Final Endowment Tax Regulations Adopt Reasonable Approach

The IRS and the Department of the Treasury on September 18 released final rules for the endowment excise tax created under the Tax Cuts and Jobs Act of 2017—and took a measured approach to the levy on certain private colleges and universities. 

In the final rules, IRS and Treasury officials responded to many of the concerns raised by NACUBO and others and adopted many of NACUBO’s recommendations. The final regulations acknowledge that colleges and universities are not strictly comparable to private foundations and have made several adjustments to the proposed rules that reflect the difference.

Institutions that are subject to the net investment income tax may be relieved to see that the final regulation:  

• Provides a reasonable safe harbor for calculating cash needs, rather than the proposed 1.5 percent of the fair market value of the institution’s non-charitable use assets
• Excludes from the calculation of net investment income—
• Income derived from institutional student loans in the calculation of net investment income (NII)
• Income from housing for student, faculty, and staff
•  Royalty income derived from patents and copyrights resulting from the work of students or faculty members
•  Appreciation in a gift of donated property that occurred prior to the donation 

•  Allows institutions to carry over capital losses against capital gains in future years
• Excludes charitable lead trusts and charitable remainder trusts from the definition of related organizations, as well as 403(b) retirement savings plans and custodial accounts
• Streamlines the requirements to gather basis information from donors of gifts of appreciated property
• Tailors the rules related to controlled organizations to more adequately reflect campus scenarios

While we are pleased with the steps taken by regulators to address our comments and those of stakeholder institutions in the final regulations, NACUBO remains staunchly opposed to the underlying legislative policy that drove the creation of this tax. It exclusively targets colleges and universities and directs charitable resources away from their critical missions.  

NACUBO’s analysis is ongoing.