how the government can help tax-exempt organizations

22nd Annual Health Sciences Tax Conference Tax-exempt organizations: how the government can help you December 5, 2012

Tax-exempt organizations: how the government can help you

Disclaimer

► Any US tax advice contained herein was 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.


Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.


Objective

► Introduction ► Tax incentives ► Nonprofit hospital property tax exemption ► Recent state activity affecting health care organizations ► Questions and answers


Presenters

► Lauren Brosius Director of Accounting Advocate Health Care Oak Brook, IL

► Joseph Christofanelli Ernst & Young LLP Chicago, IL +1 312 879 3139 [email protected]

► Gary Horowitz Ernst & Young LLP Iselin, NJ +1 732 516 4328 [email protected]

► Katherine Kurtzman Ernst & Young LLP Chicago, IL +1 312 879 2183 [email protected]


A holistic view of the process is key to deriving maximum value from the process

►Conduct ongoing compliance review

►Renegotiate if circumstances change

Comply

►Receive “official” offer; review all terms and conditions

►Clarify and negotiate terms if applicable

►Measure/track realized value

Obtain

►Work with key executives to review

company-wide opportunities (e.g., CapEx, employment changes, training activities)

►Leverage benchmarking

Identify

►Prepare list of applicable programs,

key criteria, and application and decision timetables

►Prioritize the programs using a cost-benefit analysis

Qualify

►Hold project meetings with funders

► Prepare, submit and monitor applications

►Assemble consortium of partner organizations

Pursue

Max. cash flow min. risk of loss

ClientEY Global Team

Identify

Qualify

Pursue Obtain

Comply


Limitations of decentralization ► Ineffective data collection ► One-off pursuits ► Single department approach for

incentive pursuits ► Tax or human resources (HR) or

government relations or development or real estate, etc.

► Isolated experiences/relationships with public officials

► No leverage of company’s economic impact

► Extraordinary expenditures only ► Value leakage

► Loss of value between negotiation/realization

► Incentives limited to single focus (e.g., real estate or HR or tax)

► Irrelevant incentives or misappropriation of resources to less material incentives

► Limited knowledge transfers

► Streamlined/prioritized data collection ► Opportunity pooling (negotiate for

future project phases and routine capital spending)

► Coordinated department focus ► Company key stakeholders working

together to drive incentives value ► Established, deep relationships and

continuous contact with public officials ► Quantification and leverage of

company’s economic impact ► Extraordinary and routine expenditures ► Maximized value

► Implementation ownership ► Teaming with focused consultants ► Creative approach to identifying

incentives opportunities ► Relevant packages – value determined

with tax profile in mind ► Comprehensive/continuous knowledge

transfer back to company stakeholders

Benefits of an integrated process

Centralization

Common process

Teaming

Value

Knowledge transfer

Approach: benefits of an integrated process (capital expenditures)


Incentives checklist Triggers for credits and incentives ► Capital spending (real and personal property) — 2 years+

► Facility expansions, remodeling or acquisitions

► Replacement equipment

► New production lines

► Training expenditures

► New jobs

► Lease expirations

► Green/energy efficiency/sustainability goals


Tax incentives

► Hiring tax credits ► Payroll tax rebates ► Income/franchise

tax credits for capital investment and targeted activities

► Sales and use tax refunds/rebates/ exemptions

► Real and personal property tax abatements/ rebates

► Federal and state zone credits

► New Markets Tax Credit § 45D

► Foreign trade zones

Cash incentives

► Discretionary grants for capital investment

► Infrastructure assistance (roads, water, wastewater, etc.)

► Permit/impact fee waivers

► Community Development Block Grant

► Global FP7 grants ► Global R&D grants

Training benefits

► Training cash grants: performance-based contracts that provide reimbursement of prospective training expenditures

► Training tax credits (retroactive and prospective): dollar-for-dollar reduction in tax liability for qualified expenditures

► In-kind services: no (low) cost service for curriculum development

Financing

► Tax increment financing (TIF)

► Free/discounted land or building

► Forgivable loans ► Industrial

Revenue Bonds (IRBs)

Climate change

► Stimulus funding ► Utility

rebates/discounts ► § 179D deductions ► Energy efficiency

credits and grants ► Credits and grants

for investments in renewable energy property

► Pollution control tax credits and abatements

► Recycling tax credits

Potential incentive opportunities


Types of tax credits and incentives

► Statutory — automatic ► Statutory tax credits and incentives are provided once pre-defined

requirements have been met. ► There is a possibility that credits could be obtained on a retroactive

basis.

► Statutory — pre-approval ► Statutory tax credits and incentives that require pre-identification

of company specifications and program certification by government officials

► Discretionary ► Customized financial incentive packages that are negotiated

with state and local government agencies


Job creation tax credits and grants

► Income tax credits generated upon the creation of qualified jobs ► Focus primarily on net new full-time jobs ► Wages typically must exceed prescribed wage levels ► Special job creation credits available for targeted groups and

designated target areas

► Examples of programs include the following: ► Florida — Qualified Target Industry Tax Refund Program ► Georgia — Job Tax Credit Program ► Indiana — Economic Development for a Growing Economy

Tax Credit ► Kansas — Promoting Employment Across Kansas


Key states for job creation tax credits and grants

AK

ME

RI

VT NH MA

NY

CT PA NJ

DC

DE

WV

NC

SC

GA

FL

OH

IL

KY

IN

MI WI

VA

TN

AL MS

AR

LA TX

MD

Major job creation tax credits

OK

MO KS

IA

MN

ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR

ID

NV

CA

HI

WY


Investment tax credits

► Income tax credits generated through the purchase and placing in service of qualified real and/or tangible personal property

► Examples of programs include the following: ► Alabama — Capital Tax Credit ► Colorado — Investment Tax Credit ► Illinois — Replacement Tax Investment Credit ► Indiana — Hoosier Business Investment Tax Credit ► Kansas — High Performance Incentive Program


Key states for investment tax credits

AK

HI

ME

RI

VT NH MA

NY

CT PA NJ

DC

DE

WV

NC

SC

GA

IL

OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN

ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR

ID

NV

CA VA

FL

Major investment tax credits

MD


Employee training incentives

► Forty-six states and the federal government offer some form of employee training tax credits and/or incentives.

► Two different levels of training grants and/or tax credits currently exist: ► Federal-level training grants:

► High growth job training initiative grants (US Department of Labor) ► On-the-job and customized training grants (Workforce

Investment Boards) ► State-level training grants and tax credits:

► California — Employment Training Panel ► Illinois — Employer Training Investment Program ► Indiana — Skills Enhancement Fund ► Kansas – Industrial Training Program ► Florida — Quick Response Training


Key states for employee training incentives

AK

HI

ME

RI

VT NH MA

NY

CT PA NJ

DC

DE

WV

NC

SC

GA

FL

IL

OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN

ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR

ID

NV

CA VA

MD

Key states with training grants

Key states with training credits


Location-based incentives

► Credits and incentives based upon job creation and/or capital investment made within designated target areas ► Benefits may include enhanced income tax credit opportunities,

sales and use tax exemptions, property tax abatements, and utility tax reductions or rebates.

► Examples of programs include the following: ► California Association of Enterprise Zones ► Missouri — Enhanced Enterprise Zones ► Minnesota — Job Opportunity Building Zones ► Illinois – Enterprise Zone Program ► Pennsylvania — Keystone Opportunity Zones


Key states for location-based incentives

AK

HI

ME

RI

VT NH MA

NY

CT PA NJ

DC

DE

WV

NC

SC

GA

FL

IL

OH IN

MI WI

KY

TN

AL MS

AR

LA TX

OK

MO KS

IA

MN

ND

SD

NE

NM AZ

CO UT

WY

MT

WA

OR

ID

NV

CA VA

Major location-based tax credits

MD


Discretionary — credits and incentives

► State and local governments offer a variety of benefits ► They typically involve companies contemplating relocation,

expansion and/or making major capital investments

► Tax incentives may include items such as: ► Reductions in income/franchise tax, sales and use tax, real and

personal property taxes or employment tax ► Employee training grants ► Infrastructure grants ► Utility rate discounts ► Expedited permitting ► Zero-interest financing ► Closing funds


Discretionary — best practices

► What are the keys to success? ► Executive sponsorship ► Keep options open (i.e., don’t show your cards) ► Follow communication protocol (internal/external) ► Negotiate everything up-front ► Understand which incentives are beneficial to the company ► Be prepared to accept clawback provisions ► Be conservative on job-growth projections ► Conduct compliance and complete forms ► Don’t rely on anything unless it is in writing

► Incentives should work hand-in-hand with the company’s overall business objectives and current/future tax positions.


Discretionary — best practices (cont.)

► What are the barriers to success? ► The jurisdiction believes that no other options are available.

► Poorly coordinated communications ► Company contacting government employees ► Company not considering other locations

► Results in significantly lower package(s)

► Lack of intercompany teaming ► Negotiating an incentive you cannot use ► Failure to follow through with compliance requirements ► Jurisdictions typically offer basic incentive packages to

companies and fail to consider implementation of programs offered


Discretionary — sample project time line

Short list of metropolitan areas Select specific metropolitan area

Execute cost analysis Conduct site visits Commence real estate negotiations Execute term sheet Announce new location publicly Finalize lease/purchase agreement Lease commencement date

►Occupancy begins

Realize incentives’ value Implement incentives Draft and submit incentives applications

Finalize written incentives offer Secure initial incentives offers from all competing locations Present economic/fiscal impact results to government Submit detailed project parameters and gap analysis

Discuss project anonymously with government authorities Prepare comparative analysis of incentives’ values

Incentives steps

Real estate steps


Why businesses are interested in going green

Corporate response to climate

change

Revenue generation ► New products and

services ► Shorter payback

models ► New business models ► Innovation investment

Expectations ► Customers ► Consumers ► Investors ► Employers ► Media

Cost reduction ► High energy cost; expected

increase in cost ► Operational efficiencies ► Information technology

(IT) activity ► Reduced waste ► Cost of carbon

Government regulation ► Environmental laws ► Non-governmental organization

(NGO) operating guidelines ► Federal and state climate

change programs ► Regional initiatives ► Financial reporting


State and local incentives

► Property tax abatement ► Job creation tax credits ► Renewable energy grants ► Business development

grants ► Sales tax exemptions ► Income tax exemptions

and credits ► Research and

development credits

► Training grants and credits ► Low-interest financing ► Tax increment financing

(TIF) ► Recycling incentives ► Transportation incentives ► Alternative fuel

use incentives


TIF

► Established in Illinois in 1977 by 65 ILCS 5/11-74.4.1 et seq.

► Assists local governments to attract private investment and new businesses and retain current businesses

► Utilizes incremental property taxes to assist with private development

► TIF districts are established for a term of 23 years

► Administered by the municipality in accordance with state of Illinois law


TIF — economic development tool

► 47 states have TIF

► Over 900 TIF districts in the state of Illinois

► Over 150 TIF districts in the city of Chicago


TIF increment

0

1

2

3

4

5

6

7

5 10 15 20 25

Base TIF increment

Years

US$ Revenues (in millions)


Types of eligible costs

► Cost of studies, development of plans and specifications, and professional fees

► Property assembly costs including acquisition of land or property (real or personal) and site preparation and improvements

► Cost of rehabilitation, reconstruction or repair of existing public or private buildings, and fixtures or leasehold improvements

► Cost of construction of public works or improvements ► Training costs


Illinois Enterprise Zone Program

Overview ► Passed in 1984 ► Fosters development/redevelopment of “depressed” areas ► Provides tax benefits and other incentives ► Administered by the Illinois Department of Commerce and

Economic Opportunity (DCEO)


Enterprise Zone utility tax exemption

► Utility tax exemption ► A state utility tax exemption on natural gas, electricity and the

administrative surcharge, as well as the telecommunication excise tax on originating calls.

Note: Local units of government may also exempt their taxes on natural gas, electricity and telecommunications for Department of Commerce and Economic Opportunity (DCEO)- certified businesses.


Qualification for utility tax exemption

► The company’s facility must be located in a designated Illinois Enterprise Zone.

► The company must receive certification from the DCEO, which requires one of the following: ► US$5 million investment which results in the creation of 200 new

full-time equivalent jobs or ► US$20 million investment which results in the retention of 1,000

full-time jobs


Top 10 missed opportunities to avoid

1. “But for these incentives … this expansion project or capital spending would possibly happen elsewhere.”

► Beware of premature announcements

► Competitive projects typically yield higher savings

2. Leverage your company’s “economic impact” to a jurisdiction. Never assume you do not qualify. Bundle projects!

► Jobs (new and retained)

► Salaries and wages

3. Negotiate incentives with knowledge of your tax and operational profiles.

► Company direction and priorities

► Target incentives bringing greatest value

4. Capture routine capital spending (2 years+) for potential incentives.

► Expansions and renovations. System upgrades?

► Retention incentives? Leverage multiple facilities?

5. Negotiate and understand potential clawbacks.

► Transfer with mergers and acquisitions?

► Missed targets: renegotiate

6. Analyze opportunities to expand existing incentives agreements.

► Review business case

7. Governments compete for new capital projects!

► Leverage what others have been offered

► Never assume the first offer is the best and final

► Top 10 list matters

8. Collaboration with operations, real estate, HR, etc.

9. Expansions and consolidations need a stronger story.

► Is your company in a targeted industry?

► Has another jurisdiction expressed interest?

10.Most cash grant allocations occur annually! Need to look beyond a regulation or statute


:

► Illinois update ► Nonprofit hospital property tax exemption


Illinois exemption in need of clarification

► Illinois constitution — property must be used exclusively for charitable purposes

► Illinois Department of Revenue — primary purpose must be charitable care. “Motorola or soup kitchen?”

► No clear definition of charity or how much is necessary to gain or maintain exemption


Recent Illinois history

2006: IL Attorney General supports charity care mandate ► Legislative proposal would require 8% of total operating expenses in

charity care ► Defeated by the General Assembly 2010: IL Supreme Court decision ► Provena Covenant Medical Center was not doing “enough” charity care,

among other factors ► Decision instructed the Legislature to act to establish a standard –

IL Department of Revenue (IDOR) holds all applications 2011: IDOR action ► Denied exemptions for three providers seeking exemption ► Administration interested in potential revenue and coercion tool for

Medicaid reform ► Governor stayed further decisions and declared a legislative deadline to

establish state-wide standards


Parties to the debate

“What counts? How much?” ► Attorney General ► Department of Revenue ► Governor’s office ► Cook County ► Local governments ► Patient advocates ► Labor ► Hospitals ► Illinois Hospital Association


What happened?

After nine months of intense legislative negotiations and nine years of debate in the state: ► The hospital tax exemption bill passes and creates a path

for nonprofit providers seeking exemption ► Establishes a formula to determine liability per hospital campus

and itemizes what counts toward meeting it

► Deal was “baked” into larger package including: ► Medicaid cuts and expansive reforms ► New revenue (cigarette tax and provider assessment) ► Further charity care requirements


What counts?

Senate Bill 2194/Public Act 97-0688: ► Benefits to low-income individuals:

► Traditional charity care cost ► Provides subsidized health services or supplies

► Relieving the burden of government: ► Medicaid shortfall … or …10% of Medicaid ► Unreimbursed cost for dual-eligibles ► Direct subsidies to state or local government supporting care for

low-income populations


How much is enough?

Value of property tax exemption: ► Lower of actual assessment or formula to estimate value

of exemption

► Sets the bar for what each hospital in the state should do in “charitable” work


Additional components

► Nonprofit hospitals that satisfy property tax exemption test are also exempt from Illinois sales and use tax.

► There is a state income tax credit for charity care provided by non-exempt hospitals.


Future outlook

► Optimistic about the new policy solution that provides a clear target for exemption

► Concern that the state will reconsider if all hospitals meet exemption standards

► The state’s fiscal situation will determine further scrutiny


Future outlook (cont.)

► Renewed focus on communicating our contributions to the communities we serve through the Advocate Community Album and the many filings required by federal and state agencies: ► Form 990 Schedule H ► Medicare Cost Report ► State of Illinois Annual Community Benefit Report ► Illinois Department of Public Health Annual Survey ► State of Illinois Annual Affidavit for Exemption


Recent state activity affecting health care organizations

► In New York ► Sales and use tax audits

► Withholding tax audits

► HMO tax

► MTA tax

► Unclaimed property

► Other states/other taxes?

Questions ?

Thank you for your participation and feedback!

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