What expense category is Mission-Related Investment (MRI) Costs?

For many foundations and nonprofit organizations, Mission-Related Investments (MRIs) are a powerful tool for advancing their charitable goals. Unlike traditional investments that are made solely for financial return, mission-related investment’s are made primarily to achieve a specific programmatic objective, even if they also generate some income.

The costs associated with making these investments—such as fees for due diligence, legal services, and consulting—are a necessary part of the process. However, these costs are not a simple, currently deductible expense. 

The IRS and standard accounting principles treat them as part of the investment itself. This guide will clarify how to correctly categorize mission-related investment costs to ensure your organization's financial reporting is accurate and compliant.

Mission-Related Investment (MRI) Costs Category

The costs you incur to make a Mission-Related investment are a capital expenditure. They are not a currently deductible program, administrative, or fundraising expense.

Instead, these costs must be capitalized, meaning they are added to the basis (or cost) of the investment asset itself. This is based on the fundamental principle from IRS Publication 535 which requires that costs to acquire an asset be capitalized as part of that asset's cost.

Important Considerations While Classifying Mission-Related Investment  Costs

The most critical factor is to distinguish between an investment (an asset) and a grant (an expense).

Capitalize, Do Not Expense

The fees paid to professionals to research, structure, and execute an Mission-Related investment are part of the cost of acquiring the investment. This includes:

• Legal fees for drafting the investment agreement.
• Due diligence and consulting fees.
• Other direct transaction costs.

These costs are recorded on the balance sheet as part of the total value of the Mission-Related investment asset, not on the statement of activities as a current expense.

Mission-Related Investment vs. Grant

• Mission-Related Investment: An investment that is expected to be repaid, potentially with a financial return (even if below market rate). It is recorded as an asset.
• Grant: A payment made to another organization with no expectation of financial return. It is recorded as a program expense.

Program-Related Investments (PRIs)

The IRS uses the term Program-Related Investment (PRI) to describe a similar concept, particularly for private foundations. The instructions for Form 990 explain that a PRI's primary purpose is to accomplish the organization's exempt purpose, not to produce income. These investments are reported as assets on the balance sheet.

Tax Implications and Recordkeeping

The tax treatment for MRI costs requires capitalization, not a standard expense deduction.

How to Report the Costs

For a nonprofit organization filing a Form 990, Return of Organization Exempt From Income Tax:

• The Mission-Related Investment itself (including all capitalized costs) is reported as an asset on the Statement of Financial Position (Balance Sheet), Part X.
• The costs are not reported as a functional expense on the Statement of Functional Expenses (Part IX).

When Are These Costs Recovered?

The capitalized costs are recovered only when the investment is sold or disposed of. At that time, the higher basis will reduce the calculated capital gain or increase the capital loss from the investment.

What Records to Keep

You must maintain meticulous records to substantiate the total cost of the Mission-Related Investment. Your records should include:

• The formal investment agreement.
• Invoices from all service providers (legal, consulting, due diligence).
• Proof of payment for the investment and all related fees.
• Documentation of the mission-related purpose of the investment.

How Fyle Can Automate Expense Tracking for Mission-Related Investment Costs

Fyle helps you capture and organize all the costs associated with making an Mission-Related investment, providing a clean record for your accountant to handle capitalization correctly.

• Track by Investment: Code all due diligence and legal fees to a specific Mission-Related investment project for precise cost aggregation.
• Centralize All Documents: Attach the investment agreement, legal invoices, and due diligence reports directly to the expense records in Fyle.
• Categorize for Capitalization: Code the costs as a capital expenditure to signal that they must be added to the investment's basis.
• Automate Your Accounting: Sync the capitalized costs to the correct investment asset account in QuickBooks, Xero, NetSuite, or Sage Intacct.