In recent years, the taxation of higher education institutions has become a significant point of deliberation. In 2017, Congress enacted IRC Section 4968, which imposes a 1.4% excise tax on net investment income of certain educational institutions with noncharitable use assets of at least $500,000 per student and at least 500 tuition paying students. This tax has been controversial, and despite efforts by educational institutions to repeal it, recent developments suggest that relief is unlikely and that the excise tax could be increased.
Currently, due to growing endowments and how the IRC Section 4968 tax is calculated, the reach of the excise tax has expanded to cover more institutions than originally anticipated. While the IRS originally anticipated that the tax would apply to 40 or fewer institutions, in 2022 the tax applied to 58 schools with total excise tax payments of $243,710,847.
One effort to mitigate the tax was introduced in 2021 in H.R. 5152, the Higher Education Endowment Tax Reform Act, which proposed a phase-out of the excise tax for certain private colleges and universities that provide qualified aid awards to first-time, full-time students. This bill was not enacted.
Two bills introduced in 2023 would make significant changes to the structure of the tax:
Another bill introduced in 2023, H.R. 5933, the DETERRENT Act, would increase reporting of foreign gifts made to U.S. colleges and universities.
Crowe observation
The significant activity in Congress related to taxing higher education institutions is an indication of increased scrutiny of these organizations.
Looking ahead
If enacted, the proposals to increase tax and reporting imposed on colleges and universities could have significant financial implications on higher education institutions. As the legislative landscape in this area continues to evolve, it is crucial for institutions to consult with their advisers to stay informed about these developments and to consider the potential impacts on their operations.
