IRS issues proposed regs on college endowment income

The Internal Revenue Service proposed regulations Friday for the new 1.4 percent excise tax on the net investment income of certain private colleges and universities who are now facing taxes on their endowments under the Tax Cuts and Jobs Act.

The proposed regulations involve an aspect of the 2017 tax overhaul that provoked particular consternation in the academic world. The IRS’s proposed regulations define some of the terms necessary for educational institutions to determine whether the section 4968 excise tax applies to them.

The excise tax applies to any private college or university with at least 500 full-time tuition-paying students (more than half of whom are in the U.S.) and that has assets other than those used in its charitable activities worth at least $500,000 per student. An estimated 40 or fewer institutions are affected by the new tax rules, but they include some prestigious schools, including Ivy League institutions.

For the affected educational institutions, the IRS’s new guidance clarifies how the schools should determine net investment income, including how to include the net investment income of related organizations and how to determine a college or university’s basis in property.

The proposed regulations include the interim guidance provided last year in Notice 2018-55, that for property held by an institution at the end of 2017, generally permits the educational institution to use the property’s fair market value at the end of 2017 as its basis for calculating the tax on any resulting gain.