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How the government can help tax-exempt organizations

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We will discuss various benefits that are available, negotiation and implementation and then evaluate recent developments in state and local taxation of tax-exempt organizations.

We will discuss various benefits that are available, negotiation and implementation and then evaluate recent developments in state and local taxation of tax-exempt organizations.

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  • 1. 22nd Annual Health SciencesTax ConferenceTax-exempt organizations:how the government can help youDecember 5, 2012
  • 2. Disclaimer► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.Page 2 Tax-exempt organizations: how the government can help you
  • 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & YoungGlobal Limited, each of which is a separate legal entity. Ernst & Young LLP is a clientserving member firm of Ernst & Young Global Limited operating in the US. For moreinformation about our organization, please visit www.ey.com.This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of thisdocument may be reproduced, transmitted or otherwise distributed in any form or byany means, electronic or mechanical, including by photocopying, facsimiletransmission, recording, rekeying, or using any information storage and retrievalsystem, without written permission from Ernst & Young LLP. Any reproduction,transmission or distribution of this form or any of the material herein is prohibited andis in violation of US and international law. Ernst & Young LLP expressly disclaimsany liability in connection with use of this presentation or its contents by any third party.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 Tax-exempt organizations: how the government can help you
  • 4. Objective► Introduction► Tax incentives► Nonprofit hospital property tax exemption► Recent state activity affecting health care organizations► Questions and answersPage 4 Tax-exempt organizations: how the government can help you
  • 5. Presenters► Lauren Brosius ► Gary Horowitz Director of Accounting Ernst & Young LLP Advocate Health Care Iselin, NJ Oak Brook, IL +1 732 516 4328 gary.horowitz@ey.com► Joseph Christofanelli Ernst & Young LLP ► Katherine Kurtzman Chicago, IL Ernst & Young LLP +1 312 879 3139 Chicago, IL joseph.christofanelli@ey.com +1 312 879 2183 katherine.kurtzman@ey.comPage 5 Tax-exempt organizations: how the government can help you
  • 6. A holistic view of the process is key toderiving maximum value from the process Identify ► Work with key executives to review company-wide opportunities (e.g., CapEx, employment changes, training activities) ► Leverage benchmarking Comply Qualify► Conduct ongoing compliance review ► Prepare list of applicable programs, Identify key criteria, and application and► Renegotiate if circumstances change decision timetables ► Prioritize the programs using a cost-benefit analysis Comply ClientEY Global Qualify Team Max. cash flow min. risk of loss Obtain Pursue ► Receive “official” offer; review all ► Hold project meetings with funders terms and conditions Obtain Pursue ► Prepare, submit and monitor ► Clarifyand negotiate terms if applications applicable ► Assemble consortium of partner ► Measure/track realized value organizationsPage 6 Tax-exempt organizations: how the government can help you
  • 7. Approach: benefits of an integrated process(capital expenditures) Limitations of Benefits of an decentralization integrated process ► Ineffective data collection Centralization ► Streamlined/prioritized data collection ► One-off pursuits ► Opportunity pooling (negotiate for ► Single department approach for future project phases and routine incentive pursuits capital spending) ► Coordinated department focus ► Tax or human resources (HR) or Common process government relations or development ► Company key stakeholders working or real estate, etc. together to drive incentives value ► Isolated experiences/relationships ► Established, deep relationships and with public officials continuous contact with public officials ► No leverage of company’s Teaming ► Quantification and leverage of economic impact company’s economic impact ► Extraordinary expenditures only ► Extraordinary and routine expenditures ► Value leakage ► Maximized value ► Loss of value between Value ► Implementation ownership negotiation/realization ► Teaming with focused consultants ► Incentives limited to single focus ► Creative approach to identifying (e.g., real estate or HR or tax) incentives opportunities ► Irrelevant incentives or ► Relevant packages – value determined misappropriation of resources to Knowledge transfer with tax profile in mind less material incentives ► Comprehensive/continuous knowledge ► Limited knowledge transfers transfer back to company stakeholdersPage 7 Tax-exempt organizations: how the government can help you
  • 8. Incentives checklistTriggers for credits and incentives► Capital spending (real and personal property) — 2 years+► Facility expansions, remodeling or acquisitions► Replacement equipment► New production lines► Training expenditures► New jobs► Lease expirations► Green/energy efficiency/sustainability goalsPage 8 Tax-exempt organizations: how the government can help you
  • 9. Potential incentive opportunities Tax Cash Training Financing Climate incentives incentives benefits change ► Hiring tax credits ► Discretionary ► Training cash ► Tax increment ► Stimulus funding ► Payroll tax rebates grants for capital grants: financing (TIF) ► Utility ► Income/franchise investment performance- ► Free/discounted rebates/discounts tax credits for ► Infrastructure based contracts land or building ► § 179D deductions capital investment assistance (roads, that provide ► Forgivable loans ► Energy efficiency and targeted water, wastewater, reimbursement of prospective ► Industrial credits and grants activities etc.) training Revenue Bonds ► Credits and grants ► Sales and use tax ► Permit/impact (IRBs) expenditures for investments in refunds/rebates/ fee waivers ► Training tax renewable energy exemptions ► Community credits (retroactive property ► Real and personal Development Block and prospective): ► Pollution control tax property tax Grant dollar-for-dollar credits and abatements/ ► Global FP7 grants reduction in tax abatements rebates ► Global R&D grants liability for ► Recycling tax ► Federal and state qualified credits zone credits expenditures ► New Markets Tax ► In-kind services: Credit § 45D no (low) cost ► Foreign trade service for zones curriculum developmentPage 9 Tax-exempt organizations: how the government can help you
  • 10. Types of tax credits and incentives► Statutory — automatic ► Statutory tax credits and incentives are provided once pre-defined requirements have been met. ► There is a possibility that credits could be obtained on a retroactive basis.► Statutory — pre-approval ► Statutory tax credits and incentives that require pre-identification of company specifications and program certification by government officials► Discretionary ► Customized financial incentive packages that are negotiated with state and local government agenciesPage 10 Tax-exempt organizations: how the government can help you
  • 11. Job creation tax credits and grants► Income tax credits generated upon the creation of qualified jobs ► Focus primarily on net new full-time jobs ► Wages typically must exceed prescribed wage levels ► Special job creation credits available for targeted groups and designated target areas► Examples of programs include the following: ► Florida — Qualified Target Industry Tax Refund Program ► Georgia — Job Tax Credit Program ► Indiana — Economic Development for a Growing Economy Tax Credit ► Kansas — Promoting Employment Across KansasPage 11 Tax-exempt organizations: how the government can help you
  • 12. Key states for job creation tax creditsand grants Major job creation tax credits WA ME MT ND VT OR NH MN MA ID NY SD WI MI WYWY RI PA CT IA NJ NV NE OH MD IN DE UT IL DC CA CO WV MO KS VA KY NC TN AZ OK NM AR SC GA MS AL AK TX LA HI FLPage 12 Tax-exempt organizations: how the government can help you
  • 13. Investment tax credits► Income tax credits generated through the purchase and placing in service of qualified real and/or tangible personal property► Examples of programs include the following: ► Alabama — Capital Tax Credit ► Colorado — Investment Tax Credit ► Illinois — Replacement Tax Investment Credit ► Indiana — Hoosier Business Investment Tax Credit ► Kansas — High Performance Incentive ProgramPage 13 Tax-exempt organizations: how the government can help you
  • 14. Key states for investment tax credits Major investment tax credits WA ME MT ND VT OR NH MN MA ID NY SD WI MI WY RI PA CT IA NJ NV NE OH MD IN DE UT IL DC CA CO WV KS MO VA KY NC TN AZ OK NM AR SC GA MS AL AK TX LA HI FLPage 14 Tax-exempt organizations: how the government can help you
  • 15. Employee training incentives► Forty-six states and the federal government offer some form of employee training tax credits and/or incentives.► Two different levels of training grants and/or tax credits currently exist: ► Federal-level training grants: ► High growth job training initiative grants (US Department of Labor) ► On-the-job and customized training grants (Workforce Investment Boards) ► State-level training grants and tax credits: ► California — Employment Training Panel ► Illinois — Employer Training Investment Program ► Indiana — Skills Enhancement Fund ► Kansas – Industrial Training Program ► Florida — Quick Response TrainingPage 15 Tax-exempt organizations: how the government can help you
  • 16. Key states for employee training incentives Key states with training grants Key states with training credits WA ME MT ND VT OR NH MN MA ID NY SD WI MI WY RI PA CT IA NJ NV NE OH IN MD DE UT IL CA CO WV DC KS MO VA KY NC TN AZ OK NM AR SC GA MS AL AK TX LA HI FLPage 16 Tax-exempt organizations: how the government can help you
  • 17. Location-based incentives► Credits and incentives based upon job creation and/or capital investment made within designated target areas ► Benefits may include enhanced income tax credit opportunities, sales and use tax exemptions, property tax abatements, and utility tax reductions or rebates.► Examples of programs include the following: ► California Association of Enterprise Zones ► Missouri — Enhanced Enterprise Zones ► Minnesota — Job Opportunity Building Zones ► Illinois – Enterprise Zone Program ► Pennsylvania — Keystone Opportunity ZonesPage 17 Tax-exempt organizations: how the government can help you
  • 18. Key states for location-based incentives Major location-based tax credits WA ME MT ND VT OR NH MN MA ID NY SD WI MI WY RI PA CT IA NJ NV NE OH MD IN DE UT IL DC CA CO WV KS MO VA KY NC TN AZ OK NM AR SC GA MS AL AK TX LA HI FLPage 18 Tax-exempt organizations: how the government can help you
  • 19. Discretionary — credits and incentives► State and local governments offer a variety of benefits ► They typically involve companies contemplating relocation, expansion and/or making major capital investments► Tax incentives may include items such as: ► Reductions in income/franchise tax, sales and use tax, real and personal property taxes or employment tax ► Employee training grants ► Infrastructure grants ► Utility rate discounts ► Expedited permitting ► Zero-interest financing ► Closing fundsPage 19 Tax-exempt organizations: how the government can help you
  • 20. Discretionary — best practices► What are the keys to success? ► Executive sponsorship ► Keep options open (i.e., don’t show your cards) ► Follow communication protocol (internal/external) ► Negotiate everything up-front ► Understand which incentives are beneficial to the company ► Be prepared to accept clawback provisions ► Be conservative on job-growth projections ► Conduct compliance and complete forms ► Don’t rely on anything unless it is in writing► Incentives should work hand-in-hand with the company’s overall business objectives and current/future tax positions.Page 20 Tax-exempt organizations: how the government can help you
  • 21. Discretionary — best practices (cont.)► What are the barriers to success? ► The jurisdiction believes that no other options are available. ► Poorly coordinated communications ► Company contacting government employees ► Company not considering other locations ► Results in significantly lower package(s) ► Lack of intercompany teaming ► Negotiating an incentive you cannot use ► Failure to follow through with compliance requirements ► Jurisdictions typically offer basic incentive packages to companies and fail to consider implementation of programs offeredPage 21 Tax-exempt organizations: how the government can help you
  • 22. Discretionary — sample project time line  Short list of metropolitan areas  Select specific metropolitan area  Execute cost analysis  Conduct site visits  Commence real estate negotiationsReal estate steps  Execute term sheet  Announce new location publicly  Finalize lease/purchase agreement  Lease commencement date ► Occupancy begins  Realize incentives’ value  Implement incentivesIncentives steps  Draft and submit incentives applications  Finalize written incentives offer  Secure initial incentives offers from all competing locations  Present economic/fiscal impact results to government  Submit detailed project parameters and gap analysis  Discuss project anonymously with government authorities  Prepare comparative analysis of incentives’ valuesPage 22 Tax-exempt organizations: how the government can help you
  • 23. Why businesses are interested ingoing green Government regulation Revenue generation ► Environmental laws ► New products and ► Non-governmental organization services (NGO) operating guidelines ► Shorter payback ► Federal and state climate models change programs ► New business models ► Regional initiatives Corporate ► Innovation investment ► Financial reporting response to climate Cost reduction change ► High energy cost; expected Expectations increase in cost ► Customers ► Operational efficiencies ► Consumers ► Information technology ► Investors (IT) activity ► Employers ► Reduced waste ► Media ► Cost of carbonPage 23 Tax-exempt organizations: how the government can help you
  • 24. State and local incentives► Property tax abatement ► Training grants and credits► Job creation tax credits ► Low-interest financing► Renewable energy grants ► Tax increment financing► Business development (TIF) grants ► Recycling incentives► Sales tax exemptions ► Transportation incentives► Income tax exemptions ► Alternative fuel and credits use incentives► Research and development creditsPage 24 Tax-exempt organizations: how the government can help you
  • 25. TIF► Established in Illinois in 1977 by 65 ILCS 5/11-74.4.1 et seq.► Assists local governments to attract private investment and new businesses and retain current businesses► Utilizes incremental property taxes to assist with private development► TIF districts are established for a term of 23 years► Administered by the municipality in accordance with state of Illinois lawPage 25 Tax-exempt organizations: how the government can help you
  • 26. TIF — economic development tool► 47 states have TIF► Over 900 TIF districts in the state of Illinois► Over 150 TIF districts in the city of ChicagoPage 26 Tax-exempt organizations: how the government can help you
  • 27. TIF increment Revenues (in millions)US$ 7 6 5 4 Base 3 TIF increment 2 1 0 Years 5 10 15 20 25 Page 27 Tax-exempt organizations: how the government can help you
  • 28. Types of eligible costs► Cost of studies, development of plans and specifications, and professional fees► Property assembly costs including acquisition of land or property (real or personal) and site preparation and improvements► Cost of rehabilitation, reconstruction or repair of existing public or private buildings, and fixtures or leasehold improvements► Cost of construction of public works or improvements► Training costsPage 28 Tax-exempt organizations: how the government can help you
  • 29. Illinois Enterprise Zone ProgramOverview► Passed in 1984► Fosters development/redevelopment of “depressed” areas► Provides tax benefits and other incentives► Administered by the Illinois Department of Commerce and Economic Opportunity (DCEO)Page 29 Tax-exempt organizations: how the government can help you
  • 30. Enterprise Zone utility tax exemption► Utility tax exemption ► A state utility tax exemption on natural gas, electricity and the administrative surcharge, as well as the telecommunication excise tax on originating calls.Note: Local units of government may also exempt their taxes on natural gas, electricity and telecommunications for Department of Commerce and Economic Opportunity (DCEO)- certified businesses.Page 30 Tax-exempt organizations: how the government can help you
  • 31. Qualification for utility tax exemption► The company’s facility must be located in a designated Illinois Enterprise Zone.► The company must receive certification from the DCEO, which requires one of the following: ► US$5 million investment which results in the creation of 200 new full-time equivalent jobs or ► US$20 million investment which results in the retention of 1,000 full-time jobsPage 31 Tax-exempt organizations: how the government can help you
  • 32. Top 10 missed opportunities to avoid1. “But for these incentives … this expansion project or 5. Negotiate and understand potential clawbacks. capital spending would possibly happen elsewhere.” ► Transfer with mergers and acquisitions? ► Beware of premature announcements ► Missed targets: renegotiate ► Competitive projects typically yield higher savings 6. Analyze opportunities to expand existing incentives2. Leverage your company’s “economic impact” to a agreements. jurisdiction. Never assume you do not qualify. Bundle ► Review business case projects! ► Jobs (new and retained) 7. Governments compete for new capital projects! ► Salaries and wages ► Leverage what others have been offered ► Never assume the first offer is the best and final3. Negotiate incentives with knowledge of your tax and operational profiles. ► Top 10 list matters ► Company direction and priorities 8. Collaboration with operations, real estate, HR, etc. ► Target incentives bringing greatest value 9. Expansions and consolidations need a stronger story.4. Capture routine capital spending (2 years+) for potential ► Is your company in a targeted industry? incentives. ► Has another jurisdiction expressed interest? ► Expansions and renovations. System upgrades? ► Retention incentives? Leverage multiple facilities? 10. Most cash grant allocations occur annually! Need to look beyond a regulation or statutePage 32 Tax-exempt organizations: how the government can help you
  • 33. :► Illinois update ► Nonprofit hospital property tax exemptionPage 33 Tax-exempt organizations: how the government can help you
  • 34. Illinois exemption in need of clarification► Illinois constitution — property must be used exclusively for charitable purposes► Illinois Department of Revenue — primary purpose must be charitable care. “Motorola or soup kitchen?”► No clear definition of charity or how much is necessary to gain or maintain exemptionPage 34 Tax-exempt organizations: how the government can help you
  • 35. Recent Illinois history 2006: IL Attorney General supports charity care mandate ► Legislative proposal would require 8% of total operating expenses in charity care ► Defeated by the General Assembly 2010: IL Supreme Court decision ► Provena Covenant Medical Center was not doing “enough” charity care, among other factors ► Decision instructed the Legislature to act to establish a standard – IL Department of Revenue (IDOR) holds all applications 2011: IDOR action ► Denied exemptions for three providers seeking exemption ► Administration interested in potential revenue and coercion tool for Medicaid reform ► Governor stayed further decisions and declared a legislative deadline to establish state-wide standardsPage 35 Tax-exempt organizations: how the government can help you
  • 36. Page 36 Tax-exempt organizations: how the government can help you
  • 37. Parties to the debate“What counts? How much?”► Attorney General► Department of Revenue► Governor’s office► Cook County► Local governments► Patient advocates► Labor► Hospitals► Illinois Hospital AssociationPage 37 Tax-exempt organizations: how the government can help you
  • 38. What happened?After nine months of intense legislative negotiations andnine years of debate in the state:► The hospital tax exemption bill passes and creates a path for nonprofit providers seeking exemption ► Establishes a formula to determine liability per hospital campus and itemizes what counts toward meeting it► Deal was “baked” into larger package including: ► Medicaid cuts and expansive reforms ► New revenue (cigarette tax and provider assessment) ► Further charity care requirementsPage 38 Tax-exempt organizations: how the government can help you
  • 39. What counts?Senate Bill 2194/Public Act 97-0688:► Benefits to low-income individuals: ► Traditional charity care cost ► Provides subsidized health services or supplies► Relieving the burden of government: ► Medicaid shortfall … or …10% of Medicaid ► Unreimbursed cost for dual-eligibles ► Direct subsidies to state or local government supporting care for low-income populationsPage 39 Tax-exempt organizations: how the government can help you
  • 40. How much is enough?Value of property tax exemption:► Lower of actual assessment or formula to estimate value of exemption► Sets the bar for what each hospital in the state should do in “charitable” workPage 40 Tax-exempt organizations: how the government can help you
  • 41. Additional components► Nonprofit hospitals that satisfy property tax exemption test are also exempt from Illinois sales and use tax.► There is a state income tax credit for charity care provided by non-exempt hospitals.Page 41 Tax-exempt organizations: how the government can help you
  • 42. Future outlook► Optimistic about the new policy solution that provides a clear target for exemption► Concern that the state will reconsider if all hospitals meet exemption standards► The state’s fiscal situation will determine further scrutinyPage 42 Tax-exempt organizations: how the government can help you
  • 43. Future outlook (cont.)► Renewed focus on communicating our contributions to the communities we serve through the Advocate Community Album and the many filings required by federal and state agencies: ► Form 990 Schedule H ► Medicare Cost Report ► State of Illinois Annual Community Benefit Report ► Illinois Department of Public Health Annual Survey ► State of Illinois Annual Affidavit for ExemptionPage 43 Tax-exempt organizations: how the government can help you
  • 44. Recent state activity affecting health careorganizations► In New York ► Sales and use tax audits ► Withholding tax audits ► HMO tax ► MTA tax ► Unclaimed property► Other states/other taxes?Page 44 Tax-exempt organizations: how the government can help you
  • 45. Questions ?
  • 46. Thank youfor your participation and feedback!

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