Details of Public Law 119-21, section 70415 , One Big Beautiful Bill Act

Previously, the Tax Cuts and Jobs Act (Public Law 115-97, section 13701) added a federal law that imposed an excise tax on an applicable educational institution for each taxable year equal to 1.4 percent of the net investment income of the institution for the taxable year.

This provision replaces the 1.4 percent excise tax with a tiered percentage of the net investment income of the institution for the taxable year based on an institution’s student adjusted endowment amounts as follows:

1.4 percent for an institution with a student adjusted endowment of at least $500,000 and not in excess of $750,000,

4 percent for an institution with a student adjusted endowment in excess of $750,000 and not in excess of $2,000,000 and

8 percent for an institution with a student adjustment endowment in excess of $2,000,000.

This provision also modifies the definition of an applicable educational institution as an institution: (1) that has at least 3,000 (previously 500) students during the preceding taxable year; (2) that is an eligible educational institution as described in section 25A of the IRC; (3) that is not described in the first section of section 511(a)(2)(B) of the IRC (generally describing State colleges and universities); (4) has student adjusted endowments of at least $500,000; and (5) more than 50 percent of the students of which are located in the United States. For this purpose, the number of students at a location is based on the daily average number of full-time students attending the institution, with part-time students being taken into account on a full-time student equivalent basis.

The excise tax is calculated as a percent of net investment income and is determined using rules similar to the rules of IRC section 4940(c) (relating to the net investment income of a private foundation). The provision provides that the computation of net investment income includes student loan interest and federally subsidized royalty income.

For purposes of determining whether an institution meets the student adjusted endowment asset threshold and determining net investment income, assets and net investment income include amounts with respect to an organization that is related to the institution. An organization is treated as related to the institution for this purpose if the organization: (1) controls, or is controlled by, the institution; (2) is controlled by one or more persons that control the institution; or (3) is a supported organization or a supporting organization during the taxable year with respect to the institution. In addition, (1) no such amount is taken into account with respect to more than one educational institution; and (2) unless the related organization is controlled by the educational institution or is a supporting organization (described in IRC section 509(a)(3)) with respect to the institution for the taxable year, assets and investment income that are not intended or available for the use or benefit of the educational institution are not taken into account.

The provision provides that the Secretary would promulgate regulations or other guidance necessary to prevent avoidance of the tax under this provision, including regulations or other guidance to prevent tax avoidance by restructuring of endowment funds or other arrangements to reduce or eliminate net investment income.

The provision would additionally require each applicable educational institution exempt from taxation under IRC section 501(a) to include on its annual return the number of tuition-paying students taken into account for purposes of the excise tax and the number of students of the institution calculated in accordance with the excise tax.

The FTB does not administer these types of excise taxes.