRS mails a deficiency notice, the foundation removes the investment from jeopardy, or the tax is assessed, whichever comes first.⁹ A foundation manager who knowingly participated owes a parallel 10 percent tax, capped at $10,000 per investment.¹

If the investment is not removed from jeopardy within the taxable period, the foundation faces an additional 25 percent tax on the amount still in jeopardy, and a manager who refuses to agree to remove the investment owes an additional 5 percent, capped at $20,000 per investment.¹⁰ A properly structured PRI is expressly exempt from this entire regime.³

When a PRI Later Stops Qualifying

Circumstances can change after the investment is made. A borrower might pivot away from the charitable activity the PRI was designed to fund, or market conditions might shift so the terms start looking commercial. The IRS treats the investment as potentially jeopardizing from that point forward, not retroactively.²

The foundation gets a 30-day grace period after it or any of its managers gains actual knowledge of the critical change. During that window, the jeopardizing-investment excise taxes do not apply. After day 30, the investment is evaluated under the normal rules and the penalty clock starts. Monitoring matters: catching a problem early leaves time to restructure or exit before penalties begin.

Documentation the Foundation Must Keep

Before any money moves, the foundation needs a signed written agreement that spells out the charitable objectives, restricts the use of funds to those objectives, and prohibits the recipient from spending the capital on lobbying, political activity, or other nonexempt purposes.⁴

After the investment is made, the foundation must collect annual reports from the recipient covering both financial expenditures and progress toward the charitable mission, keep its own books and records accessible, and report the investment on its annual Form 990-PF, including the amount invested, the recipient’s name, and an evaluation of the investment’s charitable performance. Missing any of those steps can convert the PRI into a taxable expenditure under Section 4945, which triggers a separate set of excise taxes.¹¹

How PRIs Differ From Mission-Related Investments

Foundations exploring social-impact investing will run into a related but legally distinct concept: the mission-related investment, or MRI. The difference is return expectation. A PRI is made at below-market terms because its primary purpose is charitable. An MRI targets a market-rate financial return while also aligning with the foundation’s social goals.

Because MRIs seek competitive returns, they fail the “no significant profit motive” prong of the PRI test. Several consequences follow. MRIs do not count toward the annual distribution requirement, they stay in the investment asset base used to calculate the 5 percent floor, and they are not automatically exempt from the jeopardizing-investment rules. A foundation evaluates an MRI under the same prudent-investor standards it would apply to any portfolio investment. Many larger foundations use both tools: PRIs for below-market, high-impact opportunities where recycled capital is the point, and MRIs for portfolio holdings that align investment returns with mission.

1
Office of the Law Revision Counsel. 26 USC 4944 – Taxes on Investments Which Jeopardize Charitable Purpose
2
Internal Revenue Service. Program-Related Investments
3
eCFR. 26 CFR 53.4944-3 – Exception for Program-Related Investments
4
Internal Revenue Service. Terms of Grants – Private Foundation Expenditure Responsibility
5
Internal Revenue Service. Terms of Program-Related Investments – Private Foundation Expenditure Responsibility
6
Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income
7
eCFR. 26 CFR 53.4942(a)-3 – Qualifying Distributions Defined
8
Office of the Law Revision Counsel. 26 USC 4940 – Excise Tax Based on Investment Income
9
eCFR. 26 CFR 53.4944-5 – Definitions
10
eCFR. 26 CFR 53.4944-2 – Additional Taxes
11
Internal Revenue Service. IRC Section 4945(h) – Expenditure Responsibility