Final Regulations for Section 4968
Final Regulations on New 1.4% Tax on Net Investment Income of Certain Private Colleges Released
The Tax Cuts and Jobs Act added section 4968, which imposes a 1.4-percent excise tax on the net investment income (“NII”) earned by applicable educational institutions for taxable years beginning after December 31, 2017. Affected institutions are private colleges and universities that had at least 500 tuition-paying students during the preceding tax year, more than 50 percent of which are located in the United States, and had at least $500,000 of non-exempt use assets per student. It is expected that this new tax will affect fewer than 40 institutions.
On September 18, 2020, Treasury and the IRS released final regulations, making some favorable changes to the earlier proposed regulations that were released in July 2019. Those changes include:
- Income from program-related activities such as student loans, student housing, and faculty/student-created intellectual property is excluded from the calculation of NII.
- Capital gain from the sale or exchange of property that is used by the institution for its exempt activities is excluded from the calculation of NII.
- Any appreciation in the value of donated property that occurred prior to the date of its donations to the institution is disregarded when calculating the capital gain or loss from the sale of the property for the purpose of calculating NII.
- Capital loss carryovers will be allowed but not carrybacks.
The regulations are proposed to apply to tax years beginning after the date the final regulations are published in the Federal Register. Therefore, for earlier tax years, an exempt organization may rely on one of the following:
- A reasonable, good-faith interpretation of section 4968 that includes consideration of any relevant legislative history.
- The proposed regulations in their entirety.
- Notice 2018-55.