Federal Tax Authorities Release Final Regulations on Excise Tax to Net Investment Income

Thoughtware Alert Published: Oct 07, 2020
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On September 18, 2020, the federal tax authorities released an advanced copy of final regulations (TD 9917) for determining the Section 4968 excise tax that applies to the net investment income of certain colleges and universities. The new statute imposes on each applicable educational institution an excise tax equal to 1.4 percent of the institution’s net investment income. 

The final regulations under §4968 “include guidance on the scope of applicable educational institutions to which the excise tax applies, including determining who will be counted as a ‘tuition-paying student,’ which institutions will be treated as ‘located in the United States,’ and which assets will be included in determining whether an institution meets the $500,000 per student threshold in the statute.”

The following highlights changes from the proposed regulations:

  • Expanding the definition of “student” to include not only those in degree programs but also individuals taking courses for academic credit
  • Clarifying the definition of “tuition-paying”; includes students with third-party scholarships but excludes students who receive scholarships awarded by the institution. The final regulations add that, in determining whether a student is tuition-paying, government grants (federal and local) are taken into account
  • Providing three specific examples to determine if the student resided in the U.S. for at least a portion of the time the student attended the institution
  • Simplifying the “net investment income” calculation and differentiating it from the rules that apply to private foundations under §4940
  • Modifying certain “capital gains net income” calculations
  • Providing guidance on rules for treating specified assets, including tangible assets, and net investment income of certain related organizations
  • Defining “control” for organizations that control an educational institution; are controlled by an educational institution; and are controlled by one or more persons who also control the educational institution

Applicability Date

Although the final regulations will apply to tax years of educational institutions that begin after the date TD 9917 is published in the Federal Register, no date for this anticipated publication has yet been set.

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