New College Endowment Tax under the Tax Cuts and Jobs Act
posted Sep 5, 2018 by Paul Oliveira, CPA in the Global Tax Blog
The new federal tax reform bill, the Tax Cuts and Jobs Act (TCJA), which was passed in December, includes a new provision targeting America’s wealthiest colleges. The TCJA will assess a 1.4% excise tax on investment returns at private colleges with at least 500 students whose endowments are valued at more than $500,000 per student. The provision has been met with harsh criticism.
What exactly is a college endowment?
Endowments are donated to colleges and represent money or other financial assets that are meant to be invested to grow the principal and provide additional income for future investments and expenses.
Usually endowment funds follow a fairly strict set of long term guidelines which dictate how much of each year’s investment income can be used. This amounts to 5% of the endowment’s total asset value for many universities.
Why was the provision put in place?
Proponents of the endowment tax say it will raise a few hundred million dollars a year to offset the tax cuts contained in the Tax Cuts and Jobs Act. Others have said the tax is aimed at pushing colleges to address the college debt crisis, and that the tax ensures that private endowments are placed on equal footing with private foundations.
How many schools will the provision affect?
The provision is expected to impact around 35 schools, including five in MA- Harvard, Massachusetts Institute of Technology (MIT), Amherst College, Williams College and Wellesley College. Here’s the complete list:
- Princeton University
- Princeton Theological Seminary
- Yale University
- Harvard University
- Stanford University
- Pomona College
- The Juilliard School
- Weill Cornell Medical College (Note: According to Cornell University, units in New York City including the medical college count toward the university's single endowment. So the medical college would not be affected by the new tax.)
- Amherst College
- Swarthmore College
- Massachusetts Institute of Technology
- Grinnell College
- Williams College
- California Institute of Technology
- Rice University
- Wellesley College
- Cooper Union
- Medical College of Wisconsin
- Dartmouth College
- Washington and Lee University
- Bowdoin College
- University of Notre Dame
- University of Richmond
- Smith College
- Baylor College of Medicine
- Icahn School at Mt. Sinai
- Emory University
- Washington University in St. Louis
- Bryn Mawr College
- Claremont McKenna College
- Trinity University (Texas)
- University of Chicago
How much will the tax end up costing?
As mentioned earlier on in this blog, the tax is 1.4% of endowments. Affected colleges can expect to pay quite a bit each year to accommodate the tax. MIT’s president expects that the tax will cost at least $10 million per year.
Other potential effects
Many colleges fear that the provision will reduce the ability to provide financial aid, innovative education and pioneering research for students. In addition, there are concerns that the tax will:
- Weaken colleges’ ability to support students and research.
- Constrain the resources that enable schools to provide the financial aid that makes college more affordable or even accessible to some.
- Eliminate the opportunity to enroll students who could yield discoveries, cures, innovation, and economic growth at the college.
Questions on the endowment tax? Don’t hesitate to reach out to our Tax Services Team today.