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Guidance for Recording Refunds and Best Practices for Documenting Contributions

The objective of this article is not to debate these items but rather to provide accounting guidance on the topic, assuming the decision has been made to provide refunds to families.

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The objective of this article is not to debate these items but rather to provide accounting guidance on the topic, assuming the decision has been made to provide refunds to families.

Independent schools around the world have launched distance learning platforms to continue providing educational services to their students.  Some have made the decision to close their campuses for the remainder of the academic year, while others have yet to conclude on the matter.  To refund or not to refund tuition and/or other fees has become the question contemplated by most independent schools, boarding and day.  There are many factors, in addition to legal enforceability, that need to be weighed in making this decision, including whether the level of services has actually been compromised, and fiscal, reputational and cultural impact.  Furthermore, how should a refund be calculated if one were to be offered?

The objective of this article is not to debate these items but rather to provide accounting guidance on the topic, assuming the decision has been made to provide refunds to families.

The treatment of this transaction for reporting purposes is rather straight forward, but partially depends upon how the refund would be offered; the student’s status as returning or non-returning will likely play a key role in the ultimate decision.  Regardless of the form it takes, the amount of the refund would reduce the respective revenue category (net tuition, fees, auxiliary revenues, etc.) for fiscal year 2020.  For returning students, the refund would likely be offered as a credit to the fee bill for fiscal year 2021 and be reported in deferred revenue as of the end of the 2020 fiscal year.  Non-returning students would receive the amount as a direct repayment, but if the payment is not made prior to the end of the 2020 fiscal year, the amount of the refund would be reported as an account payable or other similar liability.

The fact remains, however, that an independent school’s operating expenses are not generally variable in nature, and during the best of years, tuition and fees do not cover those expenses.  The issue is exacerbated for many independent schools if refunds are requested or provided.  As such, an option being discussed around the industry is whether it is possible to ask the families to donate the refunded amount back to the school to help cover its continuing operating expenses.

One must remember that a contribution, according to Internal Revenue Service Publication 526, “is voluntary and is made without getting, or expecting to get, anything of equal value.”  Accordingly, one of the school’s primary risks related to this option is not obtaining proper documentation in order to avoid providing a private benefit to specific individuals or inappropriate tax deductions.  To mitigate this risk, schools should consider the following actions:

  1. Establish and document the eligible pool of students, e.g. all boarding students, domestic and international, without preference to any particular family within this eligible pool.
  2. Establish the calculation method and apply it consistently.
  3. Provide the refund to the entire pool. The return donation must be voluntary.
  4. Ideally, the refund would be issued in the form of a check to the families, and a separate donation would be made by the donor/family; this process offers a more conclusive paper trail and establishes the transactions as separate from one another.
  5. The school should provide the donor/family with a charitable contribution acknowledgement letter that includes wording that no goods or services were received in exchanged for the donation, as well as a disclaimer that the family should consult its tax advisor.
  6. Many schools have expressed concern over establishing a precedent for refunds. In their communications to the families, schools might consider an explanation citing the current pandemic circumstances.

Once a contribution is established, reporting includes nothing more than reducing the respective revenue line item, as noted earlier, when the refund is issued, and recording contribution revenue when the contribution is received.

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Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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