The tax reform laws largely centered on tax cuts. Between the huge reductions in the corporate tax rate and the smaller yet still significant drops in the rates on tax brackets for individual taxpayers, the Trump administration stressed the idea that most taxpayers would pay less in tax.
One little-noticed provision of the new tax laws, though, imposed a brand-new tax on a select set of taxpayers. It'll only affect a few dozen entities, but if the provision survives, it would mark a new era for some of the most prestigious educational institutions in the nation.
Why your school could have to pay a new tax
Toward the end of the Tax Cuts and Jobs Act, a provision added a new excise tax based on the investment income of private colleges and universities. Most institutions of higher education are tax exempt under Section 501(c)(3) of the Internal Revenue Code, which not only prevents them from having to pay taxes on their income but also allows donations from alumni and other charitably minded donors to be tax deductible.
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Specifically, the new provision imposes a 1.4% tax on the net investment income of any private college or university that meets the qualifying criteria. The tax applies only to schools that had at least 500 students and in which more than 50% of students are located within U.S. borders. Most importantly, the tax applies only to schools that have assets exceeding $500,000 multiplied by the number of students attending the school. The provision specifically excludes state colleges and universities.
Because of the asset test, only a small number of educational institutions will be subject to the tax. However, the names of those affected are among the most prestigious in the nation, including Ivy League members Harvard, Yale, Princeton, and Dartmouth; tech giants Stanford, Caltech, and MIT; and top New England liberal arts colleges including Williams, Amherst, and Bowdoin.
How colleges and universities want to school the IRS
The schools that will have to pay the new tax have already looked for ways to fight back. Some have argued that the way in which the tax was structured is unconstitutional as an attempt to curb what some tax reform proponents might see as inappropriate exercise of academic freedoms. Others are looking at ways to restructure their assets in order to minimize or eliminate any tax liability from the measure. For instance, assets that are used directly toward the educational purpose of the college or university -- such as classroom buildings, for example -- aren't intended to be included in assets for purposes of calculating per-student figures. To the extent that educational institutions can recharacterize assets, it could reduce tax liability.