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.
For these schools, the proposed legislation, aligned with the recent
regulatory updates, provides some welcome relief. The bill comes after debate about whether the excise tax was helping to ensure private college and university endowment assets were being used to reduce the increasingly high cost of education for low-income students attending top private institutions.
The proposed bill includes modifications to the endowment excise tax under Internal Revenue Code (IRC) 4968 and the addition of a public university infrastructure credit.
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.
