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Abstract: 

The Tax Cuts and Jobs Act added new IRC §4968, which imposes a 1.4% excise tax on the net investment income of certain nonprofit private colleges and universities. In order to be subject to the tax, a school must have at least 500 tuition-paying students (measured during the preceding taxable year), more than 50% of which are located in the United States; and, as of the last day of the preceding year, must have non-exempt use assets of at least $500,000 per student. For purposes of these calculations, the number of students is based on the daily average number of full-time students, with part-time students taken into account on a fully-time student equivalent basis. As described fully in this article, a student who receives a third-party scholarship, including one from a family foundation, is considered a tuition-paying student, but a student who receives a full scholarship administered directly by the college or university is not. As the number of schools subject to the new excise tax grows, family foundations may be encouraged to replace their self-administered scholarship programs with scholarship grants to schools.

Keywords: IRC §4968; IRC §25A; Functionally Related Businesses

Affiliations:  1: Family Foundation Advisor.