The Financial Management of Hospitals and Healthcare Organizations
Michael Nowicki
Chapter 3
Tax Status of Healthcare Organizations
Taryn D. Davis
June 6, 2007
Outline
Healthcare corporations are granted legal status as corporations by the state. Most hospitals are designated as for-profit or not-for-profit.
· For-profit corporations pay taxes, including income, sales, and property/real estate tax.
· Not-for-profit corporations do not pay taxes and are tax-exempt.
Tax-exempt organizations
· Tax-exempt companies must meet criteria that is established by the federal, state and local governments.
· Companies are given tax-exempt status to
· Relieve the government of the burden of providing the services themselves. (to provide to those that cannot afford healthcare)
· Reward companies for performing services that enhance community values and goals.
To qualify for tax-exempt status:
· Operate for charitable, scientific, or educational reasons
· Serve public rather than private sector
· Agree not to engage in prohibited transactions (political campaign, influencing legislation)
· Lend income without receiving adequate security and interest
· Pay compensation in excess of reasonable salary levels
· Make any investments for more than adequate consideration
· Sell any asset for less than adequate consideration
· Diverting part of its income or assets
· Offer preferential service
Revenue Ruling 69-545 (1969):
· Hospitals must operate a full-time ER that accepts all patients regardless of whether they can pay
· Hospitals must provide care for all patients in the community who can pay with private funds or through public programs (Medicare/Medicaid)
Is there a difference between community benefits for not-for-profit vs. for-profit hospitals?
· Point of debate
· Claim was initially made in the New England Journal of Medicine
· Claim stated for-profit hospitals did not provide benefits to the community
· Little evidence has been found to support the claim
Court reviews of not-for-profit status
· Courts aim to more closely monitor not-for-profit hospitals to ensure they are meeting the rules
· Hospitals should provide an amount of charity care that equals the value of local and state tax-exempt benefits received
IRS Challenges to tax-exempt status
· In 1987, the IRS begin to audit tax-exempt organizations
· Coordinated Examination program (CEP) – method for identifying organizations to audit
o Instituted in 1991
o New audit program consisting of an interdisciplinary team to examine corporate restructuring, pension, payroll taxes, income taxes, and tax exempt bond financing
· HFMA 1992 – audit guide for tax-exempt hospitals
o Examined the following:
§ Community benefit standard (who is on government board, how much charity care given, complaints of patient dumping)
§ Unreasonable compensation and private inurement (physician relationships that violate private benefit, compensation, recruiting practices)
§ Financial analysis (unrelated business income, private interest, lobbying activities)
§ Joint ventures (between hospital and physician/radiologist, etc)
§ Independent contractors (should they be contractors or employees?)
Legislative challenges to tax-exempt status
· Little legislation out there related to tax privileges of tax-exempt organizations at the state or federal level
· Existing law may be too lenient and difficult to enforce
· Taxpayer Bill of Rights II – addresses tax-exemption
o Signed into law in 1996
o Provides IRS with immediate sanctions prior to revoking tax-exempt status
o Requires tax-exempt organizations to disclose excess benefit transactions and excise taxes paid for such transactions
o Subjects individuals (executives) as responsible for excess benefit transaction
· Individual organizations should pay attention to the legislation coming down at the state and federal levels
o States (ex. Texas) have passed laws that legally bind not-for-profits to provide a certain amount of community benefits
Terms & Definitions
Patient dumping – denying or transferring patients based on the inability to pay
CEP – coordinated examination program; method for identifying organizations to audit
Excess benefit transaction – any transaction in which payment or benefit exceeds the value of the transaction (ex. Unreasonable compensation)
HFMA 1992 – audit guide for tax-exempt hospitals
Taxpayer Bill of Rights II – addresses tax-exemption
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