Treasury Releases Proposed Regulations on Endowment Excise Tax
The Department of Treasury and the IRS have released proposed regulations for the excise tax on net investment income at certain private colleges and universities (aka the "endowment tax") enacted as part of the Tax Cuts and Jobs Act. The 2017 law stipulates that private colleges and universities with more than 500 tuition-paying students and endowment assets of at least $500,000 per student must pay a 1.4 percent tax on their net investment income.
The proposed rules provide guidance on determining if an institution is subject the tax and how to calculate the tax owed. Treasury estimates that approximately 40 schools are likely to be subject to the excise tax, but that number may change depending on how certain aspects of the final regulations are defined. The guidance outlines how the department would define who qualifies as a tuition-paying student and net investment income. The proposed rules indicate that net investment income is not limited to endowment assets. The following could be included in the tax:
- interest earned from loans made by schools to its students,
- earnings from renting facilities to students (not room and board), and
- profits from associated hospitals and alumni organizations.
The law would also apply to earnings from capital gains, interest, rents, royalties, and dividends.
Notably, the proposed regulations impact how institutions account for gifts of appreciated property. Schools that qualify for the tax would calculate gain of a gift of donated property using the donor’s basis. To comply with the statute, institutions would need to confirm the basis with the donor and secure documentation.
The public can submit comments to the department regarding the proposed regulations. The Treasury and IRS have specifically requested comments regarding the inclusion of a special rule in the final regulations that exempts any appreciation of gifts of property prior to its donation to an institution. CASE is working with NACUBO and other higher ed associations to submit comments and continue our efforts to repeal the tax. The deadline for comments is October 1, 2019.