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 [email protected].