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‘Endowment tax’ regulatory guidance for educational institutions

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September 2020


The IRS on September 18 released an advance version of Final Regulations under Section 4968, which imposes a 1.4% excise tax on the net investment income (NII) of certain private colleges and universities that have at least 500 tuition-paying students and whose nonexempt-use assets have a fair market value of at least $500,000 per student. The Final Regulations adopt Proposed Regulations issued July 3, 2019 with a number of important modifications. The Final Regulations apply to tax years beginning after the date the regulations are published in the Federal Register.

The Final Regulations address numerous issues, including how an educational institution determines if it is subject to the NII excise tax and how to calculate such tax. Below is a brief overview of key changes and additions contained in the Final Regulations. PwC will issue more in-depth analysis in the coming days. 

The takeaway

Many of the areas where the Final Regulations differ from the Proposed Regulations result from an acknowledgment that operations of educational institutions differ greatly from those of private foundations and, therefore, warrant different rules to calculate NII. Educational institutions often have larger, non-discretionary operating expenses and less flexibility with respect to their investments. The IRS made notable changes to sections of the Final Regulations that address some of these concerns. For example, the IRS allowed for increased exclusions from NII and a higher allowable cash balance for exempt-use assets. However, implementation of procedures related to the tax likely will continue to be an administrative burden for affected educational institutions.

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Rob Friz

Health Services Tax Leader, PwC US

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