Changes to Community Benefit Reporting for Tax-Exempt Hospitals

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For tax year 2013, the Internal Revenue Service (IRS) has made a change to the manner in which tax-exempt organizations that operate one or more hospital facilities compute community benefit for purposes of reporting on Schedule H of Form 990.  The change may result in tax-exempt hospitals reporting less community benefit than in prior years.

When reporting community benefit on Schedule H, tax-exempt organizations that operate one or more hospital facilities apply against “total community benefit expense” any “direct offsetting revenue” to yield “net community benefit expense.”  The 2013 Schedule H instructions contain a change in the definition of “direct offsetting revenue.” 

Prior to 2013, both restricted and unrestricted grants were excluded from “direct offsetting revenue.”  A restricted grant is a grant that must be used for a specific purpose, such as a grant to provide financial assistance or fund research.  The Schedule H instructions for 2013 now state that “direct offsetting revenue” includes restricted grants and contributions the organization uses to provide a community benefit.   Unrestricted grants, which may be used for other purposes, remain excluded. 

As a result of this definitional change, hospitals that receive restricted grants or contributions will increase the amount of direct offsetting revenue they report on Schedule H by the amount of such restricted grants or contributions which, in turn, will decrease the next community benefit reported.  For example, a hospital that conducts research, whether funded by the hospital or by outside grants, previously could count all of the research as net community benefit.  Under the new Schedule H instructions, however, only hospital-funded research will count toward net community benefit.

In December 2013, after the IRS issued a draft version of Form 990, the Healthcare Financial Management Association (HFMA) and the American Hospital Association (AHA) voiced opposition to the change stating that it “distorts the amount and percentage of community benefits provided.”   Now that the change has been implemented, hospitals receiving restricted grants or contributions may see a decrease in their reported net community benefit as compared to prior years. 

To view the IRS’s summary of other significant changes to Schedule H, Form 990, click here. 

Reporters, Connie Dotzenrod, Atlanta, +1 404 572 3585, cdotzenrod@kslaw.com,  Isabella Edmundson, Atlanta, +1 404 572 3527, iedmundson@kslaw.com.

Topics:  Exempt Organizations, Hospitals, IRS, Non-Profits

Published In: Health Updates, Nonprofits Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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