The recently released draft of the House Ways and Means Committee’s proposed tax bill included a significant impact on colleges and universities. The 2017 Tax Cuts and Jobs Act imposed a 1.4% excise tax on the investment income of an “applicable educational institution.” The proposed bill expands the excise tax, as detailed below.

  • 1.4% in the case of an institution with a student endowment in excess of $500,000 and less than $750,000
  • 7% in the case of an institution with a student endowment in excess of $750,000 and less than $1,250,000
  • 14% in the case of an institution with a student endowment in excess of $1,250,000 and less than $2,000,000, and
  • 21% in the case of an institution with a student endowment in excess of $2,000,000

Applicable Educational Institution

An “applicable educational institution” is described as an eligible educational institution (as defined in IRC section 25A(f)(2)):

  • Which had at least 500 tuition-paying students during the preceding tax year,
  • More than 50% of the tuition-paying students of which are located in the U.S.,
  • Which is not a state college or university or a qualified religious institution, and
  • The “student adjusted endowment” of which is at least $500,000.

Student Adjusted Endowment

“Student adjusted endowment” means the aggregate fair market value of the institution’s assets (determined as of the end of the preceding tax year, other than those assets used directly in carrying out the institution’s exempt purpose) divided by the number of eligible students of the institution. An eligible student meets the requirements under Section 484(a)(5) of the Higher Education Act of 1965.

The institution’s net investment income is determined under rules similar to the rules of IRC section 4940(c).

The proposed bill also includes the aggregation of related organizations. A related organization is defined as any organization that:

  • Controls, or is controlled by, such institution,
  • Is controlled by one or more persons who also control such institution, or
  • A supported organization (as defined in IRC section 509(f)(3)) or an organization described under IRC section 509(a)(3).

Although the bill is in draft format, we will watch closely as it moves through Congress. If you have any questions about how the proposed legislation may impact your organization, please contact your trusted Dean Dorton advisor.