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Effect of the New Excise Tax on Investment and Its Impact on Private Colleges and Universities

Effect of the New Excise Tax on Investment and Its Impact on Private Colleges and Universities

Since the end of 2017 & into today, there is a 1.4% excise tax directed on the net investment right from the new tax law. This excise tax affects the net investment income of some colleges and institutions that are private tax-exempt.

Congress's decision to go with the 1.4% rate is due to the approximation of the tax paid by private institutions on their net investment income.

According to this new tax law, they defined an applicable college or university as an institution that:

  • Has no less than 500 students paying tuition during the previous tax year

  • Over 50% of the tuition-paying institutions are based in the United States.

  • The institution is not public but privately owned.

  • The asset has an aggregate fair market value of $500,000, at least for each enrolled student at the end of the preceding tax year. Assets used in taking care of the school's exempt purpose are, however, excluded.

The example below will shed light on how the law applies.

We will be using the example of an institution with 3,000 students.  They will not be subjected to tax except the assets are more than $ 1.5 billion or the same. We got this by multiplying 3,000 by 

$500,000. As soon as the asset meets this, the tax will also apply to the net investment income. This will also apply to the asset income above the threshold. The threshold should have a higher value such that it will exempt most institutions from the tax. 

The student's population is a factor of the daily average of full-time student equivalences. As a result, two students that attend the same college on a part-time basis will be classified as a single student – one full-time student. Under this new law, there is no segregation between graduate and undergraduate students.

The law also takes into account the assets alongside the net investment income. This is alongside the asset and net investment income. The law recognizes this to determine the asset threshold and the tax. The following makes an organization related:

  • The organization controls the institution.

  • The control of the organization is based on one or more people that control the institution.

  • The organization is a supporting organization during the year.

A related organization's asset and net investment cannot go to two or more institutions as allocation. Also, the net investment income and assets absent from the institution's use or do not benefit them are not considered for tax purposes. This only happens if the institution controls the related organization.

We, however, still need some information from the IRS to clarify some items. Some of these are:

  • To examine what asset of an institution is not, what defines assets used in taking care of the school's exempt purpose?

  • There are assets and net investment income that are not scheduled to be used by the institution. What defines these assets and net investment income?

  • Does determining net investment income have some special rule guiding it?

  • Student’s location in the United States is under what condition?

  • What are the institutions to be considered aggregated? In the case of a separate medical school, how will such be aggregated within the university?


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