22nd Annual Health SciencesTax ConferenceTax-exempt organizations:how the government can help youDecember 5, 2012
DisclaimerAny US tax advice contained herein was not intended or written to be used, and cannot be used,for the purpose of...
DisclaimerErnst & Young refers to the global organization of member firms of Ernst & Young Global Limited,each of which is...
Presenters►   Lauren Brosius                                                      ►   Gary Horowitz    Director of Account...
Objective►   Introduction►   Tax incentives►   Nonprofit hospital property tax exemption►   Recent state activity affectin...
A holistic view of the process is key to deriving maximumvalue from the process                                           ...
Approach: benefits of an integrated process(capital expenditures)  Limitations of                                         ...
Incentives checklistTriggers for credits and incentives►   Capital spending (real and personal property) — 2 years+►   Fac...
Potential incentive opportunities      Tax incentives                    Cash incentives                  Training benefit...
Types of tax credits and incentives►   Statutory — automatic    ►     Statutory tax credits and incentives are provided on...
Job creation tax credits and grants►   Income tax credits generated upon the creation of qualified jobs    ►     Focus pri...
Key states for job creation tax credits and grants                                                                        ...
Investment tax credits►   Income tax credits generated through the purchase and placing in service of    qualified real an...
Key states for investment tax credits                                                                                     ...
Employee training incentives►   Forty-six states and the federal government offer some form of employee    training tax cr...
Key states for employee training incentives                            WA                                                 ...
Location-based incentives►   Credits and incentives based upon job creation and/or capital investment    made within desig...
Key states for location-based incentives                                                                                  ...
Discretionary — credits and incentives►   State and local governments offer a variety of benefits    ►     They typically ...
Discretionary — best practices►   What are the keys to success?    ►     Executive sponsorship    ►     Keep options open ...
Discretionary — best practices►   What are the barriers to success?    ►     The jurisdiction believes that no other optio...
Discretionary — sample project time line   Short list of metropolitan areas           Select specific metropolitan area ...
Why businesses are interested in going green Government regulation • Environmental laws                                   ...
State and local incentives►   Property tax abatement                                             ►   Training grants and c...
TIF►   Established in Illinois in 1977 by 65 ILCS 5/11-74.4.1 et seq.►   Assists local governments to attract private inve...
TIF — economic development tool►   47 states have TIF►   Over 900 TIF districts in the state of Illinois►   Over 150 TIF d...
TIF increment Revenues (in millions) US$      7                                                                           ...
Types of eligible costs►   Cost of studies, development of plans and specifications,    and professional fees►   Property ...
Illinois Enterprise Zone ProgramOverview►   Passed in 1984►   Fosters development/redevelopment of “depressed” areas►   Pr...
Enterprise Zone utility tax exemption►   Utility tax exemption    ►     A state utility tax exemption on natural gas, elec...
Qualification for utility tax exemption►   The company’s facility must be located in a designated Illinois    Enterprise Z...
Top 10 missed opportunities to avoid1. “But for these incentives … this expansion project or capital spending would     6....
Advocate Health Care►   Illinois update    ►     Nonprofit hospital property tax exemptionPage 33            Tax-exempt or...
Illinois exemption in need of clarification►   Illinois constitution — property must be used exclusively for    charitable...
Recent Illinois history 2006: IL Attorney General supports charity care mandate ►   Legislative proposal would require 8% ...
Page 36   Tax-exempt organizations: how the government can help you
Parties to the debate“What counts? How much?”► Attorney General► Department of Revenue► Governor’s office► Cook County► Lo...
What happened?After nine months of intense legislative negotiations and nine yearsof debate in the state:►   The hospital ...
What counts?Senate Bill 2194/Public Act 97-0688:►   Benefits to low-income individuals:    ►     Traditional charity care ...
How much is enough?Value of property tax exemption:►   Lower of actual assessment or formula to estimate value of exemptio...
Additional components►   Nonprofit hospitals that satisfy property tax exemption test    are also exempt from Illinois sal...
Future outlook►   Optimistic about the new policy solution that provides a clear target    for exemption►   Concern that t...
Future outlook►   Renewed focus on communicating our contributions to the communities we    serve through the Advocate Com...
Recent state activity affecting health care organizations►   In New York    ►     Sales and use tax audits    ►     Withho...
Questions?Page 45   Tax-exempt organizations: how the government can help you
Thank you for your participation and feedback!
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Tax-exempt organizations - how the government can help you

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- Recent state activity affecting health care organisations

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Tax-exempt organizations - how the government can help you

  1. 1. 22nd Annual Health SciencesTax ConferenceTax-exempt organizations:how the government can help youDecember 5, 2012
  2. 2. DisclaimerAny 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 orapplicable state or local tax law provisions.Page 2 Tax-exempt organizations: how the government can help you
  3. 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & Young Global Limited,each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm ofErnst & Young Global Limited operating in the US. For more information about our organization,please visit www.ey.com.This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document maybe reproduced, transmitted or otherwise distributed in any form or by any means, electronic ormechanical, including by photocopying, facsimile transmission, recording, rekeying, or using anyinformation storage and retrieval system, without written permission from Ernst & Young LLP. Anyreproduction, transmission or distribution of this form or any of the material herein is prohibitedand is in violation of US and international law. Ernst & Young LLP expressly disclaims any liabilityin 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. 4. 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 ► Katherine Kurtzman Ernst & Young LLP Ernst & Young LLP Chicago, IL Chicago, IL +1 312 879 3139 +1 312 879 2183 joseph.christofanelli@ey.com katherine.kurtzman@ey.comPage 4 Tax-exempt organizations: how the government can help you
  5. 5. Objective► Introduction► Tax incentives► Nonprofit hospital property tax exemption► Recent state activity affecting health care organizations► Questions and answersPage 5 Tax-exempt organizations: how the government can help you
  6. 6. A holistic view of the process is key to deriving maximumvalue 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, ► Renegotiate if circumstances change key criteria, and application and Identify decision timetables ► Prioritize the programs using a cost-benefit analysis Comply ClientEY Global Qualify Team Obtain Max. Cash Flow Pursue ► Receive “official” offer; review all Min. Risk of Loss ► Hold project meetings with funders terms and conditions ► Prepare, submit and monitor applications ► Clarify and negotiate terms if applicable Obtain Pursue ► Assemble consortium of ► Measure/track realized value partner organizationsPage 6 Tax-exempt organizations: how the government can help you
  7. 7. Approach: benefits of an integrated process(capital expenditures) Limitations of Benefits of an decentralization integrated process Centralization ► Ineffective data collection ► Streamlined/prioritized data collection ► One-off pursuits ► Opportunity pooling (negotiate for ► Single department approach for incentive pursuits future project phases and routine capital spending) ► Tax or human resources (HR) or government Common process relations or development or real estate, etc. ► Coordinated department focus ► Isolated experiences/relationships with ► Company key stakeholders working together public officials to drive incentives value ► No leverage of company’s ► Established, deep relationships and continuous economic impact Teaming contact with public officials ► Extraordinary expenditures only ► Quantification and leverage of company’s economic impact ► Value leakage ► Extraordinary and routine expenditures ► Loss of value between negotiation/realization ► Incentives limited to single focus ► Maximized value Value (e.g., real estate or HR or tax) ► Implementation ownership ► Teaming with focused consultants ► Irrelevant incentives or misappropriation of resources to less material incentives ► Creative approach to identifying incentives opportunities ► Limited knowledge transfers Knowledge transfer ► Relevant packages – value determined with tax profile in mind ► Comprehensive/continuous knowledge transfer back to company stakeholdersPage 7 Tax-exempt organizations: how the government can help you
  8. 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. 9. Potential incentive opportunities Tax incentives Cash incentives Training benefits Financing Climate change ► Hiring tax credits ► Discretionary grants for ► Training cash grants: ► Tax increment financing ► Stimulus funding ► Payroll tax rebates capital investment performance-based (TIF) ► Utility rebates/discounts ► Income/franchise tax ► Infrastructure assistance contracts that provide ► Free/discounted land or ► § 179D deductions credits for capital (roads, water, reimbursement of building prospective training ► Energy efficiency credits investment and targeted wastewater, etc.) ► Forgivable loans expenditures and grants activities ► Permit/impact ► Industrial Revenue ► Training tax credits ► Credits and grants for ► Sales and use tax fee waivers Bonds (IRBs) (retroactive and investments in renewable refunds/rebates/ ► Community Development prospective): dollar-for- energy property exemptions Block Grant dollar reduction in tax ► Pollution control tax credits ► Real and personal property ► Global FP7 grants liability for qualified and abatements tax abatements/ rebates ► Global R&D grants expenditures ► Recycling tax credits ► Federal and state zone credits ► In-kind services: no (low) cost service for ► New Markets Tax Credit curriculum development § 45D ► Foreign trade zonesPage 9 Tax-exempt organizations: how the government can help you
  10. 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. 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. 12. Key states for job creation tax credits and grants Major job creation tax credits WA ME MT ND VT OR MN NH MA ID NY SD WI MI WY WY RI PA CT IA NJ NV NE OH MD DE IN UT IL DC CA CO MO WV KS VA KY NC TN AZ OK NM AR SC AL GA MS AK TX LA HI FLPage 12 Tax-exempt organizations: how the government can help you
  13. 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. 14. Key states for investment tax credits Major investment tax credits WA ME MT ND VT OR MN NH MA ID NY SD WI MI WY RI PA CT IA NJ NV NE OH MD DE IN UT IL DC CA CO WV KS MO VA KY NC TN AZ OK NM AR SC AL GA MS AK TX LA HI FLPage 14 Tax-exempt organizations: how the government can help you
  15. 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. 16. Key states for employee training incentives WA ME MT ND VT OR MN NH 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 MS AL GA Key states with AK training grants TX LA HI Key states with FL training creditsPage 16 Tax-exempt organizations: how the government can help you
  17. 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. 18. Key states for location-based incentives Major location-based tax credits WA ME MT ND VT OR MN NH MA ID NY SD WI MI WY RI PA CT IA NJ NV NE OH MD DE IN UT IL DC CA CO WV KS MO VA KY NC TN AZ OK NM AR SC AL GA MS AK TX LA HI FLPage 18 Tax-exempt organizations: how the government can help you
  19. 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. 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. 21. Discretionary — best practices► 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. 22. Discretionary — sample project time line  Short list of metropolitan areas  Select specific metropolitan area  Execute cost analysis  Conduct site visits  Commence real estate negotiations  Execute term sheet  Announce new location publiclyReal estate steps  Finalize lease/purchase agreement  Lease commencement date ► Occupancy begins  Realize incentives’ valueIncentives steps  Implement incentives  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. 23. Why businesses are interested in going green Government regulation • Environmental laws Revenue generation • Non-governmental organization (NGO) • New products and services operating guidelines • Shorter payback models • Federal and state climate change programs • New business models • Regional initiatives • Innovation investment • Financial reporting Corporate response to climate Cost reduction change Expectations • High energy cost; expected increase in cost • Customers • Operational efficiencies • Consumers • Information technology (IT) activity • Investors • Reduced waste • Employers • Cost of carbon • MediaPage 23 Tax-exempt organizations: how the government can help you
  24. 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 (TIF)► Business development grants ► Recycling incentives► Sales tax exemptions ► Transportation incentives► Income tax exemptions and credits ► Alternative fuel use incentives► Research and development creditsPage 24 Tax-exempt organizations: how the government can help you
  25. 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. 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. 27. TIF increment Revenues (in millions) US$ 7 Base 6 TIF increment 5 4 3 2 1 0 5 10 15 20 25 YearsPage 27 Tax-exempt organizations: how the government can help you
  28. 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. 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. 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. 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. 32. Top 10 missed opportunities to avoid1. “But for these incentives … this expansion project or capital spending would 6. Analyze opportunities to expand existing incentives agreements. possibly happen elsewhere.” ► Review business case ► Beware of premature announcements ► Competitive projects typically yield higher savings 7. Governments compete for new capital projects!2. Leverage your company’s “economic impact” to a jurisdiction. Never ► Leverage what others have been offered assume you do not qualify. Bundle projects! ► Never assume the first offer is the best and final ► Jobs (new and retained) ► Top 10 list matters ► Salaries and wages3. Negotiate incentives with knowledge of your tax and operational profiles. 8. Collaboration with operations, real estate, HR, etc. ► Company direction and priorities 9. Expansions and consolidations need a stronger story. ► Target incentives bringing greatest value ► Is your company in a targeted industry?4. Capture routine capital spending (2 years+) for potential incentives. ► Has another jurisdiction expressed interest? ► Expansions and renovations. System upgrades? 10. Most cash grant allocations occur annually! Need to look beyond a ► Retention incentives? Leverage multiple facilities? regulation or statute5. Negotiate and understand potential clawbacks. ► Transfer with mergers and acquisitions? ► Missed targets: renegotiatePage 32 Tax-exempt organizations: how the government can help you
  33. 33. Advocate Health Care► Illinois update ► Nonprofit hospital property tax exemptionPage 33 Tax-exempt organizations: how the government can help you
  34. 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. 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. 36. Page 36 Tax-exempt organizations: how the government can help you
  37. 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. 38. What happened?After nine months of intense legislative negotiations and nine yearsof 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. 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. 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. 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. 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. 43. Future outlook► 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. 44. Recent state activity affecting health care organizations► 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. 45. Questions?Page 45 Tax-exempt organizations: how the government can help you
  46. 46. Thank you for your participation and feedback!

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