IRS Proposes Regulations to Soften Endowment Tax Hit

Clarification of 1.4% excise tax could reduce amount paid by universities.

The IRS has issued a notice saying that it and the Department of the Treasury plan to propose regulations that will not only provide clarification on the so-called endowment tax, but could lessen the hit to colleges and universities who are subjected to it.

The Tax Cuts and Jobs Act of 2017 added section 4968 to the tax code, which imposes a 1.4% excise tax on the net investment income of private colleges and universities with at least 500 students, and with assets of at least $500,000 per full-time student. According to the IRS, an estimated 40 or fewer institutions are affected by the tax.

The proposed guidance states that any institution that is subject to the excise tax that sells property for a profit can use the fair market value of the property as of Dec. 31 2017, as its basis for calculating the tax on any gain. In many instances, the new stepped-up basis rule will reduce the amount of gain subject to the new tax, the IRS said. The normal basis rules will still apply for calculating any loss.

The Treasury and IRS also said they 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.

Until the new regulations are issued, the IRS said that “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.”

In March, Congressmen John Delaney (D-MD) and Bradley Byrne (R-AL) introduced a bill to repeal the endowment tax. The Don’t Tax Higher Education Act bill has the support of the American Council on Education, the Council for Advancement and Support of Education (CASE), the National Association of College and University Business Officers, and the National Association of Independent Colleges and Universities.

“Our tax policy should encourage donors to make charitable gifts supporting wider access through scholarships, research, and academic programs at colleges, universities, and independent schools,” said Sue Cunningham, CEO of CASE, in a release. “It should not penalize donor generosity.”

The bill has been referred to the House Committee on Ways and Means.

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