The ACME Manufacturing Co. is a small business operating in a under-served urban community. It is owned by a group of African American and Latino men and women. The company has approached a number of commercial banks to provide funds for additions to working capital for its operations, but has been unable to secure financing at economically feasible rates.
The APEX Foundation makes a below market-rate loan to ACME with the primary purpose of supporting economic development in the community in which ACME operates. This loan is made as a program related investment.
APEX makes the loan with no expectation of producing income or realizing any appreciation of property and the loan significantly supports the foundation's exempt activities. In fact, APEX would not have lent to ACME, but for its relationship to those activities.
Unfortunately, after APEX executes the loan to ACME, it needs to extend the repayment date of the loan to ensure the continued financial stability of ACME. Since the extension continues to support APEX's exempt purpose the program related investment status of the arrangement remains in force.
This is an illustration modified from examples provided by the Internal Revenue Service. It is not a legal opinion on the tax treatment of any specific agreement between a private foundation and other entity.