Eluding the Endowment Tax

Picture a mad scramble at wealthy private colleges and universities in the days after the Republican tax reform plan passed Congress, as officials scurried to find ways to dodge or minimize the new excise tax on their endowments.

With the legislation kicking in for taxable years starting after Dec. 31, there would have been little time to lose. The tax reform package places an annual 1.4 percent excise tax on net investment income at an estimated several dozen colleges and universities. Specifically, the tax will apply to institutions with at least 500 students and net assets of $500,000 per student. That includes some of the nation's wealthiest colleges, such as Harvard, Stanford and Princeton Universities, but also some that fall under the tax in large part because they have relatively small student bodies, such as Claremont McKenna College.

It also includes colleges with unique missions and circumstances that don't fit the generic picture of a college and its endowment. Kentucky's Berea College uses its substantial per-student endowment to enable it to not charge tuition and was the center of legislative maneuvering as the bill passed. Cooper Union has a per-student endowment of more than $500,000 only because it owns the $675.6 million Chrysler Building in New York City -- which represented more than 80 percent of Cooper Union's endowment value in 2016.

Picture the chaos as money managers and business officers frantically ran simulations to determine which changes would limit their tax bills. Can portfolios be sold so that the gains on top-performing assets are realized before they are taxed? Can donations be redirected so that they will not go into funds exposed to taxation? Should colleges on the edge of the bill’s $500,000-per-student cutoff enroll a few more students to drive down the average value of their assets? Should those with slightly more than 500 students try to cut enrollment next year so as to drop below that limit?

Then ignore that scene, because it’s pure fiction.

Read more at Inside Higher Ed: https://www.insidehighered.com/news/2018/01/02/wealthy-colleges-face-uncertainty-they-seek-ways-avoid-new-endowment-tax