New IRS Rule Likely to Make Impact Investing Easier

Monday, September 21, 2015

The Internal Revenue Service took a major step this week to calm grant makers’ fears about taking risks with impact investments, giving them a green light to commit more of their assets to investments that further their missions.

The news came just a few days before the Kresge Foundation’s Thursday announcement that it would put 10 percent of its endowment, or $350-million, into impact investing by 2020, one of the largest such commitments by a wealthy grant maker.

Kresge had been planning the move long before the IRS took action, but the two steps are a major sign of momentum for the impact-investing movement. While many big foundations have shown interest in mission investing, only a tiny share of their endowments are invested in companies aligned with their charitable goals.

A big reason, say tax experts, is that foundations are worried they will be penalized for making impact investments.

Foundations are taxed on investment gains made when their investment officers don’t use what the IRS calls "ordinary business care and prudence" to protect a grant maker’s long-term financial needs. In an announcement on Tuesday, the IRS said that mission-related investments don’t necessarily jeopardize a foundation’s financial future and shouldn’t automatically be subject to a tax.

Fear of the tax has been one "veto point" that investment managers have raised to object to social investments, said David Wood, director of the Initiative for Responsible Investment at Harvard University.

"It was an easy way to say no," he said.

This week’s statement from the IRS, said Mr. Wood, is a "big deal," because it acknowledges that an endowment is a tool to achieve a mission and not just a financial engine that propels a foundation’s programs.


Source: The Chronicle of Philanthropy (link opens in a new window)

impact investing, philanthropy