TAX ISSUES ARE GAINING PROMINENCE for healthcare organizations regardless of their status with the Internal Revenue Service, and 2008 could prove to be a challenging year for hospital finance professionals.
But while most accounting departments grapple with the tricky tenets of taxation, their situations follow two distinctly different paths, depending on whether they are not-for-profit or for-profit.
On the not-for-profit side, hospitals are being pressured to justify their tax-exempt status by demonstrating that they provide an appropriate level of charity care or community benefit. A not-for-profit that isn’t meeting the minimum threshold could see its tax-exempt status jeopardized.
Conversely, for-profits must be cognizant of the Financial Accounting Standards Board Interpretation 48 (FIN 48), a standard designed to create greater detail and transparency in tax accounting. Launched at the beginning of 2007, industry experts contend that FIN 48 will force for-profit hospitals to scrutinize and report their tax positions much more thoroughly than in the past.
The issue that not-for-profits must address has been percolating for years, as municipalities, townships, counties and states have, in a hardscrabble hunt for more revenue, taken a hard look at their tax-exempt status, questioning their validity and whether they are acting more like for-profit organizations. In 2006, the effort expanded to the federal level after a report from the minority staff of the U.S. Senate Finance Committee recommended that Congress consider placing 501(c)(3) hospitals that do not meet “minimum charity care levels” into a new 501(c)(4) category that precludes them from issuing tax-exempt bonds and receiving tax-deductible charity contributions.
Francine Machisko, senior principal at the Falls Church, Va.-based Noblis Center for Health Innovation, sees a growing outcry from governmental entities about not-for-profit organizations failing to adequately demonstrate their contributions to society.
“The popular perception is that all tax-exempt organizations are not providing services commensurate with the benefits they get,” she said. “(Society) wants to make sure that they are getting at least an equal value in return. But it’s a very difficult thing for any government to get their arms around because there isn’t a true definition of charity care and community benefit.”
There is also no consistency in the way not-for-profit hospitals measure and report their charitable services, Machisko said.
“They are literally all over the map,” she said. “Some base their reports on cost, some on charges and some point to other services like community newsletters, education and research.”
At this point, it is difficult to advise accounting departments on how to devise a specific formula because there isn’t one, Machisko said.
“There is no threshold established by the IRS or anyone else – (there is no) globally accepted definition,” she said. “The idea is that tax-exempt hospitals are supposed to be providing charity care and community benefit, but nowhere does it say what number is supposed to be.”
A recent IRS survey of some 500 not-for-profit healthcare organizations is said to have found a diverse set of approaches to reporting and wide variations in the amount of charity care provided. While some hospitals reported providing as much as 10 percent of their annual revenues on charity care, others “provided very little,” Machisko said.
What financial executives at not-for-profits can do to stay ahead of government officials is to conduct a thorough assessment of the hospital’s benevolent services, she said.
“Keep abreast of what’s happening,” she said. “Look internally, and make sure you have policies in place for charity care and track the information completely. I can’t say for sure whether 5 percent of annual revenues will be a target number, but it’s a good place to start.”
Of more immediate concern is FIN 48, which many for-profit hospitals must address in 2008. It represents a fundamental shift in the way hospital accounting departments report “uncertain tax positions” on their financial statements, said Paul Sassano, tax solution director for Brookfield, Wis.-based Jefferson Wells.
“‘Uncertain tax positions’ are those that fall into the gray area of a previously filed return or an anticipated position in a return not yet filed,” he said. “In the past, companies accounted for these gray areas differently. Adopting FIN 48 will require corporate tax departments to devote more time, money and expertise in scrutinizing their tax positions.”
FIN 48 is required for for-profit hospitals if they report gap financials on their tax returns. They must disclose their tax position – relative to income tax – on Form 10K to give the IRS a roadmap to see if there is money set aside for tax issues.
“It is to measure the organization’s tax position and to establish a consistent threshold of what is an aggressive position or not, such as setting up a holding company or lease structure to optimize tax benefit,” Sassano said. “It provides greater transparency for taxes in general.”
Adopting FIN 48 may affect the hospital’s income statement expense, require the notation of additional expenses or force taking benefit for items within disclosure requirements, he said.
“It may cause a lot of adjustments to P and L statements due to transparency at the forefront and income statement volatility,” Sassano said.