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After More Than a Year of Uncertainty, IRS Releases Proposed Guidance on Filing Endowment Tax

The tax on returns from large unviersity endowments passed in December 2017 as part of a Republican-backed tax bill.
The tax on returns from large unviersity endowments passed in December 2017 as part of a Republican-backed tax bill. By Leah S. Yared
By Luke W. Vrotsos and Cindy H. Zhang, Crimson Staff Writers

After more than a year of uncertainty, the Internal Revenue Service issued proposed guidance on Friday for higher education institutions — including Harvard — required to pay a new tax on their endowments.

The 58-page document, the office’s first attempt to write regulations for the tax, outlines various legal definitions and terms associated with the tax. This language is necessary for understanding how it will be implemented, according Robert Kelchen, a professor studying higher education finances at Seton Hall University.

“I don’t think there’s anything terribly surprising,” Kelchen said. “I think the biggest takeaway is this is a really complex regulation to define — even what counts as an eligible student has to be defined.”

The tax, passed in December 2017 as part of a Republican-backed tax bill, targets university endowments worth more than $500,000 per student with a 1.4 percent excise tax on returns. State universities and schools with fewer than 500 tuition-paying students will be exempt, according to the IRS guidelines.

The controversial tax has long met resistance from Harvard. After its passage, then-University President Drew G. Faust deemed the tax “unprecedented,” predicting it “will weaken our ability to support students and research.” The University has lobbied extensively against the tax in the nation’s capital both before and after it passed.

In the year and a half since its passage, Harvard has awaited guidance on how to file the tax. The new guidelines were released just before the end of the first fiscal year for which Harvard will have to pay the tax, as the tax applies to fiscal years that started after Dec. 31, 2017 and Harvard’s fiscal year begins July 1.

University administrators have estimated that, if Harvard had been required to pay the tax in 2017, it would have cost the University roughly $43 million.

The proposed rules are now open to a 90-day public comment period, for which the IRS has laid out specific areas for which it seeks feedback.

For example, the IRS requested comment on a technical point about student-loan interest rates. The guidelines state that the interest students pay on loans with below-market rates may not be considered investment income since it is a form of scholarship to students, yet the guidelines also noted the difficulties in determining what the market rate would be in many cases.

“Comments advocating an exception for the interest received on student loans should explain how these concerns could be addressed. It would be helpful if such comments also provide information regarding the number of student loans applicable educational institutions make each year, how they set the interest rates on those loans, and whether the rates are set below market, or at market rates,” the guidelines read.

University spokesperson Brigid O’Rourke declined to specifically state whether Harvard would submit a formal public comment in an emailed statement. She wrote, however, that the University was opposed to the endowment tax and would keep advocating for its repeal.

“We are working to analyze the proposed guidance released late on Friday and legal requirements of this new tax,” she wrote. “We will continue to work with policy makers and others in the higher education community to push for Congress to re-examine this misguided and damaging provision in light of the Congress's stated goals of increasing access and affordability.”

Still, Kelchen said attempts to repeal the endowment tax will most likely fall short given the tax’s bi-partisan backing and a growing desire to have colleges pay more to the government.

“This is something that has been talked about for at least a decade and it’s a policy that has gotten at least some support from the left and the right politically. I think there is more pressure now for even nonprofit colleges to pay more taxes,” said Kelchen, pointing to cities like Boston and Pittsburgh, which have tried to get universities to make voluntary payments to the city.

“The door is opening for more local communities or even states to try to get revenue from colleges as well,” Kelchen said.

—Staff writer Luke W. Vrotsos can be reached at

—Staff writer Cindy H. Zhang can be reached at​​​​

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