IRS Releases Guidance Regarding TCJA Higher Education Excise Tax on Net Investment Income

On June 8, 2018, the IRS released Notice 2018-55 (“Notice”) regarding the Tax Cuts and Jobs Act's 1.4% excise tax on the net investment income of “applicable education institutions.” In short, the Notice provides that, in determining net investment income, taxpayers should calculate gains on the sale of property using a stepped-up basis, namely, basis of the fair market value of the property at December 31, 2017. Calculation of losses will continue to follow normal rules.

The 1.4% excise tax on net investment income only applies to "applicable educational institutions" defined as follows:

  • Colleges and universities with at least 500 students during the preceding tax year, of which more than 50 percent are located in the United States;
  • Private educational institutions and not state colleges and universities described in Code Sec. 511(a)(2)(B); and
  • Institutions having assets with an aggregate fair market value of at least $500,000 per student (not including assets used directly to carry out the institution’s exempt purpose) as measured at the end of the preceding tax year.

It’s estimated that 40 or fewer colleges and universities will be impacted by this new tax. Affected institutions will need to create “new” basis records for all investment assets on the balance sheet as of December 31, 2017. The effect of this provision will be to tax appreciation earned and realized after December 31, 2017. Normal basis rules shall continue to apply to capital losses.

The IRS intends to propose regulations under which losses may offset gains to the extent of gains, and where no capital loss carryovers or carrybacks will be allowed. Proposed regulations may allow losses from property sales by related organizations to offset gains realized by other related organizations.

The IRS also intends to issue further guidance regarding the excise tax, until such time taxpayers may rely on the Notice. The tax will be reported on Form 4720, Return of Certain Excise Taxes, under chapters 41 and 42 of the Internal Revenue Code.

If you have any questions about this matter, please reach out to us at Schneider Downs.

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