ISSUE

The 2017 “Tax Cuts and Jobs Act” contains a provision whereby some private colleges may have to pay a 1.4% excise tax on endowment earnings.

 

SITUATION

Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

Their Controller has heard about a “new tax on colleges.”  They call to ask about the 1.4% excise tax on private college endowments.  “Are we subject to this tax?”

We tell them that no, for now, MBC would not be subject to the tax (under I.R.C. Section 4968) and that, as a rule of thumb, the tax would only affect schools with a minimum of $250 million in “endowment assets.”  Also, the IRS has just proposed guidance that could provide a “stepped-up basis” for capital gains subject to inclusion in the “net investment income” of schools to which the section/tax might apply.

 

RULES

From IRS Newswire (Issue Number: IR-2018-134):

WASHINGTON — A private college or university, subject to the new 1.4 percent excise tax on net investment income, that sells property at a gain generally may use the property’s fair market value at the end of 2017 as its basis for figuring the tax on any resulting gain, the Internal Revenue Service said today. In many instances, this new stepped-up basis rule will reduce the amount of gain subject to the new tax. Normal basis rules will continue to apply for calculating any loss.

In Notice 2018-55, posted today on IRS.gov [6/8/18], the Treasury Department and the IRS said they plan to issue proposed regulations addressing this and other matters relating to the new excise tax. In the meantime, affected taxpayers may rely on the special basis step-up rule described in the notice. The notice also requests public comment on other issues addressed in the notice, as well as any other matters that should be addressed in future guidance. See the notice for details on submitting comments.

The excise tax was included in the Tax Cuts and Jobs Act (TCJA), tax reform legislation enacted in December. The tax applies to any private college or university with at least 500 full-time tuition-paying students, more than half of whom are located in the United States, that has an endowment of at least $500,000 per student. An estimated 40 or fewer institutions are affected. According to the notice, the basis of property held on Dec. 31, 2017, that is later sold at a gain will be not less than its fair market value on Dec. 31, 2017, plus or minus subsequent normal basis adjustments. Similarly, Treasury and IRS intend to propose regulations under which losses may offset gains to the extent of gains, but no capital loss carryovers or carrybacks will be allowed. Proposed regulations also may permit losses from property sales by related organizations to offset gains realized by other related organizations.

 

BOTTOM LINE

  • Internal Revenue Code Section 4968 (new) contains a provision where some private colleges will be required to pay a 1.4% excise tax on “net investment income.”
  • It appears the rules and definitions for this “income” calculation might emulate Private Foundation tax rules – guidance is forthcoming.
  • The tax applies to any private college or university with at least 500 full-time tuition-paying students, more than half of whom are located in the United States, that has an endowment of at least $500,000 per student.
  • It is estimated that only about 40 or fewer institutions will be affected by this new tax.

 

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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