It’s Time to Get 501(r) Compliant

As scrutiny of tax-exempt hospitals continues to increase, it’s critical that hospitals adapt to the latest regulations—particularly those that are about to go into effect in the fiscal year beginning July 1.

In 2015, new provisions outlined in Section 501(r) of the Internal Revenue Code (IRC) aimed to distinguish the practices of tax-exempt hospitals from those of for-profit hospitals, requiring nonprofit hospitals to justify their tax-exempt status. Full compliance is required for a hospital’s tax year beginning after December 29, 2015 (which falls on July 1 for many hospitals) in order to avoid taxation and revocation of the hospital’s 501(c)(3) status. As we discussed in late September, 501(r) penalties are contingent on the extent of the mistake and the organization’s intent, but are also lessened by attempts to correct the error. As the fiscal year for many organizations draws to a close, the time is now to get compliant with these provisions to avoid costly consequences.

Recently, some stakeholders, including the AICPA, have argued that organizations such as nursing facilities and others that operate outside of the traditional hospital structure should be exempt from compliance with Section 501(r). They claim the burden of compliance is too high for organizations that don’t primarily function as traditional hospitals. The AICPA points to vast differences in the types of organizations that operate as licensed hospitals from state to state. However, the AICPA’s request has not yet resulted in a change, and organizations such as research institutes and nursing homes must be prepared for compliance.

Organizations hoping to retain their tax exempt status should take steps before the July 1 deadline to help them avoid penalty – and also understand what prompt corrections will need to be made if they miss the deadline.

Follow this link to sign up and view our archived webinar on 501(r) compliance.

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