§4968 — Title 26 Internal Revenue Code | U.S. Code

Summary

Private colleges and universities that meet certain tests must pay a tax each year equal to a percentage of their net investment income. The tax rates are 1.4% when the school’s student adjusted endowment is at least $500,000 and not more than $750,000, 4% when it is over $750,000 and not more than $2,000,000, and 8% when it is over $2,000,000. To owe the tax, a school must have had at least 3,000 tuition-paying students in the prior year, more than half of those students in the United States, a student adjusted endowment of at least $500,000, and must not be a state college or university. “Student adjusted endowment” means the fair market value of the school’s assets (not used directly for its exempt purpose) at the end of the prior year divided by its number of students, using the daily average of full-time students (with part-timers counted as full-time equivalents). Net investment income is figured under rules like those for private foundations and includes interest on student loans and royalties tied to federally funded research. Assets and investment income of related organizations can be counted too, with limits to avoid double-counting or including assets not meant to benefit the school. The Treasury must issue rules to stop attempts to avoid this tax.

Title 26, §4968

Internal Revenue Code — Source: USLM XML via OLRC

(a)There is hereby imposed on each applicable educational institution for the taxable year a tax equal to the applicable percentage of the net investment income of such institution for the taxable year.

(b)For purposes of this section, the term “applicable percentage” means—

(1)1.4 percent in the case of an institution with a student adjusted endowment of at least $500,000, and not in excess of $750,000,

(2)4 percent in the case of an institution with a student adjusted endowment in excess of $750,000, and not in excess of $2,000,000, and

(3)8 percent in the case of an institution with a student adjusted endowment in excess of $2,000,000.

(c)For purposes of this subchapter, the term “applicable educational institution” means an eligible educational institution (as defined in section 25A(f)(2))—

(1)which had at least 3,000 tuition-paying students during the preceding taxable year,

(2)more than 50 percent of the tuition-paying students of which are located in the United States,

(3)the student adjusted endowment of which is at least $500,000, and

(4)which is not described in the first sentence of section 511(a)(2)(B) (relating to State colleges and universities).

(d)For purposes of this section, the term “student adjusted endowment” means, with respect to any institution for any taxable year—

(1)the aggregate fair market value of the assets of such institution (determined as of the end of the preceding taxable year), other than those assets which are used directly in carrying out the institution’s exempt purpose, divided by

(2)the number of students of such institution.

(e)For purposes of subsections (c) and (d), the number of students of an institution (including for purposes of determining the number of students at a particular location) shall be based on the daily average number of full-time students attending such institution (with part-time students taken into account on a full-time student equivalent basis).

(f)For purposes of this section—

(1)Net investment income shall be determined under rules similar to the rules of section 4940(c).

(2)(A)Net investment income shall be determined by taking into account any interest income from a student loan made by the applicable educational institution (or any related organization) as gross investment income.

(B)(i)Net investment income shall be determined by taking into account any Federally-subsidized royalty income as gross investment income.

(ii)For purposes of this subparagraph—

(I)The term “Federally-subsidized royalty income” means any otherwise-regulatory-exempt royalty income if any Federal funds were used in the research, development, or creation of the patent, copyright, or other intellectual or intangible property from which such royalty income is derived.

(II)For purposes of this subparagraph, the term “otherwise-regulatory-exempt royalty income” means royalty income which (but for this subparagraph) would not be taken into account as gross investment income by reason of being derived from patents, copyrights, or other intellectual or intangible property which resulted from the work of students or faculty members in their capacities as such with the applicable educational institution.

(III)The term “Federal funds” includes any grant made by, and any payment made under any contract with, any Federal agency to the applicable educational institution, any related organization, or any student or faculty member referred to in subclause (II).

(g)(1)For purposes of subsections (d) and (f), assets and net investment income of any related organization with respect to an educational institution shall be treated as assets and net investment income, respectively, of the educational institution, except that—

(A)no such amount shall be taken into account with respect to more than 1 educational institution, and

(B)unless such organization is controlled by such institution or is described in section 509(a)(3) with respect to such institution for the taxable year, assets and net investment income which are not intended or available for the use or benefit of the educational institution shall not be taken into account.

(2)For purposes of this subsection, the term “related organization” means, with respect to an educational institution, any organization which—

(A)controls, or is controlled by, such institution,

(B)is controlled by 1 or more persons which also control such institution, or

(C)is a supported organization (as defined in section 509(f)(3)), or an organization described in section 509(a)(3), during the taxable year with respect to such institution.

(h)The Secretary shall prescribe such regulations or other guidance as may be necessary to prevent avoidance of the tax under this section, including regulations or other guidance to prevent avoidance of such tax through the restructuring of endowment funds or other arrangements designed to reduce or eliminate the value of net investment income or assets subject to the tax imposed by this section.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2025—Pub. L. 119–21 amended section generally. Prior to amendment, section consisted of subsecs. (a) to (d) relating to tax imposed, applicable educational institution, net investment income, and assets and net investment income of related organizations, respectively. 2018—Subsec. (b)(1)(A). Pub. L. 115–123, § 41109(a)(1), inserted “tuition-paying” after “500”. Subsec. (b)(1)(B). Pub. L. 115–123, § 41109(a)(2), inserted “tuition-paying” after “50 percent of the”.

Statutory Notes and Related Subsidiaries

Effective Date

of 2025 Amendment Pub. L. 119–21, title VII, § 70415(c), July 4, 2025, 139 Stat. 223, provided that: “The

Amendments

made by this section [amending this section and section 6033 of this title] shall apply to taxable years beginning after December 31, 2025.”

Effective Date

of 2018 Amendment Pub. L. 115–123, div. D, title II, § 41109(b), Feb. 9, 2018, 132 Stat. 159, provided that: “The

Amendments

made by this section [amending this section] shall apply to taxable years beginning after December 31, 2017.”

Effective Date

Pub. L. 115–97, title I, § 13701(c), Dec. 22, 2017, 131 Stat. 2168, provided that: “The

Amendments

made by this section [enacting this section] shall apply to taxable years beginning after December 31, 2017.”

§4968 Excise Tax Based on Investment Income of Private Colleges and Universities

Summary

Title 26, §4968

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Amendments

Effective Date

Amendments

Effective Date

Amendments

Citations & Metadata