Endowment tax is the
taxation
A tax is a mandatory financial charge or levy imposed on an individual or legal person, legal entity by a governmental organization to support government spending and public expenditures collectively or to Pigouvian tax, regulate and reduce nega ...
of
financial endowment
A financial endowment is a legal structure for managing, and in many cases indefinitely perpetuating, a pool of Financial instrument, financial, real estate, or other investments for a specific purpose according to Donor intent, the will of its fo ...
s that are otherwise not taxed due to their charitable, educational, or religious mission. Endowments can be up to several billion dollars at
some universities,
some charitable foundations, and some medical foundations.
Endowment tax in the United States
Excise tax on private foundation endowments
Unlike nonprofit corporations classified as a
public charity
A charitable organization or charity is an organization whose primary objectives are philanthropy and social well-being (e.g. educational, religious or other activities serving the public interest or common good).
The legal definition of ...
, private foundations in the United States are generally subject to a 1% or 2% excise tax on any
net investment income.
Federal changes in 2017 and 2018
As enacted in the
Tax Cuts and Jobs Act of 2017
The Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, , is a congressional revenue act of the United States originally introduced in Congress as the Tax Cuts and Jobs ...
and amended by the
Bipartisan Budget Act of 2018
The Bipartisan Budget Act of 2018 is a federal statute concerning spending and the budget in the United States, that was signed into law by President Donald Trump on February 9, 2018. Delays in the passage of the bill caused a nine-hour fundi ...
, an excise tax of 1.4% on endowment income is levied on universities that have at least 500 tuition-paying students and net assets of at least $500,000 per student. The $500,000 is not adjusted for inflation, so the threshold is effectively lowered over time.
The endowment tax provision of the Tax Cuts and Jobs Act has been criticized as funding tax breaks for corporations and the wealthy at the expense of education.
Critics note that the tax could threaten financial aid for low-income students, stifle social mobility, and prevent medical research.
This tax only impacts the top 53 wealthiest schools, and is in line with what most other philanthropic charities pay in excise taxes. There continue to be vigorous efforts that advocate the repeal of the tax.
See also
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Payment in lieu of taxes
A payment in lieu of taxes, abbreviated as PILT or PILOT, is a payment made to compensate a government for some or all of the property tax revenue lost due to tax exempt ownership or use of real property.
Canada
In Canada, payment in lieu of taxes ...
References
Taxes by type
Cambridge, Massachusetts
Taxation in the United States
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