ExpressTaxExempt Blog

Tax-Exempt Hospitals Must Comply with Section 501(r) Regulations

Section 501(r) regulations provide guidelines on how hospitals retain their tax-exempt status. These requirements were implemented to the Internal Revenue Code by the Patient Protection and Affordable Care Act back in 2010. Failing to comply with the following rules will cause hospitals to lose their tax exemption:

  • Meeting the Community Health Needs Assessment (CHNA) conditions of Section 501(r)(3)
  • Following the Financial Assistance Policy (FAP) necessities of Section 501(r)(4)
  • Ensuring that charges for emergency and other medical care for patients with FAP don’t surpass amounts typically billed to patients with insurance
  • Preventing any outstanding payment collections before making rational efforts to determine if the patient qualifies for assistance under FAP

Other penalties include a $50,000 excise tax towards hospital organizations failing to meet the Community Health Needs Assessment for the filing year.

Regulations imposed by Section 501(r) went into effect for the taxable year starting after December 31, 2015, and applies to hospital organizations - including government hospital organizations - seeking tax-exempt recognition under Section 501(c)(3). Some government hospitals aren’t responsible for filing IRS Form 990 or submit CHNA information with a 990 form; however, they are still required to make their CHNA and FAP reports publicly available.

Even though failure to comply with Section 501(r) regulations may cause the IRS to revoke tax-exempt status from a hospital, federal officials consider the following facts before revocation:

  • The primary reason for failure
  • The importance and nature of the failure
  • Whether or not the hospital failed requirements in the past
  • The number, extent, and significance of facilities that failed if applicable
  • Whether the hospital had practices and procedures in place to ensure overall compliance before failing
  • Whether the hospital quickly corrected the failure and enforced any safeguards to prevent future failures
  • Whether staff regularly followed compliance practices and procedures and the failure happened from some mistake or oversight

Overall, any omissions from a report or errors in operational requirements that are minor, or otherwise accidental due to reasonable causes, are not seen as failing to meet regulations.

An Accountable Care Organization (ACO) is exempt from following Section 501(r) guidelines, but multiple medical facilities are allowed to duplicate the same FAP and other policies as long as it’s the same for each facility. Furthermore, separate hospitals within the same community can perform a joint community health needs assessment and create a joint strategy meeting those goals.

If a health system operates multiple hospitals and one facility fails to meet requirements, that failure will not affect the exemption status of the overall health organization. The IRS may impose a corporate hospital facility tax towards the non-compliant facility for the year it failed compliance. Operations from the failed facility are not seen as unrelated trade or business nor will finances for the non-compliant hospital be affected.

Experts recommend board members of nonprofit hospitals to review regulations from Section 501(r) and carefully examine their healthcare policies to ensure compliance. And remember to file the required 990 form, if applicable, along with the Schedule H.

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Reporting Endowment Funds with Form 990

reporting endowment funds on Form 990On Part IV, Line 10 of IRS Form 990, you must answer if your exempt organization held any assets in temporarily restricted endowments, permanent endowments, or quasi-endowments - the ownership of these funds are either directly with your tax-exempt group or a through a related organization.

If you answer “Yes,” then you need to proceed to Schedule D, Part V. Here are a few guidelines from the IRS about reporting your organization’s endowment funds:

Endowment Assets
The IRS requires you to enter the amounts of current and prior year contributions, grants, administrative expenses, and asset transfers to the organization’s endowment funds. List your estimated percentage of total endowment funds along with any information on other grants that aren’t in your group’s possession.

Types of Endowment Funds
The IRS breaks down endowment funds into three categories - the funds you report will fit either one or all of these classifications:

  • Temporarily Restricted Endowments - Donor-restricted gifts that provide an income source for a specified amount of time or until a particular event occurs.
  • Permanent Endowments - Donor-restricted gifts that provide an ongoing source of revenue and includes the stipulation that invests and retains the principal.
  • Quasi-Endowments - Also known as Board-Designated Endowments, these are funds established within the organization from either unrestricted donations or organizational funds.

Even though there are different types of endowments, you report them all together as a lump sum for the current and prior years and then provide a percentage amount of the current year-end balance for each classification.

Possession of Funds
You need to indicate whether or not there are any endowment funds owned by unrelated organizations or any related organizations. If funds are in possession of a related organization, you have to confirm whether or not those groups are listed on a Schedule R. Finally, the IRS requests you describe the intended uses of the organization’s endowment funds in Part XIII of the Schedule D.

With ExpressTaxExempt.com, you can enter all your information regarding endowment funds on a single screen, and we automatically generate it correctly on your Schedule D.

Contact our U.S. - based support team for any other questions or concerns about reporting endowment funds - we’re available at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST or send a message at your convenience with support@ExpressTaxExempt.com.

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Joint Ventures for Tax-Exempt Hospitals

One way health systems can counter against depleting resources and growing demand is by entering into a joint venture with physicians or other businesses.

While this method can boost efficiency and enhance services, it’s important to ensure the joint venture doesn’t endanger your hospital’s tax-exempt status.

A joint venture typically works by creating a new business partnership for tax purposes like a limited liability company (LLC). With a nonprofit hospital partnering with a for-profit company, some issues could discredit your exemption status. Here are a few things experts say you want to avoid.

Private Inurement
A private inurement is using the revenue or assets of an exempt organization to benefit an officer, director, or other key members. Federal laws strictly prohibit tax-exempt groups from private inurement - ensure there are no improper benefits, written or verbal, within the agreement of the venture.

Neglecting Charitable Functions
A tax-exempt organization has to engage in some charitable work - this is fact. If substantial activity from the joint venture isn’t to advance charitable efforts, then the partnership could negatively impact your hospital’s exemption status.

Excessive Unrelated Business Income
Revenue coming from activities that typically has nothing to do with an organization’s exempt purpose is unrelated business income - and gets taxed at the standard rate. Tax-exempt groups are allowed to have revenue from unrelated activities, but if that extra business becomes more significant than the tax-exempt purpose, it can revoke your exemption status.

Private Benefit
A private benefit is using revenue from your joint venture towards a private entity rather than the public. Once again, if the private interest is more substantial than the charitable cause, your hospital can lose its tax-exempt status. You can prevent this outcome by having your nonprofit control the majority of activities conducted by the joint venture.

Ignoring IRC 501(r) Guidelines
With the regulations set under the IRC 501(r), a taxable entity and a nonprofit organization that jointly owns a hospital must conduct specific responsibilities such as performing a community health needs assessment, reducing charges with billing and collection policies, and having a financial assistance policy. Failure to follow the 501(r) rules can result in the hospital’s loss of tax exemption.

Other operation issues relate to a joint venture retaining its exemption, but a sure way to remain compliant with the IRS tax-exempt rules is to file your required 990 form every year. ExpressTaxExempt.com makes it easy to e-file annual, exemption returns and schedules directly to the IRS and supports real-time, automatic email notifications of your filing status.

Our U.S. - based support team is available to assist with your e-filing experience - give us a call at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST or contact us anytime via email with support@ExpressTaxExempt.com.

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Tax-Exempt Retention for Hospitals

With the most recent changes in tax-exempt requirements and healthcare reform, nonprofit hospitals are facing several challenges with exemption classification and retention. Experts say that nonprofit hospitals receive about $13 billion in tax exemptions annually - that’s a significant amount of money that law officials believe can efficiently fund federal, state, and local programs, if imposed.

However, the opposition argues that enforcing taxes on nonprofit hospitals will not only affect staff, medical programs, and equipment but also lead to higher payments for patients. Even though there is no mandated threshold, state laws typically expect a nonprofit hospital to provide charitable services that value over 1% of gross receipts.

Here are a few other suggestions from tax professionals about maintaining tax-exempt status for a nonprofit hospital:

  • Comply with the new tax-exempt requirements established by the Patient Protection/Affordable Care Act (PPACA)
  • Express the hospital’s capabilities of accepting Medicaid and Medicare patients and services for low-income patients
  • Develop rebuttable cases that show reasonable compensation relationships
  • Build and retain documents showcasing charitable benefits and charity care the hospital annually provides for the community
  • Prove that any money received for community benefit purposes is used exclusively for that activity such as medical research or health education

State courts have also established reasons that can prevent tax-exempt entitlement for a nonprofit hospital:

  • Little or no patients receive free or discounted care
  • The value of free care provided is minimal
  • Immediately refers unpaid bills to collections
  • Charges full rates for uninsured patients
  • Fails to provide straightforward benefits to the community it serves

It’s critical for board members to review their hospital’s methods and operations each year and ensure that they’re following the guidelines to classify as tax-exempt. It’s just as important as being compliant with the IRS and filing your annual 990 form with Schedule H.

ExpressTaxExempt’s cloud-based service allows nonprofit organizations and hospitals to file 990 forms, schedules, and extensions quicker and easier than paper filing. Contact our U.S. - based customer support team for any questions or assistance with electronically filing tax-exempt returns. Call us at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST or send a message to support@ExpressTaxExempt.com.

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New Year, New IRS Rules

With everything you had going on with your nonprofit during the back-to-back holiday seasons - not to mention other personal responsibilities - you might not have kept up with changes the IRS has implemented for nonprofits filing annual 990 forms.

No worries - we got you covered with the current filing requirements for tax-exempt organizations. We all know that filing late or submitting incomplete forms lead to thousands of dollars in IRS penalty fees - no group wants that. Here’s what you need to know about filing your annual tax return in 2017.

IRS Form 8868 Tax Extension
The 8868 extension form for exempt organizations has gotten reduced to a single form that grants an automatic 6-month extension of time. You can submit an extension request for the same applicable returns as before, which also means IRS Form 990-N (e-Postcard) is not eligible for an extension.

With no Part II of the 8868 form, there’s no longer a need for you to provide a reasonable explanation to gain the full 6-month extension. However, you are still limited to one extension per tax return for the filing year.

IRS Deadlines for Exempt Organizations
The changes with the 8868 extension form also bring slight changes to filing due dates. The filing deadlines aren’t necessarily different, but you should be aware that you only have two chances per year to file instead of the regular three.

For organizations operating on a calendar tax year, your filing due date is May 15. If you choose to file an extension, your extended deadline is Nov 15. There is no August deadline as there was with prior years, and if you fail to file before the November deadline, you’ll incur substantial penalties.

The filing due date for organizations running on a fiscal tax year is always the 15th day of the 5th month after your accounting period ends. If you opt for an extension at that time, you have until the end of six months to file your return - no other opportunities without late fees are available after the extended deadline.

E-file your 8868 extension form and 990 tax return quicker and easier than paper filing with ExpressTaxExempt.com. Our cloud-based application ensures that you submit a complete form, and if the IRS rejects your return, we identify the errors so you can correct them and re-transmit at no additional cost.

Contact our U.S. - based customer support team in Rock Hill, South Carolina for any questions or assistance with transmitting your return or extension form with the IRS. You can reach us at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST or email us, day or night, with support@ExpressTaxExempt.com.

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Governing Body, Policies, and Disclosure Sections of Form 990

Federal tax law typically does not mandate particular management structures, operational policies, or administrative practices.

However, you are still required to report information regarding your organization's governing body and management, governance policies, and disclosure practices with IRS Form 990.

Not every policy or disclose practice may apply to your exempt organization - here are few guidelines about reporting the following sections with your 990 form:

Voting Members and Relationships
Enter the total count of your organization’s governing body members with the power to vote and the independent voting members. Indicate and describe any material differences of your governing body members if they do not have the same rights to vote.

If your organization’s current list of officers has a family or business relationship with other officers, you need to identify each person and describe their relationship.

Management Duties
Report if your organization appointed any management companies and describe all of the management duty details, if applicable. Management responsibilities include but are not limited to
  • Hire, fire, or supervise personnel
  • Plan executing budgets or financial operations
  • Oversee exempt activities or unrelated trades or businesses
Important: The IRS doesn’t recommend reporting administrative services like payroll processing or investment management unless the filing organization conducts investment management services for others.

Significant Diversion
Report any significant changes in your organizing documents or bylaws for the filing year, if necessary. Indicate if your organization became aware during the year of a significant diversion of the organization’s assets. If so, be prepared to explain the nature of the diversion, dollar amounts and any property involved, corrective actions, and relevant circumstances - do not include the name of whoever diverted the assets.

Select whether your organization has members or stockholders and describe whether your group classifies as a stock corporation, a joint-stock company, partnership, a joint venture, or a limited liability company, if necessary.

If your tax-exempt organization has any members or stockholders, you need to describe the class or categories of each person, the decisions that require their approval, and the nature of their voting rights. You also are responsible for reporting any documentation of meetings and written actions of the governing body and committees with authority to act on its behalf.

Indicate if your organization controls any local chapters, branches, lodges or affiliates. Report any written policies or practices governing the activities of those subordinate groups to ensure their operations are consistent with the organization's tax-exempt purposes, if applicable.

Written Policy
Specify if your organization has a written conflict of interest policy, a written whistleblower policy, and a document retention and destruction policy. You should also have the information necessary to describe the process for determining the compensation of the officers and key employees.

List all the appropriate states which require a copy of your 990 form to fulfill state exempt organization or charitable solicitation reporting requirements. Indicate and explain whether or not your organization’s governing documents are available to the general public during the tax year.

Organization’s Books
Provide the details of the person who possesses the organization's books and records including their name, address, and phone number.

Our U.S. - based customer support can assist you with any technical issues regarding the governing body, policies, and disclosure sections so you can transmit an error-free 990 form. Contact us at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST. Or you can submit a request with support@ExpressTaxExempt.com.

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Reporting Organization’s Program Service Accomplishments

Part III of IRS Form 990 and 990-EZ requires you to report your exempt organization’s program service accomplishments. A program service is typically the major ongoing objective or mission of your nonprofit or charity. The IRS lists many examples of exempt services including

  • A hospital's provision of charity care under its charity care policy
  • A college's provision of higher education to students in a degree program
  • And much more

Here are a few instructions directly from the IRS about reporting program services on your 990 tax return:

Organization’s Mission
You begin Part III by describing your organization’s mission as articulated in your mission statement or as adopted by your organization’s governing body. With ExpressTaxExempt.com, you also have the option of indicating if your group hasn’t established a mission.

Service Changes from Prior Year
You need to answer whether your tax-exempt group offered any new, significant program services not listed on your prior Form 990/990-EZ, or ceased conducting, or made major changes in how it performs, any program services. You can describe any new services or changes on a Schedule O.

Description of Program Services
You are responsible for describing program service accomplishments for three of your organization’s largest program services - if you have less than three, then describe for the number of services you do have.

The services you list are typically measured by the total expenses incurred, but you should include the following with your descriptions:

  • Accurate measurements such as clients served, days of care provided, number of sessions or events held, or publications issued
  • The service's objective for both the current period and a long-term goal
  • Reasonable estimates for any statistical information if exact figures are not readily available

You need to be clear, concise, and complete with your descriptions. The IRS doesn’t recommend attaching any brochures, newsletters, or articles about your organization. If you need more space for explanations, you can use Schedule O.

Other Information
For each program service you list, you must also provide total expenses included on Part IX, and total grants and allocations, if applicable, included with your total costs. You’re also responsible for reporting any revenue derived directly from the service.

With ExpressTaxExempt.com, you can quickly and easily enter this information in minutes. Our application automatically generates your additional descriptions onto Schedule O and also calculates revenue, expenses, and grant values with the entries provided in the respective section.

Call our U.S. - based support team for any questions or assistance with entering program service accomplishments on your 990 form. We’re available at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST - email us at any time with support@ExpressTaxExempt.com.

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Independent Audits for Financial Statements on Form 990

Within IRS Form 990, there is Part XII for financial statements and reporting. In this section, exempt organizations need to indicate whether their financial statements were compiled, reviewed, or audited by an independent accountant. And if so, whether the process was complete on a separate or consolidated basis, or both.

Independent Audits
An audit from an independent accountant is a thorough survey of a tax-exempt organization’s financial records, accounting practices, business transactions, internal controls, and accounts. The auditor or accountant cannot be a member or a regular employee of the organization but hired through a service contract.

Important: The auditor must also receive certification from either the American Institute of Certified Public Accountants (AICPA), the Public Company Accounting Oversight Board (PCAOB), or similar groups for accounting professions.

While conducting the independent audit, the accountant determines whether your organization’s financial statements follow “generally accepted accounting principles” (GAAP). These are established principles from the Financial Accounting Standards Board (FASB) - and if your exempt group doesn't follow these guidelines, the audit will report it.

Costs and Alternatives
The location and size of your tax-exempt group determine the expense of your independent audit. Fees are typically more than $20,000 for large organizations in metro areas and can even cost small nonprofits up towards $10,000.

Accountants can also provide a financial statement review or compilation instead of a routine audit. But if a third party, usually a donor, requires an examination, then a review or compilation may not suffice. Because most exempt organizations conduct audits every few years, it’s not entirely uncommon for a third party to accept just a review of financial statements.

Reporting to the IRS
As mentioned earlier, you simply need to indicate on your 990 form whether your organization had its statements reviewed, compiled, or audited during the tax year. With ExpressTaxExempt.com, it’s as easy as selecting either “Yes” or “No.” If yes, then choose the basis of the auditing process.

Our U.S. - based customer service team is available to answer any technical questions you have about e-filing with our cloud-based service - contact us at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST, or send an email at your earliest convenience with support@ExpressTaxExempt.com.

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Start the New Year With a New Brand

A new year means new beginnings - and what better way to embrace the “new” than with a complete reboot of your nonprofit or charity?

Updating your organization’s brand can help with efficient communication, engage with a particular audience, or even keep your mission relevant with modern times.

When deciding to rebrand, you need to have a straightforward goal, and a plan to achieve it. Here are a few tips from the Internet about how to successfully change your organization's image:

Choose the Right Time to Rebrand
Though the start of the new year seems like an appropriate time for most, it isn’t necessarily right for all. Decide if your organization requires a change in needs or goals because a different branding will affect how your group operates.

Consider if your organization needs a mission update, if there’s a change in donor retention rates, or need a new opportunity to stand out. If so, then the lengthy process of rebranding may greatly benefit your charitable efforts.

Build a Brand Manual
A helpful device to have when rebranding is a brand manual or guide because you can create distinctive guidelines for your organization’s message and design. The voice of your nonprofit or charity should be consistent from print to digital, or even in-person.

Your brand manual can include communication techniques for social media and inform your team members about the organization’s new approach and vision. Be sure to establish a precise way of communicating which will give your audiences a better view of your tax-exempt group's purpose.

Change and Mix Things Up
Rebranding is the perfect time for your organization to stand out above the rest. Consider remodeling your nonprofit’s logo or creating a catchy slogan. The key is clearly expressing your group’s mission and values to your audience - refer to your brand manual about what you’re trying to convey to people.

Establish Fundamental Messages
Your organization’s essential messages work in multiple ways - they express the facts and goals of your strategy and vision, but it also displays your group’s legacy and personality. You should also be aware of what your audience values when creating key messages. Be able to strike a balance - your message is about the organization and work it accomplishes, but that information should also be relatable to your audiences.

Keep At It
Once you complete your rebranding, the changes must remain consistent, so everyone is familiar with the new look. Speak with your members throughout the entire process and consider their opinions. Have them all become knowledgeable of the new communication techniques - the more they know, the better they represent the organization.

Keep your audience up to date so when you finally implement the changes they aren’t confused with a different organization. Promote your new brand via websites and social media along with those essential messages which give your audience a better view of your goals and values.

Rebranding an exempt organization is a drawn out process that requires a considerable amount of time and effort. Even so, you still can’t neglect other responsibilities like filing your annual return with the IRS. ExpressTaxExempt.com offers cloud-based solutions for tax-exempt groups to electronically file 990 forms to the IRS quicker and easier than paper filing.

Contact our U.S. - based customer support for more information about how simple it is to complete and transmit Form 990, 990-EZ, or 990-N (e-Postcard) - call us at 704.839.2321, Monday through Friday from 9 a.m. to 6 p.m. EST or submit a request through support@ExpressTaxExempt.com.

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Frequently Asked Questions

Find answers related to e-filing IRS Form 990, 990-EZ, 990-PF, 990-N (e-Postcard), Form 1120-POL and Extension Form 8868 with our Frequently Asked Questions.

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