On July 3, the IRS published proposed regulations under IRC Section 4968, enacted by the Tax Cuts and Jobs Act, which imposes a 1.4% excise tax on the net investment income of certain private colleges and universities. The proposed regulations provide guidance on which institutions are subject to the tax and clarify rules for calculating net investment income tax. Comments and requests for a hearing are due Oct. 1, 2019. Generally, the rules will apply prospectively to tax years beginning after the final regulations are published. However, the guidance provides that taxpayers may rely on the proposed regulations retroactively for tax years beginning before publication of final regulations.
The proposed regulations define the following terms:
Institutions subject to the tax
The tax generally applies to private colleges and universities that:- Are “applicable educational institutions” as described in Section 25A(f)(2), which generally includes institutions qualified to receive federal student financial aid.
- Have at least 500 tuition-paying students, more than 50% of whom are located in the United States. The number of tuition-paying students is based on the daily average number of full-time students attending the institution. Part-time students are taken into account on a full-time student equivalent basis.
- Are not state colleges or universities.
- Have assets (other than those assets used directly in carrying out their exempt purpose) with an aggregate fair market value of at least $500,000 per student.
The proposed regulations define the following terms:
- “Student” generally means an individual enrolled in a degree, certification, or other program (including a program of study abroad approved for credit by the institution) that will lead to a recognized educational credential at an institution.
- “Tuition-paying” means the payment of any tuition or fees required to enroll in or attend courses of instruction at an institution after the application of any scholarships offered (or work-study program operated) directly by the institution. The term does not include payment for supplies or equipment required during a specific course once a student is enrolled in or attending the course or the payment of room and board or other personal living expenses. If a student is required to pay a fee to an institution that combines charges for tuition with charges for personal living expenses such as room and board, the student is a tuition-paying student.
- “Located in the United States” means residing in the United States for at least a portion of the time an individual attended the institution during the preceding tax year.
- “Assets used directly in carrying out an institution's exempt purpose” means assets actually used by the institution as such. Examples include administrative assets as well as real estate and physical property used by the institution directly in its exempt activities. A reasonable cash balance of 1.5% of the fair market value of noncharitable assets is considered to be used directly in carrying out the institution's exempt purpose. Assets held for the production of income or for investment are deemed to not be used directly in carrying out an institution’s exempt purpose. For purposes of valuing the institution’s nonexempt use assets, institutions generally must use the rules of Section 4942, with modifications.
