22nd Annual Health SciencesTax ConferenceTop-of-mind issues for tax-exempt providersDecember 3, 2012
Disclaimer►   Any US tax advice contained herein was not intended or    written to be used, and cannot be used, for the pu...
DisclaimerErnst & Young refers to the global organization of member firms of Ernst & Young GlobalLimited, each of which is...
Presenters►   Tricia Johnson                                        ►   Felicia Tucker    Ernst & Young LLP               ...
Topics►   “Follow the money” and political/lobbying activities►   Medical device excise tax►   Advisory Committee on Tax E...
“Follow the money” and political/lobbyingactivities
Political campaign activity►   Regarding a candidate►   Any activity that favors or opposes candidates for public    offic...
Lobbying►   Attempting to influence a piece of legislation►   Direct lobbying    ►    Directly contacting members of a leg...
General advocacy and educational activities►   Influence non-legislative governing bodies (e.g., the    executive branch o...
501(c)(3) organizations►   Political campaign activity    ►     Prohibited, and may cause a loss of exemption          ►  ...
501(c)(3) organizations — 501(h) election andreporting requirements►   Safe harbor expenditure test    ►     Make election...
501(c)(4), (c)(5) or (c)(6) organizations►   Political campaign activity    ►     Permitted so long as it does not constit...
Medical device excise tax
Medical device excise tax (MDET) —imposition of tax►   Internal Revenue Code (IRC) Section 4191 imposes a    2.3% excise t...
Which devices are taxable?►   Taxable medical devices are medical devices sold or used    in the United States and intende...
Which devices are exempt?►   Items not listed with a 3-letter FDA product code under FDA 510(k)    requirements►   Exports...
Determining the taxpayer►   MDET is imposed on the manufacturer, producer or importer of a taxable    article.    ►     Fo...
Tax compliance and paying the liability►   Due by the manufacturer or importer►   Tax returns will be filed quarterly on t...
Provider implications — indirect tax liability►   Cost increases    ►     The vendor may increase the price or put additio...
Provider implications — direct tax liability►   Importing    ►     Direct sourcing    ►     Via group purchasing organizat...
Provider opportunities►   Contract review    ►     Understand where a vendor could change a behavior and cause a          ...
Provider opportunities (cont.)►   Central procurement — trigger all direct liability in one    entity►   Centralize knowle...
ACT recommendations on Form 1023
ACT recommendations on Form 1023 —updating for the future►   ACT report    ►     Project ASPIRE          ►   A — Alleviate...
ACT recommendations on Form 1023 —updating for the future (cont.)►   Specific recommendations    ►     Develop fully inter...
ACT recommendations on Form 1023 —updating for the future (cont.)►   IRS suggested next steps:    ►     Develop educationa...
IRS Master File considerations
IRS Master File considerationsThe Exempt Organization Business Master File (EO BMF) contains all ofthe applicable informat...
IRS Master File considerations (cont.)►   Incorrect public charity status on IRS BMF examples are as follows:    ►     A c...
BMF vs Select CheckThere are two ways to check the deductibility of an organization with theIRS:► EO Business Master File ...
Tangible property regulations
Five things you need to know   Who is affected?   The regulations affect all taxpayers with tangible property:     ► Taxab...
Key aspects►   What do the regulations cover?    1.    Unit of property    2.    Improvements    3.    Materials and suppl...
What do they cover?                                                  Acquisition of    Improvements       Depreciation  Ma...
Unit of property: buildings and buildingsystems Heating, ventilation and air                                              ...
Materials and supplies►   Definition: tangible property (not inventory) that is:    ►     A component acquired to maintain...
Tangible propertyDe minimis rule — book conformity election►   De minimis rule to conform to book expense    ►     Must ha...
The procedural guidance►   Roadmap for implementing the regulations, including:    ►     Two-year waiver of the scope limi...
Notice 2012-73Notice 2012-73 (issued 12/20/2012) announced:► Temporary regulations (currently effective for tax years begi...
Thank you   for your participation and feedback!Page 40   Top-of-mind issues for tax-exempt providers
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Top-of-mind issues for tax-exempt providers

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This session will discuss the health system implications of the latest tangible property regulations, implementation of the medical device excise tax and ACT recommendations on Form 1023.

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Top-of-mind issues for tax-exempt providers

  1. 1. 22nd Annual Health SciencesTax ConferenceTop-of-mind issues for tax-exempt providersDecember 3, 2012
  2. 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 Top-of-mind issues for tax-exempt providers
  3. 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & Young GlobalLimited, each of which is a separate legal entity. Ernst & Young LLP is a client-servingmember firm of Ernst & Young Global Limited operating in the US. For more informationabout 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 by anymeans, electronic or mechanical, including by photocopying, facsimile transmission,recording, rekeying, or using any information storage and retrieval system, without writtenpermission from Ernst & Young LLP. Any reproduction, transmission or distribution of thisform or any of the material herein is prohibited and is in violation of US and internationallaw. Ernst & Young LLP expressly disclaims any liability in connection with use of thispresentation or its contents by any third party.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 Top-of-mind issues for tax-exempt providers
  4. 4. Presenters► Tricia Johnson ► Felicia Tucker Ernst & Young LLP Ernst & Young LLP Cincinnati, OH Jericho, NY +1 513 612 1850 +1 516 336 0362 tricia.johnson1@ey.com felicia.tucker@ey.comPage 4 Top-of-mind issues for tax-exempt providers
  5. 5. Topics► “Follow the money” and political/lobbying activities► Medical device excise tax► Advisory Committee on Tax Exempt and Government Entities (ACT) recommendations on Form 1023► Internal Revenue Service (IRS) Master File considerations► Tangible property regulationsPage 5 Top-of-mind issues for tax-exempt providers
  6. 6. “Follow the money” and political/lobbyingactivities
  7. 7. Political campaign activity► Regarding a candidate► Any activity that favors or opposes candidates for public office, including: ► Endorsement of candidates ► Contributions ► To candidates ► To political action committees (PACs) ► Public statements for/against a particular candidate or favorable activity toward or against a candidate ► Distributing materials prepared by oneself or others that favor or oppose candidates► All facts and circumstances will be consideredPage 7 Top-of-mind issues for tax-exempt providers
  8. 8. Lobbying► Attempting to influence a piece of legislation► Direct lobbying ► Directly contacting members of a legislative body ► Encouraging the public to contact members of a legislative body ► Advocating a position on a public referendum► Grassroots lobbying ► The amount spent to influence, or an attempt to affect, the opinions of the general public or any part of the general public about an issuePage 8 Top-of-mind issues for tax-exempt providers
  9. 9. General advocacy and educational activities► Influence non-legislative governing bodies (e.g., the executive branch or regulators)► Encourage voter participation in a non-partisan manner ► Voter registration ► Get out the vote drives ► Voter guides ► Candidate debatesPage 9 Top-of-mind issues for tax-exempt providers
  10. 10. 501(c)(3) organizations► Political campaign activity ► Prohibited, and may cause a loss of exemption ► Schedule C (Form 990) does allow a reporting of a correction► Lobbying ► Must be an insubstantial activity of the organization ► Facts and circumstances test, and “insubstantial” is not defined ► Safe harbor — Section 501(h) election ► Up to US$1,000,000 direct expenditures and US$250,000 grassroots; based on total exempt-purpose expenditures ► Applied on an affiliated group basis ► Excise tax for excess lobbying► General advocacy ► Permitted as an educational activityPage 10 Top-of-mind issues for tax-exempt providers
  11. 11. 501(c)(3) organizations — 501(h) election andreporting requirements► Safe harbor expenditure test ► Make election by filing Form 5768 ► Affiliated group application ► Excise tax for exceeding non-taxable amount in any one year ► Loss of exemption if excessive over a four-year period► May also un-elect► Form 990, Part IV ► 3. Did the organization engage in direct or indirect political campaign activities on behalf of or in opposition to candidates for public office? If “Yes,” complete Schedule C, Part I. ► 4. Section 501(c)(3) organizations. Did the organization engage in lobbying activities, or have a section 501(h) election in effect during the tax year? If “Yes,” complete Schedule C, Part II.Page 11 Top-of-mind issues for tax-exempt providers
  12. 12. 501(c)(4), (c)(5) or (c)(6) organizations► Political campaign activity ► Permitted so long as it does not constitute the organization’s primary activity► Lobbying ► Unlimited amount of lobbying in furtherance of its exempt purpose permitted► General advocacy ► Unlimited amount in furtherance of its exempt purpose permittedPage 12 Top-of-mind issues for tax-exempt providers
  13. 13. Medical device excise tax
  14. 14. Medical device excise tax (MDET) —imposition of tax► Internal Revenue Code (IRC) Section 4191 imposes a 2.3% excise tax on: ► The “sale” or rental (or other first use) in the US ► Of “taxable medical devices” ► By a “manufacturer” or “importer” ► Effective January 1, 2013► Proposed regulations were issued February 3, 2012 ► While the comment period ended May 7, 2012, the IRS has asked for additional comments from interested parties.Page 14 Top-of-mind issues for tax-exempt providers
  15. 15. Which devices are taxable?► Taxable medical devices are medical devices sold or used in the United States and intended for use on humans.► The Food and Drug Administration (FDA) listing includes 5,800+ separate devices. ► Manufacturers are required to list devices with the FDA. ► Hospitals may make some of the same items for internal use, but are generally exempt from the FDA-listing requirements for those items.► To be taxable, medical devices must be: ► Listed with the FDA (i.e., have a three-letter FDA product code) ► Finished goods ready for the market ► Not otherwise qualified for an exemptionPage 15 Top-of-mind issues for tax-exempt providers
  16. 16. Which devices are exempt?► Items not listed with a 3-letter FDA product code under FDA 510(k) requirements► Exports► Eyeglasses, hearing aids and contact lenses► Specific custom-fit items► Items sold for further manufacturing► Certain medical devices sold at retail► Items not required to be listed with the FDA because they are sold exclusively for use in “research”► Investigational device exemption (IDE) — a medical device not yet required to be listed with the FDA because the FDA has not yet approved it for marketingPage 16 Top-of-mind issues for tax-exempt providers
  17. 17. Determining the taxpayer► MDET is imposed on the manufacturer, producer or importer of a taxable article. ► For excise tax purposes, the term manufacturer includes a “producer” and an “importer.” ► A manufacturer is a person who produces a taxable article by processing, manipulating or changing the form of an article, or by combining or assembling two or more articles.► Because the MDET applies only to US sales of taxable medical devices, the MDET is also imposed on importers in lieu of the actual manufacturer. ► An “importer” of a taxable article is any person who brings an article into the US from a source outside the US and is the beneficial owner. ► While the IRS has yet to issue any rulings on the medical device excise tax, they have issued several rulings holding customers to be importers in situations where taxable articles are imported directly from foreign manufacturers, even if there was an agent or arranger of the sale involved.Page 17 Top-of-mind issues for tax-exempt providers
  18. 18. Tax compliance and paying the liability► Due by the manufacturer or importer► Tax returns will be filed quarterly on the Form 720► Estimated tax payments are due biweekly (every two weeks) ► First payment of the medical device excise tax is due January 28, 2013, for activity January 1–14► Exemption certificates will be available for exports and for further manufacturing► There are penalties associated with non-payment/under-payment of MDET; estimated biweekly tax payments are required to sum to 95% of quarterly liability ► Both failure-to-pay and failure-to-file penalties apply► The manufacturer or importer may try to recover the tax paid by: ► Increasing the price of the medical device or ► Adding to the invoice price the amount of the tax as a separate chargePage 18 Top-of-mind issues for tax-exempt providers
  19. 19. Provider implications — indirect tax liability► Cost increases ► The vendor may increase the price or put additional charges on the invoice, though they are not required to notify. ► For purchased convenience kits (aka custom packs), the tax will apply to the value of the entire kit, even if there are otherwise non- taxable items included.Page 19 Top-of-mind issues for tax-exempt providers
  20. 20. Provider implications — direct tax liability► Importing ► Direct sourcing ► Via group purchasing organizations (GPOs) or other similar arrangements► Kits assembled for internal use are likely not taxable to hospitals, though this is not confirmed until the IRS finalizes regulations: ► Hospitals are generally exempt from registration and listing requirements of the FDA when making kits for internal usage. The same taxable kit made by a manufacturer (using the MDET definition of a manufacturer) that is sold on a commercial basis may also be made by a hospital; however, because hospitals are exempt from registration and listing requirements of medical devices, they may not be creating taxable kits for purposes of the MDET. ► Some hospitals, however, may create medical devices and sell them to other, unrelated, hospitals or others. It is less clear whether these sales should not result in an excise tax, and this may be dependent on whether the FDA registration and listing requirements apply (such are not addressed here).Page 20 Top-of-mind issues for tax-exempt providers
  21. 21. Provider opportunities► Contract review ► Understand where a vendor could change a behavior and cause a hospital to have a direct liability ► Consider amending existing contracts to prevent the seller from passing through the cost of this tax► Kitting ► Restructure kits — focus on high value, high use ► Bring kitting in-house — consider cost/benefit analysis (assuming the IRS concurs that hospitals will be exempt for internal-use manufacturing) ► Implement exemption management process► Leases ► Understand how tax applies to the manufacturer and ensure it is not charged through on all lease payments ► Separate other economic transactionsPage 21 Top-of-mind issues for tax-exempt providers
  22. 22. Provider opportunities (cont.)► Central procurement — trigger all direct liability in one entity► Centralize knowledge regarding what items are taxable: ► Understand which items are taxable devices and which are not to ensure vendors are not arbitrarily trying to charge through, such as an across-the-board price increase ► Be able to identify items that may at first appear to have a direct liability because they are imported, but really may qualify for one of the exemptionsPage 22 Top-of-mind issues for tax-exempt providers
  23. 23. ACT recommendations on Form 1023
  24. 24. ACT recommendations on Form 1023 —updating for the future► ACT report ► Project ASPIRE ► A — Alleviate backlog ► S — Streamline process ► P — Prioritize review ► I — Improve customer service ► R — Redirect resources ► E — Enhance quality controlPage 24 Top-of-mind issues for tax-exempt providers
  25. 25. ACT recommendations on Form 1023 —updating for the future (cont.)► Specific recommendations ► Develop fully interactive Form 1023 ► Develop fully e-fileable Form 1023 ► Facilitate Form 1023 database► Primary objectives of Form 1023 ► To be effective in identifying whether the organization qualifies ► To be consistent with structure and definitions of Form 990 ► To be simplified by using a short-form and supplemental schedules ► To be educational by organizing questionsPage 25 Top-of-mind issues for tax-exempt providers
  26. 26. ACT recommendations on Form 1023 —updating for the future (cont.)► IRS suggested next steps: ► Develop educational tools about substantive requirements ► Coordinate with the Treasury Department and Office of Chief Counsel ► Examine recurring complaints and improve the filing process ► Expand the Review of Operations (ROO) program to follow up on Section 501(c)(3) organizations whose exemption application indicated potential future compliance issuesPage 26 Top-of-mind issues for tax-exempt providers
  27. 27. IRS Master File considerations
  28. 28. IRS Master File considerationsThe Exempt Organization Business Master File (EO BMF) contains all ofthe applicable information that the IRS has on file for exemptorganizations.► A name/Employer Identification Number (EIN) mismatch can cause a delay in payment from Centers for Medicare and Medicaid Services (CMS) and other payors. ► May include the group and subordinate designation structure within the IRS system as well► An incorrect address of record (AoR) can invalidate a power of attorney.► An incorrect year-end can cause late filing notices (this happens often with large systems where entities have different year-ends).Page 28 Top-of-mind issues for tax-exempt providers
  29. 29. IRS Master File considerations (cont.)► Incorrect public charity status on IRS BMF examples are as follows: ► A change in an organization’s public charity status is allowable on Form 990, Schedule A, but the IRS does not update its records from information on the Form 990. ► Following the Pension Protection Act of 2006 (PPA), many organizations updated their public charity status on Schedule A to avoid some of the donor issues associated with the 509(a)(3) status, but did not request an updated determination letter; therefore, the IRS still has the 509(a)(3) status in the public record. ► There may be a public charity issue if the organization does not qualify for the status claimed on Form 990.► Form 8940 — an organization may submit, along with the applicable user fee, a request for a letter confirming it qualifies for a new public charity status.Page 29 Top-of-mind issues for tax-exempt providers
  30. 30. BMF vs Select CheckThere are two ways to check the deductibility of an organization with theIRS:► EO Business Master File ► A state-by-state downloadable spreadsheet including organizations’ names, address, private foundation status, year-end, group exemption number, most recent 990 statistics and more.► Select Check ► This option can check if an organization is eligible for tax-deductible contributions, was automatically revoked or if it filed a 990-N.► Entities exempt under a Group Exemption Number (GEN) are not currently found with Select Check, but should be in the BMF. We have also found instances where organizations were not found in the state download, but were found in the applicable region download.Page 30 Top-of-mind issues for tax-exempt providers
  31. 31. Tangible property regulations
  32. 32. Five things you need to know Who is affected? The regulations affect all taxpayers with tangible property: ► Taxable subsidiaries ► Form 990-T activity ► Partnerships/joint ventures Why is there so much interest in these regulations? ► The regulations depart from previous law and the proposed regulations. What do they cover? ► The regulations contain many broad-reaching rules — not just repairs. When do they go into effect? ► The regulations apply to the 2014 tax year (were just extended from 2012). How are the regulations going to affect your company? ► The regulations present new implementation issues.Page 32 Top-of-mind issues for tax-exempt providers
  33. 33. Key aspects► What do the regulations cover? 1. Unit of property 2. Improvements 3. Materials and supplies 4. Acquisitions 5. Depreciation groupings and dispositions► General changes for most taxpayers include: ► Method changes ► Compliance with Section 263A► The regulations have broad applicability, with many questions remaining.► How to implement the regulations — do you have a plan?Page 33 Top-of-mind issues for tax-exempt providers
  34. 34. What do they cover? Acquisition of Improvements Depreciation Materials and Leased tangible to tangible and supplies property property property dispositions ► Definition ► Lessee/lessor ► Acquisition ► Unit of ► General asset ► Rotable spare expenditures costs property elections parts ► Leasehold ► De minimis ► Betterments ► Multiple asset ► Election to improvements rule ► Restorations groupings capitalize and ► Transaction ► New or ► Dispositions apply de and different use minimis rule investigatory ► Safe harbor costs for routine maintenance Treas. Reg. Treas. Reg. Treas. Reg. Treas. Reg. Treas. Regs. § 1.162-3T § 1.167(a)-4T § 1.263(a)-2T § 1.263(a)-3T § 1.168(i)-1T and § 1.168(i)-8TOther regulation sections amended for consistency.Page 34 Top-of-mind issues for tax-exempt providers
  35. 35. Unit of property: buildings and buildingsystems Heating, ventilation and air Fire protection and alarm system – conditioning (HVAC) system – includes sprinklers, computer includes motors, compressors, controls, fire doors/escapes, etc. boilers, chillers, pipes, ducts, etc. Security system – includes window Plumbing system – includes pipes, and door locks, security cameras, drains, sinks, bathtubs, toilets, Building structure – all security lighting, alarm system, etc. water/sewer equipment, etc. other Section 1250 components, including roof, walls, foundation, Electrical system – includes wiring, finishes, windows, outlets, junction boxes, lighting Elevator system – includes all doors, etc. elevators in the building fixtures, etc. Gas distribution system – includes Escalator system – includes all pipes and equipment used to escalators in the building distribute gas, etc.Page 35 Top-of-mind issues for tax-exempt providers
  36. 36. Materials and supplies► Definition: tangible property (not inventory) that is: ► A component acquired to maintain, repair or improve a unit of tangible property or ► Fuel, lubricants, water and similar items that are reasonably expected to be consumed in 12 months or less or ► A unit of property with an economic useful life of 12 months or less or ► A unit of property costing US$100 or less or ► Identified as such in guidance► The new definition may mean that some assets are depreciable property rather than materials and supplies.Page 36 Top-of-mind issues for tax-exempt providers
  37. 37. Tangible propertyDe minimis rule — book conformity election► De minimis rule to conform to book expense ► Must have applicable financial statements (AFS) ► Must expense amounts in its AFS consistent with written capitalization procedures ► By taxable entity, aggregate amount less than ceiling of: ► 0.1% of the taxpayer’s tax gross receipts or ► 2.0% of the taxpayer’s total book depreciation and amortization ► If an entity exceeds the ceiling, excess amount must be capitalized ► May choose which items to capitalize ► Exclusions ► Land ► InventoryPage 37 Top-of-mind issues for tax-exempt providers
  38. 38. The procedural guidance► Roadmap for implementing the regulations, including: ► Two-year waiver of the scope limitations: provides taxpayers under examination the ability to file method changes outside of window periods without obtaining examination consent and waives the five-year limitation ► Specific guidance related to the applicability of statistical sampling for computing Section 481(a) adjustments and tax-return positions ► Provisions indicating which method changes will have a full 481(a) adjustment versus those made on a modified cut-off (based on the effective date of the regulations) ► 19 new automatic changes ► Many of the new changes can be filed on a single Form 3115, although multiple 3115s are likely ► Compliance with § 263A is generally required ► Self–constructed assets and inventory ► File in Ogden, UT, office in lieu of IRS National OfficePage 38 Top-of-mind issues for tax-exempt providers
  39. 39. Notice 2012-73Notice 2012-73 (issued 12/20/2012) announced:► Temporary regulations (currently effective for tax years beginning on or after 1/1/2012): ► Will be modified to be effective for tax years beginning on or after 1/1/2014 ► May be optionally applied for tax years beginning on or after 1/1/2012 ► Optional early application may be done piecemeal► Final regulations: ► Are anticipated to be published in 2013 ► Will be effective for tax years beginning on or after 1/1/2014 ► May be optionally applied for tax years beginning on or after 1/1/2012 ► Will include modifications to de minimis rule, dispositions rules, and the routine maintenance safe harborPage 39 Top-of-mind issues for tax-exempt providers
  40. 40. Thank you for your participation and feedback!Page 40 Top-of-mind issues for tax-exempt providers

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