ahla · ahla tax issues for health care organizations october 19-21, 2014 tax primer constance fore...

AHLA

Tax Issues for Health Care Organizations ● October 19-21, 2014

Tax Primer Constance Fore Dotzenrod King & Spalding LLP Atlanta, GA Polly D. Federico Tax Director Sentara Healthcare Norfolk, VA

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PRIMER:TAX EXEMPTION AND TAX ISSUES

AHLA Tax Issues for Healthcare OrganizationsOctober 20-21, 2014

Constance F. DotzenrodKing & SpaldingAtlanta, Georgia

[email protected]

Polly D. Federico, CPA, MASentara HealthcareNorfolk, Virginia

[email protected]

Notice

This content is for educational and discussion purposes only and is not intended, and should not be relied upon, as accounting advice.

Any U.S. tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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Overview Sample types of potentially exempt healthcare organizations

Basics of Section 501(c)(3) status

Public charity vs. private foundation status

Section 501(c)(4) exemption

Interacting with the IRS: exemption applications, annual information returns, and rulings

Maintaining exemption: audits, enforcement and revocations

Intermediate sanctions

Unrelated business income tax

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Sample Types ofHealthcare Organizations

That Potentially Qualify forTax-Exempt Status

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Types of Healthcare Organizations May or may not qualify for tax-exemption Hospitals Physician groups Physician faculty practice plans Integrated delivery systems / JOA entities / regional parents Home health agencies Homes for the aged / assisted living centers Fitness centers Medical research organizations HMOs – IPA / staff model vs. arrangers Information technology organizations Accountable Care Organizations (ACOs)

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Basics of Section 501(c)(3) Status

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Basics of Section 501(c)(3) Status Advantages of tax exemption may include: Income tax exemption

Deductibility of contributions

Qualification for grants

Tax-exempt financing

Employee benefit programs

Federal unemployment taxes

Postal rate savings

Property tax exemption

Sales / use tax exemption

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Basics of Section 501(c)(3) Status (cont’d)

Qualification as a Section 501(c)(3) organization

Organizational test Permissible purposes (and no more)

Form of entity Purposes set forth in organizational document

Dissolution clause

Operational test “Exclusively” versus “primarily” Private benefit and inurement

Political activities

Lobbying activities

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Public Charity vs. Private Foundation

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Nonprofit vs. Tax-Exemptl

NonprofitCorporation

State Corporation Law

Tax-Exempt Organization

Federal Tax Law

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Tax-Exempt vs. Charitable

Tax-Exempt Organizations

CharitableOrganizations

§ 501(c)(3)

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CharitableOrganizations

Tax-Exempt Organizations

Public Charities 509(a)(1),(2) or (3)

Private Foundations

Charitable Organizations

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Public Charity vs. Private Foundation Default to private foundation status unless can meet a

public charity status

Disadvantages of private foundation status Subject to excise taxes on:

Investment Income (2% or 1%) Failure to distribute 5% or more of average value of assets annually Engaging in Self-Dealing (prohibited transactions) Excess Business Holdings (owning too much of another entity –

various tests and aggregation required) Jeopardy investments (too risky) Taxable Expenditures (items not within PF purposes)

Deductibility of contributions limited to 30% / 20% of AGI

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Public charities Subject to excise taxes on:

Excess benefit transactions “Taxable expenditures” – political and lobbying activity

Limitation on deductibility of contributions 50%/30% of AGI

Need route to public charity status – 4 possibilities: Nature of organization or activities – e.g., hospital or a school Receipt of substantial and broad-based contributions Receipt of program service revenue (exempt function income) Supporting relationship with other charitable organization(s)

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Public Charity: Section 509(a)(1)

Section 509(a)(1) / Section 170(b)(1)(A)(iii) Status based on nature of organization – who it is; what it does

Classification as “hospital” Principal purpose or function is to provide hospital or medical care

or either medical education or medical research May include rehabilitation institution, outpatient clinic, community

mental health or drug treatment center, physician practice, or skilled nursing facility if its principal purpose or function is providing hospital or medical care

Medical research organization operated in conjunction with a hospital

Note: Definition of “hospital” differs from those used for Form 990 Schedule H and IRC Section 501(r)

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Section 509(a)(1) / Section 170(b)(1)(A)(vi)

Status based on receipt of substantial support in the form of contributions from governmental units or the general public

1/3 support test – mechanical calculation

“Normally”

Alternative facts and circumstances (10%) test

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Section 509(a)(2)

Status based on receipt of substantial support in the form of revenue from conduct of activities in furtherance of exempt purposes (“program service revenue”)

1/3 support test – mechanical calculation, but different

“Normally”

Negative 1/3 test – investment income and unrelated business income

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Section 509(a)(3) Status based on relationship in support of one or more other

“publicly supported” organizations, i.e., those described in Sections 509(a)(1) or (2) Relationship test Organizational test

Operational test

Control test

Types I, II and III (functionally integrated or not)

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Old Requirements for Hospitals

Qualification as a Section 501(c)(3) organization from Revenue Ruling 69-545

Purpose: promotion of health – community benefit standard

Open emergency room Care to Medicare/Medicaid beneficiaries Use of surplus funds Open medical staff Community board

Charity care?

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New Requirements for Hospitals Health reform (PPACA) – New Section 501(r) Applicable to “hospitals” (as defined) Compliance determined on facility-by-facility basis

New requirements in four areas: Community health needs assessment

Notice 2011-52 and April 2013 Proposed Regulations Financial assistance policies

June 2012 Proposed Regulations Limitations on patient charges

June 2012 Proposed Regulations Limits on collection practices

June 2012 Proposed Regulations

Must provide audited financial statements with Form 990

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Section 501(r)(3):Community Health Needs Assessments

Requires a hospital to conduct a community health needs assessment (CHNA) at least once every three years and to adopt an implementation strategy to meet the needs identified through the CHNA.

Notice 2011-52 and April 2013 Proposed Regulationsprovide guidance.

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Section 501(r)(4):Financial Assistance Policy (FAP)

Section 501(r)(4) requires a hospital to establish a written FAP that includes: Eligibility criteria for financial assistance (free or discounted

care) Basis for calculating amounts charged to patients Method for applying financial assistance Actions the hospital may take in the event of non-payment

(this may be in a separate billing and collections policy) Measures to widely publicize the FAP within the community

served by the hospital The proposed regulations interpret each of these

statutory requirements in detail

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Section 501(r)(5): Limitation on Charges

Requires hospitals to limit charges for emergency and other medically necessary care provided to individuals eligible for financial assistance to amounts generally billed to insured individuals (AGB).

Prohibits hospitals from billing individuals eligible for financial assistance using “gross charges.”

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Section 501(r)(6): Billing and Collection Restrictions

Requires a hospital to make “reasonable efforts” to determine whether an individual is eligible for assistance under the hospital’s FAP before it engages in any extraordinary collection action (ECA).

The proposed regs, in a detailed fashion: Define what actions are considered to be ECAs; Explain what constitutes “reasonable efforts”; Address notification requirements; and Discuss special requirements applicable to incomplete FAP

applications.

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Section 501(c)(4) Qualification

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Section 501(c)(4) Qualification

Alternative status for organizations unable to qualify under Section 501(c)(3)

Avoids federal and maybe state income taxation, but does not entail other benefits of Section 501(c)(3) status No receipt of deductible contributions No tax-exempt bond financing

Congressional scrutiny regarding political activities

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Interaction with the IRS andObtaining Exemption

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Reorganization of IRS Tax Exempt and Government Entities (TE/GE) Division 2014 Reorganization Technical law specialists and support staff responsible for

published guidance (e.g., revenue rulings, revenue procedures), certain private letter ruling requests and technical advice will be shifted from TE/GE to the IRS Office of Chief Counsel

There is a conference session about the reorganization with more details

Last reorganization was in 1999 Four historical units of TE/GE:

Customer education and outreach Rulings and agreements Determinations Examinations

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Interaction with the IRS Obtaining recognition of exemption Exemption application (IRS Form 1023/1024)

Schedule C (Hospitals and Medical Research Organizations) Close via screening or further case development Assignment of reviewer “Where is my exemption application” website

Effective date of exemption

IRS determination letter

Group exemption rulings

Special projects and automatic referrals to National Office

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Form 1023 Form 1023 - Section 501(c)(3) Revised October 2013 Board member qualifications / community representation Compensation of officers Financial projections Copies of contracts and agreements Model conflict of interest policy

New Form 1023-EZ Only 3 pages long Among other things, must have annual gross receipts of

$50,000 or less and assets of $250,000 or less to use 1023-EZ New Interactive Form 1023 (Form i1023)

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Form 1024

Form 1024 - Section 501(c)(4) and other 501(c)s

Form last updated September 1998

Open-ended questions to describe activities

Community benefit is not specifically addressed/requested

Self selection considerations

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Maintaining Exemption:Audits, Enforcement and Revocations

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Annual Filing

Annual information return (IRS Form 990) Filing requirement Comprehensive scope – not just numbers

Schedule H for hospitals

Due date 15th day of 5th month following close of tax year May extend to 15th day of 11th month

Public disclosure – prior 3 years’ returns (www.guidestar.org)

May also have state filing requirements Annual registration Solicitations

Pension Protection Act (PPA) of 2006 Small organizations (under $50,000 revenue) Previously not subject to annual filing requirement

PPA of 2006 – Mandated minimal annual reporting on Form 990-N (e-Postcard)

Failure to file Form 990 for 3 years results in automatic loss of exemption On June 6, 2011, the IRS announced start of automatic

revocation of tax-exempt status Preliminary list posted Spring 2011

Updated monthly, based on year-end as organizations miss their third filing since PPA was passed

List of organizations with revoked status published on irs.gov

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Reinstatement of Exempt Status

Dealing with revocation

Specified procedures for reinstatement, via IRS TE/GE in Cincinnati

Guidance to assist in reinstatement

Revenue Procedure 2011-44

IRS website

Confirming public charity status:

“SelectCheck” on irs.gov

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IRS Examination/Enforcement

Historically, limited enforcement resources for TE/GE

IRS alternatives:

Examinations (audits)

Correspondence

Field

Team Examination Program (TEP)

General

Compliance checks

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Challenges to Exemption

Key theme since 2008 return: Good governance + Transparency = Better exempt

organization

Prior IRS initiatives Executive compensation Community benefit Exempt bonds Governance College and University Report (April 2013) National Research Program – employment taxes

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Intermediate Sanctions

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Intermediate Sanctions Concept

Penalty taxes, thus a remedy short of revocation

Taxes on disqualified person (insider)

First tier at 25% of excess benefit amount

Second tier at 200%, if not timely corrected

Taxes on organizational manager(s)

10% of excess benefit amount, up to $20,000

Definitions critical

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Intermediate Sanctions (cont’d)

Excess benefit transaction

Non-FMV transaction with a disqualified person

Compensation above reasonable market levels

Transaction at other than FMV

Prohibited revenue-sharing transaction (yet to be defined)

Prohibited transactions involving supporting organizations

Automatic excess benefits

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Disqualified persons

Persons having “substantial influence” over the affairs of the organization, either currently or within past 5 years

“Deemed” disqualified persons

Others subject to facts and circumstances test

Now includes persons who are disqualified in relation to supporting organization

Physicians?

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Rebuttable presumption of reasonableness

Approved by independent board or committee

Relied on appropriate data as to comparability

Adequately and contemporaneously documented

Protection for organization managers

Obtained rebuttable presumption

Relied on reasoned written opinion

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Twists:

May arise through controlled affiliates

Automatic excess benefits are often inadvertent, arising by failure to properly approve and report a payment, perk or benefit as compensation

Form 990 disclosure

Revocation still a possibility

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Unrelated Business Income Tax

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Unrelated Business Income Tax

Concept: net income from an activity that is unrelated to exempt purposes generally is taxable Generates tax revenue Prevents unfair competition

Three-part test Trade or business Regularly carried on Not substantially related to exempt purposes

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Unrelated Business Income Tax (cont’d)

Modifications Dividends, interest, royalties, rents, capital gains, research

income Unrelated debt-financed income Controlled subsidiaries

Exclusions Volunteer labor exception Convenience exception Sale of items received as gifts or contributions Small hospital exception

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Unrelated Business Income Tax (cont’d)

Deductions Ordinary and necessary business expenses Proximate and primary relationship to the revenue Direct vs. indirect costs Net operating losses year over year

Reporting on Form 990-T

Impact of substantial UBI – how much is too much?

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Unrelated Business Income Tax (cont’d) Common applications to healthcare organizations

Pharmacy sales and lab testing

340B Medicare drug programs? DME

Sales of blood and blood products

Fitness centers Cafeterias and gift shops

Parking facilities and transportation services

Lease of MOB space Management/administrative services and services furnished to unrelated

entities

Joint ventures

Alternative investments

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