After passage by the House and Senate earlier this week, today President Trump signed the "Tax Cuts and Jobs Act" (the "Act") into law. The Act represents the first major revision to the Internal Revenue Code of 1986 in over 30 years. Several of the changes included in the Act directly affect colleges and universities. As notable, however, are the many proposed changes that were excluded from the final version of the Act and which would have had a material adverse effect on all such institutions. This alert highlights both the proposals that were absent from the Act and those that will be enacted, most of which will become effective as of January 1, 2018.
Among the proposals which did not make it into the final version were the following:
- Repeal of the deduction for student loan interest;
- Repeal of the deduction for qualified tuition and related expenses;
- Eliminate the exclusion from income for qualified tuition waivers or reductions received by graduate students in exchange for serving as teaching and research assistants;
- Eliminate the ability of colleges and universities to issue tax exempt bonds to finance construction of facilities;
- Consolidate the American Opportunity Tax Credit and Lifetime Learning credits;
- Categorize income from licensing a tax-exempt organization's name or logo as unrelated business taxable income;
- Limit the exclusion from income for housing provided to employees of colleges or universities to $50,000 and phase out the exclusion for employees whose income exceeded certain levels.
More significant are the changes adopted by the Act which will affect colleges and universities, including the following:
- No charitable deduction will be allowed for any payment to a college or university if in exchange for a donation the payor receives the right to purchase tickets or seating at an athletic event. Previously, up to 80% of any such payment was considered a charitable deduction. This provision is effective for purchases made after December 31, 2017,
- Imposition of a 21% excise tax on compensation in excess of $1 million paid by colleges or universities to "covered employees." A covered employee is defined as one of the organization's five highest-paid employees for the tax year or any employee who was a covered employee for any taxable year after December 31, 2016. The term compensation includes wages paid and any deferred compensation if no longer subject to a substantial risk of forfeiture. Compensation also includes any compensation paid by a person or entity related to the college or university. This excise tax is imposed on the employer and not the covered employee.
- Exempt organizations must compute income separately with respect to each unrelated trade or business. It is likely colleges or universities will pay additional unrelated business taxable income ("UBTI") as a result of this change, particularly because net operating loss carryforwards from UBTI can only offset 80% of taxable income. Previously, an exempt organization could use a deduction from one unrelated trade or business to offset income from another unrelated trade or business.
- Colleges and Universities will be taxed on the value of providing their employees with transportation fringe benefits, on-premises gyms and other athletic facilities. The funds used to pay such benefits will be treated as UBTI.
- Imposition of a 1.4% excise tax on the investment income of private colleges and universities and their related organizations. This new tax takes aim at endowments, and applies to institutions with (1) more than 500 students, (2) more than 50% of their students located in the United States and (3) assets of at least $500,000 per full-time student.