Proposed Change to College Endowment Excise Tax Is Welcome Relief for Private Colleges

On September 13, 2021, the House Ways and Means Committee proposed legislation that incentivizes private schools to provide more student financial aid in return for a reduced excise tax. These proposals reflect recent Regulatory Updates that may impact education‑focused institutions.

For affected schools, particularly those navigating Nonprofit Accounting & Tax considerations, the proposed legislation offers potential relief. The bill followed ongoing debate over whether the existing excise tax effectively ensured that private college and university endowment assets were being used to help offset the rising cost of education for low‑income students attending top private institutions.

The proposed legislation includes modifications to the endowment excise tax under Internal Revenue Code (IRC) Section 4968, along with the introduction of a public university infrastructure credit. Together, these changes represent notable Tax Updates for nonprofits and educational institutions monitoring 

Proposed Modifications to the Endowment Excise Tax

 

Background:

IRC section 4968, enacted as part of the 2017 Tax Cuts and Jobs Act, imposes a 1.4% excise tax on net investment income of certain private college and university endowments. Although the tax currently impacts a small number (20 to 40) of colleges and universities, the impact to those organizations is significant.  

 

The change:

A key modification to the excise tax would effectively reduce an institution’s tax liability proportionately based on the amount of its qualified aid that exceeds 20% of its aggregate tuition and fees, up to 33%. Essentially, the change reduces the liability by 1/13 for every percentage point in which aid exceeds 20% of tuition and fees. 

Additional modifications include:

• Clarifies the 500-student threshold in which the tax will only apply to private colleges and universities with no fewer than 500 tuition-paying undergraduate students

• Indexes the $500,000 aggregate value of assets per student threshold to inflation based on the cost-of-living adjustment determined under IRC 1(f)(3).
  
  

Qualifying for the reduction:

To qualify for the reduction, your institution must furnish to the secretary a statement detailing the average federal student loans burden among:

• All first-time, full-time undergraduate students awarded a bachelor’s degree during the calendar year

• First-time, full-time undergraduate students awarded a bachelor’s degree during the calendar year who received federal student loans

• First-time, full-time undergraduate students awarded a bachelor’s degree during the calendar year who received a federal Pell Grant

• First-time, full-time undergraduate students awarded a bachelor’s degree during the calendar year who were awarded federal work-study positions

 

If you have questions on how to prepare for regulatory compliance or would like to discuss how the proposed changes impact you, contact Armanino’s tax experts.