What’s in Store for Tax-Exempt Hospitals in 2013?

A number of recent events could have an impact on tax-exempt hospitals and healthcare systems. Here is a brief look at some of the key issues hospital organization professionals should be aware of in the coming months.

Charitable Deduction: The American Taxpayer Relief Act of 2012 reinstated a limitation on itemized deductions for individuals with incomes over $250,000 and married couples filing joint returns with incomes over $300,000. Under the new law, most itemized deductions, including the charitable deduction, are reduced by the lesser of 3 percent of adjusted gross income (AGI) over the threshold or 80 percent of itemized deductions. These limitations on the charitable deduction are less drastic than some of the other proposals that were being considered. In fact, there are estimates that the new tax law, with its increased rates on the wealthy will increase charitable giving.

Extension of the Exception from UBIT for Payments from Controlled Organizations: The American Taxpayer Relief Act of 2012 also contains a provision that had expired and provided an exception to the rule that payments from controlled organizations constitute unrelated business income (UBI). This provision is retroactive to January 1, 2012, and is effective for 2013. In general, section 512(b)(13) of the Internal Revenue Code provides that if a controlled entity, such as a taxable subsidiary, pays rent, royalties, interest or an annuity to a controlling exempt entity that the payment will constitute UBI. There is an exception to this rule if the payments are not in excess of fair market value and are made pursuant to a binding contract that was in effect on August 17, 2006, or an extension of such contract. This is an important provision for many organizations with taxable subsidiaries. If your organization is using this exception, make sure all the elements of the exception are documented and in your files.  Also, since the IRS will be reviewing tax-exempt hospitals in particular (see below) and has a project to scrutinize organizations that report gross unrelated business income but no income tax due (see the new IRS Work Plan), tax-exempt hospitals should review unrelated business income and expense carefully.

IRS Review of Hospitals: The Affordable Care Act (ACA ) enacted March 23, 2010, added new requirements that hospital organizations must satisfy to be described in section 501(c)(3), as well as new reporting and excise taxes. Also, under the ACA the IRS is required to review tax-exempt hospitals every three years to determine if they are in compliance with Community Health Needs Assessment (CHNA) requirements. Over 3,000 hospitals will be reviewed this year by IRS and hospitals will not be notified they are being reviewed. The IRS will look at Form 990 and other publicly available resources such as the financial statements attached to Form 990, Form 990-T and the organization’s website. In particular, the IRS will focus on the answers to Form 990, Schedule H. Community Health Needs Assessment questions are now in Schedule H, Part V, Section B, but these questions are optional for tax years 2010 and 2011 because the CHNA requirements of section 501(r) are only effective for tax years beginning after March 23, 2012. However, note that all other questions in Part V, Section B are not optional for the 2011 tax year and must be completed (they were optional for the 2010 tax year). With increased scrutiny of tax-exempt hospitals by the IRS, documentation of tax positions is more important than ever.

What’s in Store for Tax-Exempt Hospitals in 2013,” originally appeared on The Nonprofit Standard, the blog of BDO’s Nonprofit & Education practice, that offers thought leadership on the accounting, tax, and management challenges faced by nonprofit organizations, along with commentary on sector trends and developments. An extended version of this article also previously appeared in the Winter 2013 edition of the BDO Knows Healthcare newsletter.