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22nd Annual Health Sciences
Tax Conference
Tax-exempt organizations:
how the government can help you

December 5, 2012
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
Disclaimer

Ernst & 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 of Ernst & 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 may be reproduced, transmitted or otherwise distributed in any form or by
any means, electronic or mechanical, including by photocopying, facsimile
transmission, recording, rekeying, or using any information storage and retrieval
system, without written permission from Ernst & Young LLP. Any reproduction,
transmission or distribution of this form or any of the material herein is prohibited and
is in violation of US and international law. Ernst & Young LLP expressly disclaims
any 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
Objective


►   Introduction
►   Tax incentives
►   Nonprofit hospital property tax exemption
►   Recent state activity affecting health care organizations
►   Questions and answers




Page 4     Tax-exempt organizations: how the government can help you
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.com




Page 5      Tax-exempt organizations: how the government can help you
A holistic view of the process is key to
deriving 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                                                                   organizations




Page 6                   Tax-exempt organizations: how the government can help you
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 stakeholders



Page 7                  Tax-exempt organizations: how the government can help you
Incentives checklist
Triggers 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 goals


Page 8     Tax-exempt organizations: how the government can help you
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
                                                        development




Page 9                Tax-exempt organizations: how the government can help you
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 agencies


Page 10         Tax-exempt organizations: how the government can help you
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 Kansas


Page 11        Tax-exempt organizations: how the government can help you
Key states for job creation tax credits
and 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
                                                                                                                               FL




Page 12             Tax-exempt organizations: how the government can help you
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 Program




Page 13        Tax-exempt organizations: how the government can help you
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
                                                                                                                               FL




Page 14        Tax-exempt organizations: how the government can help you
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 Training
Page 15         Tax-exempt organizations: how the government can help you
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
                                                                                                                           FL




Page 16        Tax-exempt organizations: how the government can help you
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 Zones



Page 17        Tax-exempt organizations: how the government can help you
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
                                                                                                                               FL




Page 18        Tax-exempt organizations: how the government can help you
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 funds


Page 19        Tax-exempt organizations: how the government can help you
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
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 offered


Page 21           Tax-exempt organizations: how the government can help you
Discretionary — sample project time line

   Short list of metropolitan areas
           Select specific metropolitan area
                  Execute cost analysis
                         Conduct site visits
                                 Commence real estate negotiations
Real estate steps                         Execute term sheet
                                                   Announce new location publicly
                                                           Finalize lease/purchase agreement
                                                                    Lease commencement date

                                                                         ► Occupancy   begins
                                                                    Realize incentives’ value
                                                           Implement incentives
Incentives 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’ values


Page 22             Tax-exempt organizations: how the government can help you
Why businesses are interested in
going 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 carbon



Page 23       Tax-exempt organizations: how the government can help you
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 credits


Page 24    Tax-exempt organizations: how the government can help you
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 law



Page 25    Tax-exempt organizations: how the government can help you
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 Chicago




Page 26     Tax-exempt organizations: how the government can help you
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
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 costs



Page 28    Tax-exempt organizations: how the government can help you
Illinois Enterprise Zone Program


Overview
► 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
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
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 jobs




Page 31        Tax-exempt organizations: how the government can help you
Top 10 missed opportunities to avoid

1. “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 incentives
2. 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 final
3. 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 statute




Page 32              Tax-exempt organizations: how the government can help you
:


►   Illinois update
    ►     Nonprofit hospital property tax exemption




Page 33        Tax-exempt organizations: how the government can help you
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 exemption




Page 34    Tax-exempt organizations: how the government can help you
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 standards

Page 35      Tax-exempt organizations: how the government can help you
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

► Local governments

► Patient advocates

► Labor

► Hospitals

► Illinois Hospital Association



Page 37   Tax-exempt organizations: how the government can help you
What happened?


After nine months of intense legislative negotiations and
nine 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 requirements




Page 38        Tax-exempt organizations: how the government can help you
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 populations




Page 39        Tax-exempt organizations: how the government can help you
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” work




Page 40    Tax-exempt organizations: how the government can help you
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
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 scrutiny




Page 42     Tax-exempt organizations: how the government can help you
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 Exemption




Page 43        Tax-exempt organizations: how the government can help you
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
Questions ?
Thank you
for your participation and feedback!

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How the government can help tax-exempt organizations

  • 1. 22nd Annual Health Sciences Tax Conference Tax-exempt organizations: how the government can help you December 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. Disclaimer Ernst & 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 of Ernst & 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 may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any 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 answers Page 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.com Page 5 Tax-exempt organizations: how the government can help you
  • 6. A holistic view of the process is key to deriving 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 organizations Page 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 stakeholders Page 7 Tax-exempt organizations: how the government can help you
  • 8. Incentives checklist Triggers 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 goals Page 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 development Page 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 agencies Page 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 Kansas Page 11 Tax-exempt organizations: how the government can help you
  • 12. Key states for job creation tax credits and 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 FL Page 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 Program Page 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 FL Page 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 Training Page 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 FL Page 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 Zones Page 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 FL Page 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 funds Page 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 offered Page 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 negotiations Real estate steps  Execute term sheet  Announce new location publicly  Finalize lease/purchase agreement  Lease commencement date ► Occupancy begins  Realize incentives’ value  Implement incentives Incentives 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’ values Page 22 Tax-exempt organizations: how the government can help you
  • 23. Why businesses are interested in going 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 carbon Page 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 credits Page 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 law Page 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 Chicago Page 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 costs Page 28 Tax-exempt organizations: how the government can help you
  • 29. Illinois Enterprise Zone Program Overview ► 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 jobs Page 31 Tax-exempt organizations: how the government can help you
  • 32. Top 10 missed opportunities to avoid 1. “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 incentives 2. 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 final 3. 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 statute Page 32 Tax-exempt organizations: how the government can help you
  • 33. : ► Illinois update ► Nonprofit hospital property tax exemption Page 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 exemption Page 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 standards Page 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 Association Page 37 Tax-exempt organizations: how the government can help you
  • 38. What happened? After nine months of intense legislative negotiations and nine 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 requirements Page 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 populations Page 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” work Page 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 scrutiny Page 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 Exemption Page 43 Tax-exempt organizations: how the government can help you
  • 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
  • 46. Thank you for your participation and feedback!