Here’s How the Treasury Dept. and IRS Plan to Tax Endowments

The Treasury Department and the Internal Revenue Service have brought endowments one step closer to facing taxation.  

The two have released a set of proposed regulations that would put the so-called endowment excise tax into practice. The tax is a departure from prior practices, which avoided taxing endowments at schools altogether, according to the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution that publishes analysis and facts about tax policy. 

The endowment excise tax was written into the Tax Cuts and Jobs Act, which was approved by Congress in 2017. The law stipulates that private endowments pay a 1.4 percent excise tax on net investment income. The tax will affect endowments at schools with at least 500 full-time students and assets of at least $500,000 per student. 

Following the release of the proposed regulations, the National Association of College and University Business Officers shared its own interpretation of those regulations on Monday. It also noted that a 90-day-long comment period has been opened by the Treasury Department and IRS, for those seeking to provide feedback on the matter.  

The endowment excise tax is similar to the private foundation tax, NACUBO says on its website, in that gross income from interest, dividends, rents, royalties, and capital gains would be included as taxable income under the new regulation, according to NACUBO.  

The Treasury Department and the IRS are still considering how interest from student loans will be taxed under the new regulation and are seeking comment from endowments and others on the matter, according to NACUBO.  

“Consistent with the rules governing private foundations, the proposed regulations provide that an asset is used directly in carrying out an institution's exempt purpose only if the asset is actually used by the institution in carrying out its exempt purpose,” according to NACUBO’s analysis of the proposed regulations.  

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This means that an endowment’s administrative assets, real estate, and physical property can be tax-exempt, as long as they are used in exempt activities, like for charitable or educational purposes, according to NACUBO.  

However, when those assets are used both for tax-exempt activities and non-exempt activities, they are taxed differently. According to NACUBO, an asset that is used 95 percent of the time or more for charitable or educational purposes will likely be considered exempt in the new regulation.  

Those used more often will have to make an allocation based on estimations of how often the assets are used for exempt and non-exempt activities, per NACUBO.