IRS Releases Proposed Guidance on Excise Tax of Net Investment Income

On June 28, The Internal Revenue Service (IRS) and the U.S. Department of Treasury (Treasury) released proposed guidance on Section 4968, which was created by the Tax Cuts and Jobs Act (TCJA) in 2017.

Section 4968 imposes a 1.4 percent excise tax on the net investment income of private colleges and universities with at least 500 full-time, tuition-paying students and that have assets (other than assets used directly in the institution’s exempt purpose) valued at least $500,000 per student.

The proposed regulations provide clarification for educational institutions to assess whether they are affected by Section 4968, how to determine net investment income, how to include net investment income of related organizations and how to determine an institution’s basis in property. In addition to providing some points of clarification, the Treasury is specifically requesting comments on certain aspects of the proposed regulations.

This counts as the second time the IRS and Treasury have addressed Section 4968; in June 2018, Notice 2018-55 provided interim guidance for a one-time stepped-up basis rule to limit the impact of the excise tax, stating that property held by an educational institution may generally consider the fair market value at the end of 2017 as a starting point for determining their basis in calculating tax resulting from gains.

The IRS estimates that 40 or fewer institutions are affected by the tax; however, this number could increase in the event that other educational institutions see a growth in endowments, or if the tax law becomes expanded.

The net investment income tax under Section 4968 is effective for tax years beginning after December 31, 2017. Organizations may rely on the guidance within the proposed language until the tax year beginning after the date when final regulations are published.

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