As Benjamin Franklin famously quipped, "In this world, nothing can be said to be certain, except death and taxes."
The certainty of taxes has become increasingly involved for hospitals, as the Internal Revenue Service as well as state and local governments are making sure the healthcare systems in this country are properly paying their fair share in an era of tight budgets. As the tax season now starts to hit full stride for most people in the United States, here are seven best practices for hospitals and their financial teams in order to manage their tax processes smoothly year-round.
1. Understand the new Form 990. For non-profit, tax-exempt hospitals, nothing is more important than the Form 990. It is the Holy Grail of tax documents, and the IRS released the 2011 version of the Form 990 (for tax years beginning in 2011) last month.
Milt Cerny, JD, counsel at McGuireWoods, and Rick Speizman, national partner-in-charge of the exempt organization tax practice at KPMG, say this year's Form 990 has added new reporting requirements, with those involving Schedule H as the most important for hospitals. Section 501(r) of the Internal Revenue Code, part of the Patient Protection and Affordable Care Act, imposed new tax exemption requirements on non-profit hospitals. These new requirements in turn led to new reporting on Schedule H, beginning with the 2010 Form 990. Much of the new reporting was optional for filers of the 2010 form, but it is now required for filers of the 2011 form. Here are four of the most pertinent items hospitals need to know about this year's Form 990.
• Facility information. Part V, Section A now requires hospitals and health systems to list each of their hospital and non-hospital healthcare facilities, including those operated indirectly through a "disregarded" entity like a limited liability company or a joint venture. "There is more reporting in this form, and it also requires a separate set of responses regarding policies and practices for each hospital's practices and facilities," Mr. Cerny says.
• Community health needs assessment. Part V, Section B, lines one through seven, provides new reporting obligations for hospitals, as well. Mr. Speizman says the community health needs assessment requirement of Section 501(r) is a major new tax requirement for hospitals. If hospitals want to remain tax-exempt, they have to conduct community health needs assessments, which essentially detail how a hospital is meeting the health needs of the community it serves.
The community health needs assessment is optional for tax years beginning before March 24, 2012, but many hospitals are working on this section of Schedule H now to stay ahead of the game. Examples of detailed questions in this section include how hospitals obtained data and how the assessment was made available to the public.
• Financial assistance and billing/collections policies. The financial assistance and billing/collections policy questions are still within Part V, Section B on Schedule H, and these reporting requirements essentially ask hospitals to outline the standards they apply in offering financial assistance to patients, what type of financial assistance they offer and how they publicize their policies. Mr. Cerny, however, says this section has expanded and added different terminology. "It's interesting because [the IRS] eliminated the term 'charity care' and replaced it with 'financial assistance,'" Mr. Cerny says. "That's basically asking about policies that applied to the largest number of patients."
• Compensation. Hospitals must record the compensation of top executives in their Form 990 (this is outside of Schedule H). Although the compensation reporting requirements are not new, they still are considered to be one of the most heavily scrutinized facets of the entire form. "Compensation is always going to be looked at by the IRS," Mr. Cerny says. "That's something hospitals really need to make sure they have done the due diligence for determining compensation."
Hospital financial teams should always review the compensation packages of top executives and other "insiders." "Look at the compensation of executives and see how it matches up against executives at other organizations," Mr. Speizman says. He also notes that proper reporting of compensation on Forms 990 can be difficult "because of the increased and more detailed reporting — retirement benefits, fringe benefits. A great deal of data needs to be collected. This is always a lot of work," he says.
Mr. Speizman also recommends that as a best practice, healthcare providers should give their full board of directors an opportunity to review the Form 990 in its final form before it is submitted to the IRS. Because the Form 990 is available in the public sphere, prudence and meticulous evaluation must reign supreme. "In the tax-exempt world, we're concerned about a lot more than the income tax we might owe," Mr. Speizman says. "This is information that is being looked at by the IRS, the public, potential donors, labor unions, competitors, the press — everybody. It's worth putting the proper investment into preparing Form 990 because it really is the face of your organization and continues to get more complicated as the government adds more rules and more reporting requirements."
Hospitals can download the Form 990 here (pdf) and Schedule H here (pdf). All other information on Section 501(r) can be found here.
2. Have an efficient and effective tax compliance team. The Form 990 is a major undertaking for non-profit hospitals and health systems, but every hospital — regardless of tax status — needs to have a focused tax team, says Monica Coakley, national tax leader for healthcare at KPMG.
Getting all tax filings completed on time should be a given, but being proactive and well-organized along the way is the challenge. "You need to make sure that your [hospital] has an efficient and effective tax compliance team that is planning ahead and executing a proper project management plan," Ms. Coakley says. "The company should have a clear timeline, from gathering all relevant information through any internal and external reviews and electronic submission. The planning and information gathering process should be ongoing throughout the year."
3. Evaluate the tax processes on a periodic basis. Hospital CFOs and other financial officers should evaluate periodically how they gather tax data and how they are meeting compliance obligations, including whether they have the right, robust tax technology in place. "Tax technology can make a big difference in the cost effectiveness and accuracy of the tax compliance process," Ms. Coakley says. "Having strong systems and controls in place is one of the keys to effective tax risk management."
4. Be proactive on gathering investment information. Many of the larger non-profit hospitals and health systems have substantial investment portfolios these days, and they are making very diverse investments, such as real estate, private equity funds and hedge funds.
However, compiling and retrieving the slew of information from those investments is not always easy. "Typically, those organizations are reliant on receiving forms and disclosures of information, but sometimes that information is hard to get," Mr. Speizman says. He recommends hospital financial officers stay on the offensive and be proactive about receiving timely and complete investment statements and Forms K-1 from all of the accounts and funds in which they invest.
5. Don't narrow the focus to only federal income taxes. Both non-profit and for-profit hospitals need to devote appropriate resources to state income taxes, sales taxes, property taxes and escheat taxes, which is another term for unclaimed property taxes. "It's important to not fall into the trap of allocating all of your attention and resources to the federal income tax return, although that's a large component," Ms. Coakley says. "State auditors have become increasingly aggressive as they look to close state budget shortfalls."
6. Stay on top of IRS guidance. Both non-profit and for-profit healthcare providers stand to gain a lot by staying "in the know" with IRS — as well as state and local — tax law developments. The IRS website provides updates to the federal tax code and offers official tax guidance.
Ms. Coakley says there are a number of important recent tax developments that affect taxable healthcare providers. For example, this past fall, the IRS introduced a new safe harbor for the nonaccrual-experience method of accounting, which is a special way for taxable entities to determine when certain income related to healthcare services must be recognized. The lesson? There will always be complicated rules to the tax code, and doing the research pays off in the long haul. "The rules for the nonaccrual-experience method of accounting are very complex, and the previously provided safe harbors are also very complex," Ms. Coakley says. "It's important that for-profit healthcare providers work with their tax advisors to determine how these rules are going to apply to them."
7. Acknowledge that taxes are a year-round endeavor. For the normal taxpaying American citizen, the nuts and bolts of returns are really only considered at the beginning of the year, when tax returns need to be filed. For hospitals and other large organizations, taxes need to be a year-round concern because the organization's bottom line is at stake. "Any CFO should know that taxes are an integral part of the economics of their business," Ms. Coakley says. "Tax implications and planning opportunities should be considered at the forefront of any business undertaking. Taxes shouldn't be something that only comes to mind when it's tax return filing season."
Ms. Coakley adds hospitals that are adroit in their tax planning are actually putting the organization in a better position for future success. "Tax efficiency can contribute to the bottom line," she says. "Because of the prevalence of tax credits, tax incentives, tax exemptions and other opportunities, attentive tax planning can actually create significant value for an organization."
The certainty of taxes has become increasingly involved for hospitals, as the Internal Revenue Service as well as state and local governments are making sure the healthcare systems in this country are properly paying their fair share in an era of tight budgets. As the tax season now starts to hit full stride for most people in the United States, here are seven best practices for hospitals and their financial teams in order to manage their tax processes smoothly year-round.
1. Understand the new Form 990. For non-profit, tax-exempt hospitals, nothing is more important than the Form 990. It is the Holy Grail of tax documents, and the IRS released the 2011 version of the Form 990 (for tax years beginning in 2011) last month.
Milt Cerny, JD, counsel at McGuireWoods, and Rick Speizman, national partner-in-charge of the exempt organization tax practice at KPMG, say this year's Form 990 has added new reporting requirements, with those involving Schedule H as the most important for hospitals. Section 501(r) of the Internal Revenue Code, part of the Patient Protection and Affordable Care Act, imposed new tax exemption requirements on non-profit hospitals. These new requirements in turn led to new reporting on Schedule H, beginning with the 2010 Form 990. Much of the new reporting was optional for filers of the 2010 form, but it is now required for filers of the 2011 form. Here are four of the most pertinent items hospitals need to know about this year's Form 990.
• Facility information. Part V, Section A now requires hospitals and health systems to list each of their hospital and non-hospital healthcare facilities, including those operated indirectly through a "disregarded" entity like a limited liability company or a joint venture. "There is more reporting in this form, and it also requires a separate set of responses regarding policies and practices for each hospital's practices and facilities," Mr. Cerny says.
• Community health needs assessment. Part V, Section B, lines one through seven, provides new reporting obligations for hospitals, as well. Mr. Speizman says the community health needs assessment requirement of Section 501(r) is a major new tax requirement for hospitals. If hospitals want to remain tax-exempt, they have to conduct community health needs assessments, which essentially detail how a hospital is meeting the health needs of the community it serves.
The community health needs assessment is optional for tax years beginning before March 24, 2012, but many hospitals are working on this section of Schedule H now to stay ahead of the game. Examples of detailed questions in this section include how hospitals obtained data and how the assessment was made available to the public.
• Financial assistance and billing/collections policies. The financial assistance and billing/collections policy questions are still within Part V, Section B on Schedule H, and these reporting requirements essentially ask hospitals to outline the standards they apply in offering financial assistance to patients, what type of financial assistance they offer and how they publicize their policies. Mr. Cerny, however, says this section has expanded and added different terminology. "It's interesting because [the IRS] eliminated the term 'charity care' and replaced it with 'financial assistance,'" Mr. Cerny says. "That's basically asking about policies that applied to the largest number of patients."
• Compensation. Hospitals must record the compensation of top executives in their Form 990 (this is outside of Schedule H). Although the compensation reporting requirements are not new, they still are considered to be one of the most heavily scrutinized facets of the entire form. "Compensation is always going to be looked at by the IRS," Mr. Cerny says. "That's something hospitals really need to make sure they have done the due diligence for determining compensation."
Hospital financial teams should always review the compensation packages of top executives and other "insiders." "Look at the compensation of executives and see how it matches up against executives at other organizations," Mr. Speizman says. He also notes that proper reporting of compensation on Forms 990 can be difficult "because of the increased and more detailed reporting — retirement benefits, fringe benefits. A great deal of data needs to be collected. This is always a lot of work," he says.
Mr. Speizman also recommends that as a best practice, healthcare providers should give their full board of directors an opportunity to review the Form 990 in its final form before it is submitted to the IRS. Because the Form 990 is available in the public sphere, prudence and meticulous evaluation must reign supreme. "In the tax-exempt world, we're concerned about a lot more than the income tax we might owe," Mr. Speizman says. "This is information that is being looked at by the IRS, the public, potential donors, labor unions, competitors, the press — everybody. It's worth putting the proper investment into preparing Form 990 because it really is the face of your organization and continues to get more complicated as the government adds more rules and more reporting requirements."
Hospitals can download the Form 990 here (pdf) and Schedule H here (pdf). All other information on Section 501(r) can be found here.
2. Have an efficient and effective tax compliance team. The Form 990 is a major undertaking for non-profit hospitals and health systems, but every hospital — regardless of tax status — needs to have a focused tax team, says Monica Coakley, national tax leader for healthcare at KPMG.
Getting all tax filings completed on time should be a given, but being proactive and well-organized along the way is the challenge. "You need to make sure that your [hospital] has an efficient and effective tax compliance team that is planning ahead and executing a proper project management plan," Ms. Coakley says. "The company should have a clear timeline, from gathering all relevant information through any internal and external reviews and electronic submission. The planning and information gathering process should be ongoing throughout the year."
3. Evaluate the tax processes on a periodic basis. Hospital CFOs and other financial officers should evaluate periodically how they gather tax data and how they are meeting compliance obligations, including whether they have the right, robust tax technology in place. "Tax technology can make a big difference in the cost effectiveness and accuracy of the tax compliance process," Ms. Coakley says. "Having strong systems and controls in place is one of the keys to effective tax risk management."
4. Be proactive on gathering investment information. Many of the larger non-profit hospitals and health systems have substantial investment portfolios these days, and they are making very diverse investments, such as real estate, private equity funds and hedge funds.
However, compiling and retrieving the slew of information from those investments is not always easy. "Typically, those organizations are reliant on receiving forms and disclosures of information, but sometimes that information is hard to get," Mr. Speizman says. He recommends hospital financial officers stay on the offensive and be proactive about receiving timely and complete investment statements and Forms K-1 from all of the accounts and funds in which they invest.
5. Don't narrow the focus to only federal income taxes. Both non-profit and for-profit hospitals need to devote appropriate resources to state income taxes, sales taxes, property taxes and escheat taxes, which is another term for unclaimed property taxes. "It's important to not fall into the trap of allocating all of your attention and resources to the federal income tax return, although that's a large component," Ms. Coakley says. "State auditors have become increasingly aggressive as they look to close state budget shortfalls."
6. Stay on top of IRS guidance. Both non-profit and for-profit healthcare providers stand to gain a lot by staying "in the know" with IRS — as well as state and local — tax law developments. The IRS website provides updates to the federal tax code and offers official tax guidance.
Ms. Coakley says there are a number of important recent tax developments that affect taxable healthcare providers. For example, this past fall, the IRS introduced a new safe harbor for the nonaccrual-experience method of accounting, which is a special way for taxable entities to determine when certain income related to healthcare services must be recognized. The lesson? There will always be complicated rules to the tax code, and doing the research pays off in the long haul. "The rules for the nonaccrual-experience method of accounting are very complex, and the previously provided safe harbors are also very complex," Ms. Coakley says. "It's important that for-profit healthcare providers work with their tax advisors to determine how these rules are going to apply to them."
7. Acknowledge that taxes are a year-round endeavor. For the normal taxpaying American citizen, the nuts and bolts of returns are really only considered at the beginning of the year, when tax returns need to be filed. For hospitals and other large organizations, taxes need to be a year-round concern because the organization's bottom line is at stake. "Any CFO should know that taxes are an integral part of the economics of their business," Ms. Coakley says. "Tax implications and planning opportunities should be considered at the forefront of any business undertaking. Taxes shouldn't be something that only comes to mind when it's tax return filing season."
Ms. Coakley adds hospitals that are adroit in their tax planning are actually putting the organization in a better position for future success. "Tax efficiency can contribute to the bottom line," she says. "Because of the prevalence of tax credits, tax incentives, tax exemptions and other opportunities, attentive tax planning can actually create significant value for an organization."
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