IRS Issues Endowment Tax Regulations

The IRS has issued 58 pages of proposed regulations for the so-called “endowment tax,” a 1.4% excise tax on the net investment income of certain private colleges and universities that was included in the Tax Cuts and Jobs Act (TCJA) of 2017.

The tax applies to any private college or university that has at least 500 full-time tuition-paying students (more than half of whom are located in the US) and that has assets other than those used in its charitable activities worth at least $500,000 per student. According to the IRS, an estimated 40 or fewer institutions are affected by the endowment tax.

The proposed regulations define several of the terms necessary for educational institutions to determine whether the excise tax applies to them. For affected institutions, the guidance clarifies how to determine net investment income, including how to include the net investment income of related organizations, and how to determine an institution’s basis in property.

According to the regulations, fair market value of assets per student is based on the total number of all students attending the institution, not just the number of tuition-paying students. The IRS also said universities and colleges should base the definition of “tuition-paying” on the definition of qualified tuition and related expenses that is provided for education tax credits in section 25A(f)(1) of the Internal Revenue Code.

The proposed regulations also require that a student be both enrolled at and attend the applicable educational institution. They also must be enrolled or accepted for enrollment in a degree, certification, or other program (including a program of study abroad approved for credit by the eligible institution at which such student is enrolled) leading to a recognized educational credential.

Additionally, it’s up to each institution to determine which students are considered full-time and part-time as long as those decisions are consistent with the institution’s practices in determining full-time and part-time status for other purposes.

The notice of proposed rulemaking has a 90-day public comment period, which means the comments will be due by Oct. 1.

Harvard University, one of universities opposed to the new excise tax, declined to say if it intends to submit a formal public comment, according to student newspaper The Harvard Crimson. Brigid O’Rourke, a university spokesperson, told the Crimson that the university was opposed to the endowment tax and would continue to advocate its repeal.

“We are working to analyze the proposed guidance … and legal requirements of this new tax,” O’Rourke told the Crimson. “We will continue to work with policymakers and others in the higher education community to push for Congress to re-examine this misguided and damaging provision in light of the Congress’ stated goals of increasing access and affordability.”