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Treasury Modifies Endowment Tax Rules

September 21, 2020

Associations representing colleges and universities still objected to the endowment tax that Congress enacted in 2017 but said final rules published by the Internal Revenue Service and Treasury Department on Friday made some improvements to the interim rules the agencies announced last year.

Congress, as part of a sweeping tax reform bill, created a 1.4 percent excise tax on net investment income at private colleges and universities with at least 500 tuition-paying students and assets of at least $500,000 per student.

In a reversal from the interim guidance, the Treasury and IRS now say they will not count a student whose tuition is paid through federal grants, scholarships or institutional aid as a tuition-paying student, said Steven Bloom, the American Council on Education’s government relations director.

Associations were still studying the 156-page rule. But in another change in response to input from institutions, the agencies said they will not tax colleges on the interest they receive on student aid, or revenue from housing students, faculty or staff.

Still, Bloom said the tax is extremely complicated, and the money would go into the federal government’s general coffers and not go toward helping students go to college.

Liz Clark, vice president for policy and research for the National Association of College and University Business Officers, praised the changes from the interim guidance, saying they “recognized some of the unique operating challenges colleges and universities contend with.” But she said, “NACUBO remains staunchly opposed to the legislative policy driving the creation of the tax, which diminishes the charitable resources the affected colleges have for students.”

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