What Does Tax-Exempt Status Do for Colleges?
Credit: Farrell Grehan / Getty Images- President Donald Trump posted on Truth Social saying Harvard University should lose its tax-exempt status after the nonprofit institution refused to submit to the Trump administration’s list of demanded changes.
- Many colleges and universities are tax-exempt because of the educational services they provide.
- Tax-exempt colleges and universities are more likely to use revenues to fund academic programs, student financial aid, medical research and development, and other public benefits.
- Experts doubt Harvard will lose its status, but if it does, it may dissuade some donors from donating. Donations to tax-exempt organizations can be tax deductible.
The tax-exempt status of America’s colleges and universities is the latest target in President Donald Trump’s efforts to reshape higher education in his second term.
Trump on April 15 threatened to revoke Harvard University’s tax-exempt status, one day after his administration froze more than $2 billion in federal funding for the 388-year-old Ivy League school.
Harvard has said it will not submit to the Trump administration’s demands, ostensibly part of an effort to combat antisemitism, which included directives to change Harvard’s admissions and hiring processes, student discipline, and areas of study.
Harvard, like many other educational institutions, is a 501(c)(3) nonprofit organization. This means it does not have to pay federal income taxes because it provides educational services. Tax-exempt, not-for-profit organizations can lose their tax-exempt status if they violate certain Internal Revenue Service (IRS) rules.
“Perhaps Harvard should lose its Tax Exempt Status and be Taxed as a Political Entity if it keeps pushing political, ideological, and terrorist inspired/supporting ‘Sickness?’ Remember, Tax Exempt Status is totally contingent on acting in the PUBLIC INTEREST!” Trump posted to Truth Social on April 15.
How Does A College’s Tax-Exempt Status Impact Students?
Colleges and universities are tax-exempt because the government recognizes the education they provide fosters civic engagement and citizens’ success. Every year, tax-exempt entities demonstrate compliance with federal and state laws and regulations to maintain their status.
Because educational services are considered valuable to democracy, tax-exempt colleges and universities can use their status to maximize the use of their revenues.
Tax-exempt colleges and universities can theoretically spend more of their money on research and scholarships. They can use their revenues to fund academic programs, student financial aid, medical research and development, and other public benefits.
Additionally, nonprofit organizations are less concerned about creating income and can focus on providing education to students.
For-profit organizations, which are focused on making money, are known for aggressive student recruitment tactics, low completion rates, and poor earnings outcomes.
Tax-exempt organizations can also garner more donations, as donors are inclined to donate to receive their own tax benefits. Donations to tax-exempt organizations can be eligible for a tax deduction.
How Would Revoking A College’s Tax-Exempt Status Impact Students?
Almost two million organizations, from churches to universities to charitable foundations, have tax-exempt status.
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Revoking tax status involves an audit by the IRS and meetings between the representatives from the nonprofit and IRS officials. If Harvard’s tax-exempt status is revoked, federal law allows for organizations to appeal the decision in court.
It’s unlikely Harvard will lose tax-exempt status, but if it does, it may suffer somewhat financially. Harvard likely saves tens of millions of dollars each year by being tax-exempt. Experts say it may also experience a decrease in donations from donors who want to leverage tax deductions.
According to The Harvard Crimson, Harvard has received an influx of donations since the university refused the Trump administration’s demands.
However, Harvard has a sizable endowment to rely on: roughly $52.3 billion. While much of an endowment is typically earmarked for certain purposes, it can provide a university with a bit of a safety net.
Republicans have also proposed a tax on university endowments.
“The administration’s prescription goes beyond the power of the federal government,” Alan M. Garber, president of Harvard, wrote in his letter responding to the Trump administration’s demands. “It violates Harvard’s First Amendment rights and exceeds the statutory limits of the government’s authority under Title VI. And it threatens our values as a private institution devoted to the pursuit, production, and dissemination of knowledge.”
“No government — regardless of which party is in power — should dictate what private universities can teach, whom they can admit and hire, and which areas of study and inquiry they can pursue,” Garber continued.
There is some question about the legality of the president directing the IRS to revoke tax-exempt status. In 1998, Congress passed a law prohibiting the president from influencing taxpayer audits and investigations by the IRS. The White House said the IRS started considering revoking Harvard’s status before the President’s Truth Social post.
The Trump administration has come after colleges and universities across the country, revoking funding and causing institutions to cut costs. Trump has also directed the secretary of education to begin to dismantle the Department of Education.