On Friday, June 28, 2019, the U.S. Internal Revenue Service issued proposed regulations to provide guidance on determining the excise tax applicable to net investment income of certain colleges and universities (the Proposal) under the 2018 Tax Cuts and Jobs Act (the Act).
In general, beginning after December 17, 2017, the Act imposes a 1.4% excise tax on private universities and colleges with over 500 full-time students to the extent an institution has assets of more than $500,000 per student which are not used in directly carrying out the institution’s exempt purpose. The Act failed to clarify key terms, including the definition of a “student,” when a student is a “full-time” student, or to specify what is included or excluded from the educational institution’s “direct exempt purpose.” The Proposal seeks to define these and other terms and to provide more guidance on how they are to be interpreted.
Under the Proposal, “students” would include persons enrolled in a degree, certification or other program leading to a “recognized educational credential.” A “full-time” student would be determined by the institution, but cannot be set at a lower standard than U.S. Department of Education standards.
An asset would be deemed to be used “directly in carrying out an educational institution’s exempt purpose” if it is actually used in the discharge of the exempt purpose as determined based on all facts and circumstances. Illustrations of assets used directly in the institution’s exempt purpose include:
- Office equipment, supplies and other administrative assets used directly in administration of exempt activities.
- Real estate and buildings used directly for exempt activities.
- Classrooms, research facilities and related fixtures and equipment.
- Cash balances to reasonably cover current administrative expenses and other normal and current disbursements directly connected with exempt activities. Cash balances of 1.5% or less of the institution’s non-charitable use assets will be deemed a reasonable balance.
- Paintings (and, presumably, other art work) on public display.
- Property leased at minimal or no cost in furtherance of the exempt purpose.
There is a de minimis safe harbor by which an asset will be deemed to be engaged in an exempt purpose if at least 95% of its total use is in exempt activities.
The Proposal explicitly excludes investment and income production as part of the institution’s exempt purpose, as well as office space and other property used for management of endowment funds.
The Release proposes other rules, including to what extent an entity may be considered a “related organization” under the Act, and determining the tax basis in certain assets as of the Act’s effective date of December 31, 2017.
The Proposal is available here.