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