Tax Bill A Mixed Bag for Colleges and Universities
The House Ways and Means Committee has approved sweeping tax legislation that would rewrite large swaths of the federal tax code and extend a host of tax provisions slated to expire at the end of the 2025 calendar year.
The Ways & Means Committee’s bill, which passed this week on a party-line vote, will be combined with the other reconciliation bills reported out of the House standing committees – including the bill passed by the House Education & Workforce Committee - and will move to the House floor for consideration as a single measure.
Key Provisions of the Tax Bill
Student and Family Benefits
The tax bill preserves all the student and family higher education benefits that had been under consideration for elimination. The only noteworthy change to the existing student and family higher education benefits programs would be a requirement to provide a Social Security Number for individuals applying for the American Opportunity Tax Credit and Lifetime Learning Credit. In addition, the bill expands IRC Sec. 127 employer-provided education assistance and preserves the tax-free treatment of interest on bonds – both are long-standing NAICU priorities.
Endowment Tax
However, the bill also increases the marginal taxation rates on private, nonprofit colleges and universities eligible to pay the endowment tax. While the bill does not change the formula determining which institutions pay the tax, it does exclude international and undocumented students from the per-student count. The bill also excludes certain faith-based institutions from the tax.
According to the bill language, the tax rate for private, nonprofit colleges with endowment assets per full-time student (FTE) valued at $500,000 - $750,000 will remain at the current 1.4% level. Marginal tax rates will increase for institutions with endowment assets per FTE valued between $750,000 to $1.25 million to a 7% rate. Institutions with endowment assets per FTE valued at $1.25 million to $2 million will be taxed at a rate of 14%. Finally, institutions with endowment assets per FTE valued at $2 million or greater will see marginal tax rates rise to a 21% rate.
Bonds
As for more general provisions important to nonprofit employers, the bill does not include limitations on tax-exempt bond financing, but it does propose to eliminate the deduction for employer-provided transit benefits (including parking) as part of broader reforms proposed to Unrelated Business Income Taxes (UBIT). Churches and church-related organizations are exempted from the proposed UBIT changes.
IRC Sec. 127 (employer-provided education assistance)
The bill further makes significant improvements to IRC Sec. 127 (employer-provided education assistance). Pandemic-era changes expanded allowances under IRC Sec. 127 to include student loan repayment, in addition to the historical application to tuition reimbursement. The bill makes IRC Sec. 127 a permanent program, removing the hurdle of reauthorizing the program. In addition, the annual tax-free contributions by employers, long set at $5,250 and unadjusted for nearly 40 years, will also be indexed for inflation moving forward.
The various reconciliation bills will become one package that is currently scheduled for consideration by the House Committee on Rules early next week. Once approved, the package will be quickly scheduled for floor consideration to meet the Memorial Day deadline House leadership is aiming for.
Once the reconciliation is approved by the House, the Senate will begin its own reconciliation process. The timing is less clear on when the Senate will be able to bring a reconciliation package to the floor. Ultimately, the House and Senate must resolve any differences in their bills prior to final passage.
For more information, please contact:
Karin Johns