The IRS on September 18, 2020, posted on its website final regulations (T.D. 9917) under section 4968, which imposes an excise tax of 1.4% on the net investment income of certain private colleges and universities with at least 500 tuition-paying students and endowments valued at $500,000 or more per student (“applicable educational institutions” or “AEIs”).
Read the final regulations [PDF 551 KB] (156 pages) as released by the IRS.
Section 4968 was added by the 2017 tax law (Pub. L. No. 115-97), the law that is often referred to as the “Tax Cuts and Jobs Act,” and proposed regulations implementing section 4968 were published on July 3, 2019.
In defining “net investment income” for purposes of section 4968, the proposed regulations did little more than cross-reference the rules governing a similar excise tax applicable to private foundations, and were criticized for failing to take into account the significant differences between the operations of a college or university and a typical private foundation. The proposed regulations also relied heavily on the rules applicable to private foundations to define which of the institution’s assets would be considered “used directly in carrying out the institution's exempt purpose” (that is, “exempt-use” assets) that can be excluded in calculating whether the $500,000-per-student threshold has been crossed.
The final regulations under section 4968 respond to the criticisms of the proposed regulations, by making numerous changes to the proposed regulations that are favorable for AEIs, and better take into account the differences between these educational institutions and private foundations.
Certain key provisions of the final regulations include the following measures.
The final regulations are effective the first tax year beginning after the date of publication in the Federal Register (anticipated to occur within the next few weeks). Therefore, for institutions with a June 30 year-end, the new regulations will be effective for tax years beginning July 1, 2021.
For more information, contact a tax professional with KPMG’s Washington National Tax practice:
Ruth Madrigal | +1 202 533 8817 | email@example.com
Preston Quesenberry | +1 202 533 3985 | firstname.lastname@example.org
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