Section 5 Content

​Tax-exempt and nonprofit status enables colleges and universities to focus on their research and education missions, not profits. The current tax treatment of nonprofits helps finance that mission.



In addition to potential disruptions to charitable giving and endowments, some reform proposals could impact budgeting and planning for our institutions by eliminating existing nonprofit provisions and creating new expenses. For example, public and private nonprofit colleges currently have access to tax-exempt bonds that help fund infrastructure projects on campus. And although higher education institutions are tax-exempt organizations, they are still subject to tax on any unrelated business income they may generate. Proposed reforms could change—and complicate—the current Unrelated Business Income Tax (UBIT) rules.

Tax-Exempt Bonds (Internal Revenue Code, Section 103 and Section 141)

Under Section 141, colleges and universities often use private activity tax-exempt bond financing to acquire, construct, renovate, and expand capital infrastructure such as academic buildings, residence halls, modern energy plants, and more. In 2016, higher education bond sales reached $18.4 billion.

Under Section 103(a), the interest earned on tax-exempt bonds issued by state and local governments is generally exempt from tax. State and local governments can issue two kinds of tax-exempt bonds: governmental bonds and qualified private activity bonds.

In addition, passage of a large tax cut package could trigger automatic spending cuts that would result in zeroing out the subsidy for Build America Bonds, which were issued between 2009 and 2010. The subsidies were meant to reduce the cost of borrowing for state and local government agencies, including public higher education institutions.

What's at Stake



The House tax bill would repeal private activity bonds and advance refunding bonds. The Senate bill would preserve private activity bonds but repeal advance refunding bonds, which are important for private and public institutions. Both bills would end the subsidy for Build America Bonds.

Section 3601 Private Activity Bonds. These bonds are utilized by private universities and colleges to build dorms, classrooms, and research infrastructure. H.R. 1 would essentially prevent private colleges and universities from using lower-cost tax exempt bond financing.

Section 3602 Advance Refunding Bonds. Advance refundings are an important financing tool for institutions—both public and private—to refinance outstanding debt at lower interest rates and generate significant interest savings over decades, lowering costs. Higher borrowing costs can result in diminished investments in infrastructure, fewer jobs, reduced public services, and increased service charges and other fees.

Unrelated Business Income Tax (UBIT) (Section 501)

Under Section 501, colleges and universities are subject to tax on any unrelated business income generated from activity unrelated to their educational, research, and community service missions. An example of an income-generating activity subject to UBIT is income from sales of non-educational materials such as CDs, DVDs, and other gift items by a campus bookstore.

What’s at Stake



​The Senate tax bill contains several proposals that would increase UBIT owed by many colleges and universities, including computing unrelated business taxable income separately for each trade or business in a so-called “basketing” fashion. The “basketing” proposal, which requires all losses and gains to be calculated by activity rather than in the aggregate (something not applicable in corporate taxation), would result in disparate treatment for nonprofit organizations by holding them to standards and rules not applicable to corporations.

The proposed changes to UBIT included in the Senate bill will result in increased costs and regulatory burdens on many colleges and universities, which would mean fewer resources that can be devoted to student financial aid and other educational resources. While colleges and universities should pay taxes on unrelated business activities, they should not be held to special standards that result in a higher tax burden that is not imposed on any other sector or industry.

