The federal tax on university endowments is an excise tax on the net investment income of certain large private colleges and universities, created by the Tax Cuts and Jobs Act of 2017 and expanded by the One Big Beautiful Bill Act signed on July 4, 2025. For tax years beginning after December 31, 2025, the rate runs from 1.4% up to 8% depending on how much endowment wealth a school holds per student, and only private institutions with at least 3,000 tuition-paying students and a student-adjusted endowment of $500,000 or more are subject to it. Public universities are excluded.
Which Schools Owe the Tax
Section 4968 of the Internal Revenue Code reaches only private colleges and universities that satisfy every part of a four-part test. State and local government institutions are outside the tax entirely.1Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
For tax years beginning after December 31, 2025, a private institution is an “applicable educational institution” only if all four of these are true:
- It had at least 3,000 tuition-paying students during the preceding tax year. The prior threshold, still in effect for earlier tax years, was 500 students.
- More than half of those tuition-paying students were located in the United States.
- Its student adjusted endowment was at least $500,000, meaning the fair market value of non-exempt-purpose assets at the end of the preceding tax year, divided by the number of students, hit that figure.
- It is not owned or operated by a government entity.
The student count uses the daily average number of full-time students, with part-time students converted to full-time equivalents.2eCFR. 26 CFR 53.4968-1 – Excise Tax Based on Investment Income of Certain Private Colleges and Universities
The endowment ratio uses only assets held primarily to produce income. Stocks, bonds, and similar holdings go into the numerator. Buildings and property used directly for the school’s educational mission, such as classrooms, dorms, and labs, are excluded.1Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
Assets and investment income held by a related organization for the university’s benefit count toward the school’s own totals. This closes the door on shifting an endowment into a separate legal entity to duck the thresholds. No single pool of assets, however, can be counted against more than one institution.1Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
The New Tiered Rates
The 2025 amendment scrapped the original flat 1.4% rate for a graduated structure tied to endowment per student. For tax years beginning after December 31, 2025:1Office of the Law Revision Counsel. 26 USC 4968 – Excise Tax Based on Investment Income of Private Colleges and Universities
- 1.4% if the student adjusted endowment is at least $500,000 but not more than $750,000
- 4% if it is more than $750,000 but not more than $2,000,000
- 8% if it exceeds $2,000,000
These rates are cliffs, not brackets. The applicable rate hits the entire net investment income figure, not just the slice above each threshold. A school with a student adjusted endowment of $2.5 million per student pays 8% on all of its net investment income. Crossing from $750,000 to $750,001 per student nearly triples the effective rate on the whole tax base.
Schools at the bottom of the endowment range see no change from the original 2017 rate. The larger bills fall on the wealthiest private universities.
What Counts as Net Investment Income
The tax base is net investment income, calculated as gross investment income plus capital gain net income. Gross investment income covers interest, dividends, rents, royalties, and payments received on securities loans. Tuition, government grants, and donations used for instruction are not in this calculation.3eCFR. 26 CFR 53.4968-2 – Net Investment Income
Schools deduct ordinary and necessary expenses tied to producing that income. Outside management fees, custodial costs, and internal administrative expenses for running the portfolio all qualify. Depreciation on investment property is deductible, but only under the straight-line method.3eCFR. 26 CFR 53.4968-2 – Net Investment Income
Income already subject to the unrelated business income tax is left out, so the same dollar is not taxed twice.3eCFR. 26 CFR 53.4968-2 – Net Investment Income
Basis for Assets Held Before 2018
When a school sells an asset it held on December 31, 2017, a special rule keeps pre-law gains out of the tax base. For property held continuously from that date until sale, the basis used to figure a gain is the greater of the asset’s fair market value on December 31, 2017 (adjusted for later changes) or its regular tax basis.4National Archives. Guidance on the Determination of the Section 4968 Excise Tax Applicable to Certain Colleges and Universities The stepped-up floor applies only to gains. For losses, the school uses its regular tax basis. Assets acquired after 2017 follow standard basis rules.
Filing the Return
Institutions report the tax on Schedule O of IRS Form 4720, “Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.” Schedule O walks through gross investment income, capital gain net income, and deductible expenses, including amounts from related organizations.5Internal Revenue Service. Instructions for Form 4720
The return is due on the 15th day of the 5th month after the close of the tax year. A school with a June 30 fiscal year end files by November 15. Payment normally moves through the Electronic Federal Tax Payment System.6Internal Revenue Service. Instructions for Form 4720
An automatic six-month filing extension is available by submitting Form 8868 before the original deadline.7Internal Revenue Service. Instructions for Form 8868 The extension covers filing only. Any tax owed still has to be paid by the original due date, or penalties and interest start running.
Tax years that began before January 1, 2026, still use the 500-student threshold and the flat 1.4% rate. The new 3,000-student threshold and tiered rates apply only to later tax years.
Penalties and Interest for Missing a Deadline
A late return draws a penalty of 5% of the unpaid tax for each month or partial month the return is late, up to 25%. Late payment carries a separate 0.5% monthly penalty on the unpaid balance, also capped at 25%. When both apply in the same month, the filing penalty is reduced by the payment penalty for that month, but the combined exposure can still reach 47.5% of the unpaid tax over time.
Interest runs on top of penalties from the original due date. The IRS resets the underpayment rate quarterly. For 2026, it is 7% in the first quarter and 6% in the second quarter.8Internal Revenue Service. Quarterly Interest Rates Interest compounds daily until the balance clears, which can turn a modest underpayment into a significant liability if it sits.