Are College Endowments Taxed? Excise Tax, UBIT, and PILOTs

College endowments are largely tax-free, but not entirely. Under federal law, most investment income earned by a college endowment escapes tax because the institution itself is exempt, either as a 501(c)(3) charity or as a state instrumentality. Two exceptions matter. Starting with tax years after December 31, 2025, the wealthiest private colleges owe a tiered excise tax of up to 8% on net investment income, and any college, public or private, owes regular corporate tax on profits from commercial activities unrelated to its educational mission.

The Baseline: Endowment Earnings Are Exempt

Private colleges and universities generally qualify as charitable organizations under Section 501(c)(3) of the Internal Revenue Code, which shields their investment earnings, including dividends, interest, and capital gains, from the 21% corporate income tax.¹ Public universities reach the same result through Section 115, which excludes from gross income any income accruing to a state or its political subdivisions from an essential governmental function.²

To keep that status, an institution has to stick to its educational mission, avoid enriching insiders, limit lobbying, and stay out of political campaigns. Drift far enough from those rules and the IRS can revoke the exemption.

The Excise Tax on Wealthy Private College Endowments

Congress carved out the first federal tax on endowment earnings in the 2017 Tax Cuts and Jobs Act, which added Section 4968 and imposed a flat 1.4% excise tax on net investment income at the richest private colleges. The One Big Beautiful Bill Act, signed in 2025, replaced that flat rate with a tiered structure for taxable years beginning after December 31, 2025.³

Which Schools Are Covered

The tax reaches only private institutions that meet all three tests:³

At least 3,000 tuition-paying students in the preceding tax year (up from 500 under the original 2017 law)
More than half of those students located in the United States
A student adjusted endowment of at least $500,000 per student, measured by the fair market value of assets not used directly for educational purposes

State colleges and universities are explicitly excluded. Even a very large public university endowment is outside the scope of Section 4968 no matter how big it gets.

The 2026 Rate Tiers

The rate a covered school pays scales with endowment size per student:³

1.4% on net investment income where the student adjusted endowment is between $500,000 and $750,000 per student
4% where the endowment is above $750,000 but not more than $2,000,000 per student
8% where the endowment exceeds $2,000,000 per student

The jump is substantial. A school sitting on $2 million per student now faces a rate nearly six times what the original 2017 law imposed. For the handful of elite institutions holding tens of billions in endowment assets, the annual tax bill could reach nine figures.

What Counts and How It’s Reported

Net investment income covers dividends, interest, rents, royalties, and capital gains on sold assets, less expenses of producing that income. Assets held by related organizations, such as supporting foundations, can count toward the per-student threshold. If a related organization is controlled by the school or operates as a supporting organization under Section 509(a)(3), all of its assets are included; for other related entities, only assets intended or available for the school’s benefit count.⁴

Schools report and pay the tax on Form 4720, due on the same deadline as their annual information return.⁵

Unrelated Business Income Tax

Tax exemption doesn’t cover everything a college does. Section 511 imposes federal income tax on the profits any exempt college earns from a trade or business regularly carried on and not substantially related to its educational mission, at the standard 21% corporate rate.⁶⁷⁸

So why isn’t a multi-billion-dollar stock portfolio taxed as unrelated business income? Section 512(b) carves passive investment income out of the calculation:⁹

Dividends, interest, and annuities are excluded
Royalties are excluded
Rents from real property are excluded, with some exceptions for personal property leases
Capital gains from selling investments are excluded

These exclusions cover most of what a typical endowment earns. The logic is that passively collecting portfolio returns isn’t a trade or business competing with private companies. There is a significant catch: Section 514 pulls income from debt-financed property back into the UBIT calculation even when it would otherwise be excluded. If a university borrows to buy an office building and collects rent, some or all of that rental income becomes taxable despite the general rent exclusion.⁹

Property Taxes and PILOTs

Local tax rules run separately from the federal ones. Land and buildings used directly for classrooms, dorms, libraries, and labs are generally exempt from local property taxes. But large universities often hold commercial office space, retail buildings, and undeveloped land through their investment arms, and when that property sits on the tax rolls as exempt, the surrounding municipality loses revenue it would otherwise collect.

To close that gap, many municipalities negotiate Payments in Lieu of Taxes (PILOTs) with nearby institutions. These are voluntary agreements: the university pays a set amount to the local government, often figured as a percentage of what the full property tax bill would have been, or as a flat fee renegotiated periodically. A university that refuses to participate may face political pressure, but because PILOTs are voluntary, there is generally no legal way to compel payment.

What counts as exempt educational property varies by state. The typical test looks at whether the property is used for instruction, student services, or research versus generating revenue from operations a for-profit company could just as easily run. A campus bookstore serving students usually qualifies; a retail shop selling general merchandise to the public regularly usually does not.

Where the Numbers Become Public

Private nonprofit colleges file Form 990 each year. Schedule D requires detailed endowment disclosures: beginning and ending balances, contributions, investment gains and losses, amounts distributed for scholarships or facilities, administrative expenses, and the percentage of the fund that is board-designated, permanently restricted, or subject to term restrictions.¹⁰ Section 6104(d) requires exempt organizations to make these returns available for public inspection, and Form 990-T filings are publicly available for three years after filing.

Public universities organized as state instrumentalities generally do not file Form 990, though they still file Form 990-T if they have $1,000 or more in gross unrelated business income.⁸ For public universities, the underlying financial data usually comes through state open-records laws and published financial statements instead.

1
Internal Revenue Service. Exemption Requirements – 501(c)(3) Organizations
2
Office of the Law Revision Counsel. 26 U.S. Code 115 – Income of States, Municipalities, Etc.
3
Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
4
Federal Register. Guidance on the Determination of the Section 4968 Excise Tax Applicable to Certain Colleges and Universities
5
IRS.gov. 2025 Instructions for Form 4720
6
Office of the Law Revision Counsel. 26 USC 511 – Imposition of Tax on Unrelated Business Income of Charitable, Etc., Organizations
7
Internal Revenue Service. Unrelated Business Income Tax
8
Internal Revenue Service. Instructions for Form 990-T
9
Office of the Law Revision Counsel. 26 U.S. Code 512 – Unrelated Business Taxable Income
10
Internal Revenue Service. Instructions for Schedule D (Form 990)