Yesterday the House Ways and Means Committee began a “mark up” of the Tax Cuts and Jobs Act released last week, with Chairman Brady offering an amendment to some of the bill’s provisions, including an amendment to the proposed 1.4% excise tax on investment income of certain colleges and universities. The committee approved the amendment 24-16 in a roll call vote. Several other provisions of the bill would affect educational institutions. For example, the bill would consolidate several federal educational incentives, reducing government spending on these incentives by an estimated $65.3 billion over 10 years.
Consolidation and Overall Reduction in Educational Incentives
The bill contains several provisions intended to “simplify and reform” education incentives, which together would result in a substantial reduction in federal education incentives provided through the federal tax code. According to the Joint Committee on Tax (JCT), the net effect of these provisions would increase government revenues by approximately $65.3 billion between 2018 and 2027. The bill would:
- Repeal a wide array of education incentives, including:
- The above-the-line deduction for individual taxpayers for interest payments on qualified education loans for qualified higher education expenses
- The above-the-line deduction for qualified tuition and related expenses incurred that could be claimed in lieu of certain tax credits (consolidated by Section 1201 of the bill and described below)
- The exclusion for interest on United States savings bonds used to pay qualified higher education expenses
- The exclusion for qualified tuition reductions provided by educational institutions to their employees, spouses, or dependents
- The exclusion for up to $5,250 per year in employer-provided education assistance for graduate and undergraduate courses.
JCT estimates this provision (Section 1204) would increase government revenues by $47.5 billion.
- Consolidate the existing American Opportunity Tax Credit, Hope Scholarship Credit, and Lifetime Learning Credit into a single, modified American Opportunity Tax Credit. JCT estimates that this provision (Section 1201) would increase government revenues by $17.3 billion.
- Consolidate Coverdell educational savings accounts with Section 529 plans. Under the provision, new contributions to Coverdell education savings accounts after 2017 (except rollover contributions) would be prohibited, but tax-free rollovers from Coverdell accounts into Section 529 plans would be allowed. Certain elementary and high school expenses (currently permitted to be paid out of Coverdell educational savings accounts) of up to $10,000 per year would become qualified expenses for Section 529 plans. Qualified expenses for Section 529 plans would also be expanded to cover expenses associated with apprenticeship programs. JCT estimates that the provision (Section 1202) would increase government revenues by $0.6 billion.
- Provide an income tax exclusion for cancellation of indebtedness income for certain student loan discharges on account of death or disability and for payments made under the Indian Health Service Loan Repayment Program. JCT estimates this provision (Section 1203) would reduce government revenues by $0.1 billion.
Excise Tax on Colleges and Universities
Section 5103 of the bill, as amended by Chairman Brady’s amendment, would impose a 1.4% excise tax on the net investment income of certain educational institutions. The excise tax generally would apply to a private educational institution that:
- Has at least 500 full-time equivalent students
- Has assets with an aggregate fair market value of at least $250,000 per full-time equivalent student (excluding the value of assets which are used directly in carrying out the institution’s exempt purpose)
Net investment income would be determined under rules similar to the rules currently applied to calculate the excise tax on private foundations. JCT estimated that the original provision (which would have applied to institutions with $100,000 in assets per student) would increase government revenues by $3.0 billion.
In addition, several other provisions of the bill would affect colleges, universities, and other educational institutions. For example:
- Section 3601 would terminate private activity bonds. Under current law, interest on private activity bonds is excluded from gross income. Private activity bonds are often used by educational institutions to fund capital improvements and expansion because the tax preference lowers the financing costs for the institution. Under the bill, bonds issued after 2017 would no longer qualify for preferential treatment. In addition, the bill would make interest taxable on advance refunding bonds issued after 2017.
- Section 5002 would limit the current exclusion of research income from unrelated business taxable income (UBTI) for organizations operated primarily to carry on fundamental research the results of which are freely available to the general public. Currently, these organizations generally may exclude all income derived from research, but, under the bill, the exclusion would only be available for income from research if the research is fundamental and the results are made publicly available. (UBTI exclusions for income from research performed for government entities would be left unchanged).
- Section 1401 would limit the exclusions for employer-provided housing for employees of educational institutions. Under current law, employees generally can exclude from income the value of certain employer-provided lodging that is on the business premises of the employer and that must be accepted as a condition of employment. In addition, employees of certain educational institutions can partially exclude from income the value of “qualified campus lodging” to the extent the employee pays an amount of rent considered to be “adequate” under rules defined by the tax code. The bill would limit the amount of these exclusions to $50,000 for one residence and would impose a phase-out of the exclusion for “highly-compensated employees” – which in 2018 would be those earning more than $120,000 per year. The exclusions would be completely eliminated for those earning more than $220,000 per year in 2018. These thresholds would be subject to adjustment in future years.
- Section 1306(b) would deny the charitable contribution deduction if the donor receives the right to purchase tickets for a college athletic event in connection with the gift. Under current law, individuals making contributions and receiving the right to purchase tickets for seating at an athletic event generally are entitled to a deduction for 80% of the amount contributed.