CLA Talks Video: Alternative Investments: Governance and Tax Issues
Alternative investments are not new. In fact, they have become a common strategy among many institutional investors for foundations and other nonprofits. But in spite of their popularity — or perhaps because of it — questions about taxes and governance often arise. Jennifer Tingley and Karen Gries, both principals with CliftonLarsonAllen, address a number of these issues in a four-minute CLA Talks video recorded in February 2016 at the CLA National Foundations Conference.
Alternative investments defined
An alternative investment is one that does not have a readily determinable fair value, and its assets are not listed on any national exchanges or market for which quoted prices are available from sources such as financial publications or exchanges. Common alternative investments include collective trust funds or pooled funds, hedge funds, private equity funds, and real assets such as mineral rights, timber, and other commodities.
These investments create unique challenges for foundations and nonprofit organizations, primarily in the areas of reporting, compliance and regularity, and tax filing requirements.
The role of governance
Governance plays a crucial role when investing in these types of funds. Not only must the investments be allowed by the organization, they must also be properly managed to avoid undue risk to the organization’s operations and reputation. Foundations are held to high standards; they are expected to be good stewards of their resources and fulfill the needs of their community and/or core mission. If this trust is breached the ripple effect can be devastating.
Governance must grapple with its many roles and questions that arise when evaluating and managing alternative investments:
- Does the potential benefit of the investment justify the cost?
- Tax considerations may arise with pass-through or passive income. Will it be unrelated business income (UBI) or income that would require foreign tax reporting?
- What procedures are in place at the fund manager level or investment advisor level? Do you have access to monitor and review those procedures?
- Are there other tax-exempt investors in the fund?
- What type of commitment is involved? Can the foundation meet those requirements and still stay operational and fluid?
- Is this an investment that your organization would pursue under your own due diligence processes? If not, why?
- What procedures do you have in place to monitor the investment activity for liquidity or for the valuation on your financial records? How can you ensure you are aware of potential tax gains and losses and how might that impact your current year?
- Do you document your decisions in committee and/or board minutes? Do you obtain legal counsel?
- When addressing the implications of partnership investments or S corporations, has the foundation properly addressed unrelated business income tax (UBIT) compliance, both federal and state?
- Does the nature of the investment require additional reporting for off-shore or foreign investments?
How we can help
If you have questions about how certain investments may impact your financial reporting or your tax requirements, CLA’s tax professionals can help. We work with organizations that manage billions of dollars in investments and understand the rules and intricacies of external reporting. We know how important communication and transparency are to your constituents and we will work with you to help maintain the trust and accountability that are critical to your mission.
View additional installments in the CLA Talks video series.