Faculty Journal Articles and Book Chapters


An exciting new way to fund social services has recently emerged. This new financing mechanism, called a social impact bond (SIB), has the potential to help us tackle some of our nation’s most challenging social problems. Broadly speaking, a SIB is a type of “pay for success” contract where private investors provide the upfront capital to finance a social program, but only recoup their investment and realize returns if the program is successful. Like any new financing instrument, SIBs create numerous regulatory challenges that have not yet been addressed. One unresolved issue is the tax implications of a SIB investment. This Article argues that the current law allows for multiple possible characterizations of the SIB arrangement for tax purposes. This uncertainty as to the correct characterization of a SIB investment can affect a private investor’s ultimate tax liability and subject the investor to an unnecessary audit risk. A SIB investment can also expose a non-profit investor to additional taxes or, possibly, even cause it to lose its tax-exempt status. Despite the potentially substantial tax implications of a SIB investment, no guidance exists on this issue. This Article is the first to analyze the federal income tax consequences to investors who participate in a SIB-funded program. It concludes that SIB arrangements should generally be classified as contingent debt under the current tax law but that it may be appropriate to bifurcate the transaction in the case of nonprofit investors. To address the substantial tax uncertainty created by the current law, this Article also argues that IRS guidance is ultimately necessary and suggests ways to structure the SIB arrangement to minimize the risk of any negative tax implications until such guidance is issued. Doing so will hopefully encourage investors to invest in SIBs and thereby unlock an additional source of capital to fund much needed social services.

Publication Title

Florida Tax Review

Document Type



Social Impact Bond, Tax, Finance



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.