Nonprofit Tax-Exempt Corporation Workbook

Exempt Organizations Update

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Use this checklist to guide you through the process of submitting your application. I am assuming that at a minimum, you have already incorporated your non-profit, secured an employee Identification number EIN , and assembled your board of directors. Click HERE for a copy of the form.

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The IRS warns organizations to choose your foundation classification wisely. You will fill in the questions as listed on the preview form. You will receive immediate confirmation of submittal. From my experience I have not seen a reduction in the time that it takes to receive a final approval of applications, so I would say the wait time is anywhere from two 2 to six 6 months. Have you tried applying for c 3 recognition of exemption using the Form EZ process? Tell us about your experience.

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BellTower provides aspiring non-profit organizations with assistance in forming their organization and applying for exemption. The local property tax exemption is the money nonprofits would have to pay in local property taxes if they were a for-profit. Following the approach used by Sara Rosenbaum and colleagues, we first calculated an average ratio of property taxes to total revenue for for-profits in each state. We assumed that the nonprofit would not change its physical plant if it became for-profit. In other words, if a nonprofit could not issue tax-exempt bonds, it would have to pay a higher interest rate to investors to borrow money.

To compute this value, we assumed that yield on tax-exempt bonds was 5. This implies that an investor in this tax bracket would be indifferent between tax-exempt return of 5. This, in turn, implies that resulting cost savings to the nonprofit is therefore 2. The charitable contribution subsidization equals the extra charitable contributions nonprofits receive because of the federal personal income tax exemption for charitable giving.

Table 2 shows the average value of the tax exemption as a percent of total expenses for nonprofits in our sample. The top shows the amounts for the 6 distinct categories separately, while the bottom shows the total combined across the 6 categories; this total equals 5.

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The federal corporate income tax exemption averages 2. Next are the sales tax exemption of 0. As with the community benefit estimates, there is considerable variation across these hospitals, including whether hospitals benefit from some of the categories at all. We provide more details about the distribution across hospitals below. We next compare these estimates for the nonprofit community benefits to the value of the tax exemption.

We produce estimates of the average difference across hospitals and the proportion of hospitals with community benefits exceeding the value of their tax exemption. We then show scatterplot figures to illustrate the joint distribution of the two amounts across all hospitals. For each of these, we consider various approaches to conceptualize community benefits.

The difference between total community benefits and the value of the tax exemption averages 1. The red line is not a line fitted through the scatterplot.

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As a result, hospitals to the upper left can be viewed as providing enough community benefits to justify their tax exemption, while hospitals to the lower right can be viewed as not providing enough community benefits to justify their tax exemption. There is considerable variation across hospitals in their community benefits as a percent of expenses and considerable variation across hospitals in their tax benefits as a percent of expenses.

An important question is whether all 8 categories on the IRS list warrant comparison to the level of tax benefits the nonprofits receive. Because Medicaid payment levels are lower than commercial payment levels and most nonprofits see relatively more Medicaid patients than for-profits see, there is some appeal to including unreimbursed Medicaid costs on the list. However, the level of Medicaid reimbursement is formally determined by state policy; states presumably believe these rates are generally appropriate, though some states may set rates simply to what they believe they can afford.

The problem is that the IRS Form focuses on average costs for reasons which are understandable, given the complexities of actually computing fixed versus marginal costs. These average costs are indeed higher than Medicaid payment levels, but we suspect that the marginal costs of Medicaid patients are lower than Medicaid payments.

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We therefore believe it is inappropriate to argue that unreimbursed Medicaid costs should be considered the same as charity care. Medicare unreimbursed costs are not considered to be community benefits on the IRS schedule.

Given these concerns about quantifying appropriate marginal unreimbursed costs from Medicaid and other means-tested programs, given the ambiguity of which services should be included in the category of subsidized health services which are not means-tested and the possibility of hospital departments shifting these costs across one another , and given the observation that the remaining 4 community benefit categories are both quite small in magnitude and could arguably benefit the hospital itself as marketing-related efforts, we believe that a comparison which uses charity care alone as the sole community benefit to compare with the value of the tax exemption serves as a reasonable lower bound for community benefits.

The analyses presented above in Tables 1 through 3 and Figure 1 indicate that there is wide variation across hospitals in community benefits, wide variation in the value of the tax exemption, and wide variation in the difference between the two amounts. Our final set of analyses therefore examines the extent to which this variation across hospitals can be explained by either hospital or market characteristics. Specifically, we examine whether a set of hospital and market characteristics are associated with a nonprofit having its community benefits exceed its tax exclusion by estimating several hospital-level logistic regressions, where we use our 4 different measure of community benefits ie, total versus incremental and all 8 IRS categories vs just charity care alone.

The hospital-level characteristics include bed size, system ownership, church affiliation, teaching status, percent Medicare and Medicaid patients, trauma center presence, obstetrics services provided, and case mix index. The market-level characteristics include rural vs urban, percent nonwhite, percent in poverty, percent uninsured, the presence of a public hospital or federally qualified health center FQHC , insurance and hospital market concentration, and the malpractice environment. Each of the models includes a set of state indicators to control for underlying variation in state tax policy influencing the value of the tax exemption.

Table 4 presents the results from these analyses as marginal effects on the underlying probability that community benefits exceed the value of the tax exemption ie, a 1-unit change in a given independent variable increases the percentage of hospitals with community benefits exceeding the value of the tax exemption by X percentage points.

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While many of the hospital and market characteristics are significant predictors of community benefits exceeding the value of the tax exemption in the different regressions, only a few of the characteristics yield consistent results across the 4 different characterizations of community benefits. The market characteristics associated with community benefits exceeding foregone taxes are higher county uninsurance rates and higher state malpractice payments per capita. Higher county uninsurance rates likely directly lead to larger amounts of charity care to the uninsured, while the association with higher state malpractice payments is puzzling.

Taken together, the hospital and market characteristics examined here do relatively little to explain the wide variation across hospitals in the difference between community benefits and the tax exemption. The average direct and indirect benefits of the tax exemption equal 5. If one focuses on the incremental community benefits for nonprofits relative to for-profits, the average value of the tax exemption is slightly higher than the average value of the incremental total community benefits of 5.

Our analyses have some limitations. And the lack of analogous measures of community benefits from the CMS-HCR data add uncertainty to the estimates for certain incremental community benefits for nonprofits relative to for-profits. Another limitation relates to the timing of our analyses.

The Marketplace subsidies and state Medicaid expansions where they occurred clearly reduced the number of uninsured and, in turn, likely reduced the amount of hospital charity care yet also likely increased the amount of unreimbursed Medicaid costs. Historically, policymakers have not been in uniform agreement that nonprofits must provide charity care commensurate with the value of the tax exemption.

The community benefit standard now allows for the consideration of other activities to satisfy the requirement, but the recent provisions place much of the emphasis on nonprofits providing care to indigent persons unable to pay. Taken as a whole, our analyses demonstrate that the provision of all community benefits, charity care alone, and the value of the tax exemption vary substantially across nonprofits.

Moreover, neither combined community benefits nor charity care alone whether measured as totals or incremental amounts relative to for-profits is strongly correlated with the value of the tax exemption, and few hospital or market characteristics consistently explain the difference between community benefits and the tax exemption.

For policymakers who desire to motivate hospitals to provide adequate community benefits and, in particular, sufficient charity care to underserved populations, the tax exemption currently appears to be a rather blunt instrument, as many nonprofits benefit greatly from the tax exemption yet provide relatively few community benefits. Policymakers could consider being more explicit in specifying certain levels of community benefits from nonprofits as a requirement and be willing to rescind nonprofit status to those hospitals deemed to be providing insufficient community benefits.

We thank Visaharan Sivasubramaniam for helpful research assistance. Skip to main content. Download Citation If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Via Email All fields are required. Send me a copy Cancel. Request Permissions View permissions information for this article. Article first published online: February 13, ; Issue published: January 1, Received: August 11, ; Revisions received: November 01, ; Accepted: Keywords hospitals , nonprofit status , community benefits , health care policy , health economics.

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Net Community Benefit Expense Section:. Open in new tab. Tips on citation download. The charitable status of nonprofit hospitals: Google Scholar , ISI.

Nonprofit hospitals and the federal tax exemption: Google Scholar , Medline. Nonprofit Hospitals and the Provision of Community Benefits.

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