Impact Investing: Gift or Deal?

Posted by Phil Cubeta on Sep 19, 2018 7:30:00 AM

“Doing good” is changing. How will you respond when prospective donors raise these objections?

  • If nonprofits could fix the world, they would have by now.
  • Charities are yesterday’s news, like TV and taxi companies. We want something more like an app. Money in. Impact out.
  • I do impact investing. I don’t give. With impact investing I get results and I make money, too.
  • Volunteer? I organize online with my Twitter feed and followers.
  • Work for you? Why? I can do more good and make more money starting a high impact company or working for one.

As the line between giving and getting blurs, it can become harder to know whether a particular flow of funds into a nonprofit is best characterized as a gift or as an investment. The situation may be particularly acute in, say, a university doing sponsored research in potentially very profitable areas. Consider a hypothetical university which does research into semiconductors. Which of these is a gift? And which is best seen as a business deal?

  1. Bravo Corp gives $10,000,000 to a Chair named in its honor.
  2. Bravo funds fellowships for its employees to study under the Chair, shuttling back and forth between Bravo and the school carrying news of technological breakthroughs.
  3. Bravo funds research with the proviso that it gets a prepublication look.
  4. Bravo funds research that only Bravo can use for 5 years

You might say, correctly, that either way Bravo gets a deduction, either as a charitable gift, or as a business expense, but how about the school? If the arrangement is deemed a business deal, the school would have to declare unrelated business taxable income and pay taxes. But what if the school inflates the true gift, the Chair gift, in return for throwing in a few fellowship at a very low cost? And what if the Chair agrees to give Bravo an early peek at research? You can see why the IRS has been concerned about the potential for abuse.

As impact investing grows and takes market share, traditional nonprofits will have to consider how to characterize the return on their donors’ “investment.” We’ll get ready for that future during my session at CGP Conference, “Impact Investing: Friend or Foe of Fundraising.

If you’ve already heard from donors or clients who are engaged in impact investing, please share your stories in the comments. If you’d like to learn more about impact investing, start with information from the Global Impact Investing Network.

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Topics: CGP Conference 2018, Impact Investing