Tax Issues Impacting Not-For-Profit Organizations

Transcription

1 Tax Issues Impacting Not-For-Profit Organizations December 15, 2016 Amber Sherrill, CPA, Director BKD, LLP Risk Analysis Report Year End AGENDA 501(r) Potential Risk and Exposure Areas on Form 990 Joint Ventures and Controlled Organizations The Good, the Bad, & the Ugly Physician Loans vs Physician Compensation 2// experience direction 1

2 501(r) POTENTIAL RISK AND EXPOSURE AREAS Are you 501(r) compliant? Second round of CHNA and Implementation Strategy Financial Assistance Policy (FAP), Financial Assistance Policy Plain Language Summary (PLS), and Financial Assistance Policy Application Limitation on charges Billing and collections practices Can you sit with your current policies & procedures and answer all questions on your Form 990, Schedule H, in compliance with the final 501(r) Regulations? Will your answers be red flags? 3// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS CHNA and Implementation Strategy Community Health Needs Assessment (CHNA) Likely already finished or finishing up 2 nd round Must be available on website and paper copy by request, free of charge Must apply to licensed hospital joint ventures, if not UBI Authorized governing body must adopt Implementation Strategy Extend time to adopt to 15 th day of fifth month following year of CHNA completion Written plan must be available on website orattached to the filed Form 990 Must apply to licensed hospital joint ventures, if not UBI Authorized governing body must adopt 4// experience direction 2

3 501(r) POTENTIAL RISK AND EXPOSURE AREAS Financial Assistance Policy (FAP) Must apply to all emergency and other medically necessary care provided by hospital Elements required: Eligibility criteria Basis for calculating amounts charged Method for applying Actions that may be taken in event of nonpayment Presumptive eligibility Provider list Must apply to licensed hospital joint ventures, if not UBI 5// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS Widely Publicizing the FAP Measures to publicize FAP do not have to be listed in the FAP, but. Must do the following FAP, Plain Language Summary, and FAP Application on website Paper copies upon request, free of charge Notify and inform members of the community Notify and inform individuals who receive care reasonable effort Make documents available in non-english languages lesser of 1,000 or 5% of community 6// experience direction 3

4 501(r) POTENTIAL RISK AND EXPOSURE AREAS Red Flags on Form 990, Sch H, Part V CHNA/Implementation Strategy (Q 1-12) FAP, PLS, and FAP Application (Q 13-16) Billing and Collections (Q 17-20) Policy Relating to Emergency Medical Care (Q 21) Limitations on Billing (Q 22-24) 7// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS CHNA 8// experience direction 4

5 501(r) POTENTIAL RISK AND EXPOSURE AREAS - CHNA 9// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS FAP, PLS, APPLICATION 10// experience direction 5

6 501(r) POTENTIAL RISK AND EXPOSURE AREAS FAP, PLS, APPLICATION 11// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS FAP, PLS, APPLICATION 12// experience direction 6

7 501(r) POTENTIAL RISK AND EXPOSURE AREAS BILLINGS & COLLECTIONS 13// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS BILLINGS & COLLECTIONS 14// experience direction 7

8 501(r) POTENTIAL RISK AND EXPOSURE AREAS EMERGENCY MEDICAL CARE POLICY 15// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS LIMITATIONS ON BILLINGS 16// experience direction 8

9 501(r) POTENTIAL RISK AND EXPOSURE AREAS Make sure your organization is actually 501r compliant More than just getting reports out and the policies into place Education Pay attention to the Form 990 questions Could be in compliance, but wrong answers are red flags CPA review of your policies and procedures Don t assume you are in compliance Devil is in the details 17// experience direction Joint Ventures Highly scrutinized JV is licensed hospital musts comply with 501r Abundant information on Form 990 allows IRS to analyze joint ventures Part VI - Joint Venture policy Schedule H, Part IV and Part V Schedule R S Corporation income is always UBI 18// experience direction 18 9

10 Controlled Organizations Abundant information on Form 990 allows IRS to analyze controlled entities Part VI Lines 35, 35a, and 35b Schedule R Disregarded Entities, Tax Exempt, Partnerships, Corporations, and Trusts Intercompany transactions Checklist of transactions with controlled entities and amounts 19// experience direction General overview of Unrelated Business Income (UBI) Trade or business profit motive Regularly carried on Not substantially related to performance of exempt functions Form 990-T is open to public inspection Summary of 990-T information is also shown on page 1 of Form 990 State filing potentially required (Required in AR) 20// experience direction 10

11 Joint Venture (JV) Income UBI or not? Look Through Test Does participation in the JV further a charitable purpose? Does the JV allow the charity to act exclusively to further its exempt purposes and only incidentally benefit for-profit partners? Who controls the JV? 21// experience direction JV UBI or not? Revenue Ruling Situation 1: exempt org forms hospital LLC with a for-profit Exempt org has majority voting control on the board Governing documents explicitly state that charitable purpose of LLC is to promote health and will satisfy community benefit standard for community as a whole Return of capital and distributions made in proportion to ownership interests JV only incidentally benefits for-profit partners Situation 2: exempt org forms hospital LLC with a for-profit Exempt org and for-profit have equal voting control on the board Governing documents state that charitable purpose of LLC is to operate health care facilities (no stated obligation to serve charitable purposes for whole community) Return of capital and distributions made in proportion to ownership interests More than incidental benefit to for-profit partners Exempt org can t initiate activities without approval of for-profit since doesn t have majority vote 22// experience direction 11

12 JV UBI or not? Revenue Ruling Exempt university forms LLC with for-profit to provide training programs University and for-profit have equal voting power on the board Governing documents state that sole purpose of LLC is to offer virtual teacher training seminars, which are similar to seminars conducted by university University has exclusive right to approve curriculum and training materials Virtual seminars allow university to reach individuals who otherwise could not travel to university campus Return of capital and distributions made in proportion to ownership interests 23// experience direction Creation of JV Policy Purpose Applicability Policies & Procedures Charitable Purposes & Effect Economic Terms Prohibited Activities Required Approvals Amendments to Policy Reference to Other Policies Excess Benefit, Conflict of Interest, etc. 24// experience direction 12

13 Controlled Entities (including JVs) Tax exempt and taxable entities >50% controlled for taxable entities Defined under 512(b)(13) Parent, subsidiary, brother/sister Report transactions Potential for UBI interest, rents, royalties, or annuities 25// experience direction Controlled Entities (including JVs) Reported on Schedule R of Form 990 Must maintain adequate records of intercompany transactions Not just parent to sub; brother/sister too 26// experience direction 13

14 Entity creation decisions Do you need a separate entity? What kind of entity should it be? Who should own the entity? Who should manage the entity? Do governing documents have necessary language? Will the JV or controlled entity create unwanted UBI? 27// experience direction PHYSICIAN LOANS VS COMPENSATION Loans vs Compensation Debtor/Creditor Relationship Intention of Recipient/Employee to repay Intention of Lender/Employer to force repayment Intentions must exist at the time advances are made Advance Payments for Future Services Employee is to repay employer through performance of future services No debtor/creditor relationship Compensation 28// experience direction 14

15 PHYSICIAN LOANS VS COMPENSATION Factors determining intentions Will employee forego payments for future periods? Lack of substantial repayments of interest and principal? Is employee financially unable to repay at the time of the advance? Is employee performing services without compensation or at a reduced salary? Is the loan unconditional and not contingent on future events? Lack of definite plans or schedules for repayment and failure of employer to take any action to enforce repayment? Are the advances secured? Has the employer deducted the amount of the advance? Does employee have discretion to decide when advances are to be repaid? 29// experience direction PHYSICIAN LOANS VS COMPENSATION The Vancouver Clinic, Inc. (DC WA 4/09/2013) 111 AFTR 2d Facts: Clinic is a professional services corp that provides medical treatments. Clinic entered into Associate Physician Loan Agreements with newly hired physicians to facilitate recruitment and retention. Each agreement requires physicians to work for Clinic for 5 years in exchange for 2 advances during the first and second years of employment. The physicians only have to repay the advances if they break their contract to remain employed 5 years. The advances accrue interest at the prime rate, but the physicians aren t required to pay any interest. Clinic didn t withhold income or payroll tax on the advances or report them on a Form W-2, but rather reported the income to the physicians on Form 1099 at the time of forgiveness under the Agreement. 30// experience direction 15

16 PHYSICIAN LOANS VS COMPENSATION The Vancouver Clinic, Inc. (cont.) Decision: Easily concluded the advances were in fact compensation; Since the advances were in fact wages, Clinic was required to go back and withhold the appropriate employment and income taxes and report them on Forms W-2 in the tax period in which they were made. Facts showed the parties did not actually intend repayment Expectation was the physicians would fulfill their promise to work 5 years and the advances would be forgiven No fixed schedule for repayment existed at the time the agreements were signed 31// experience direction PHYSICIAN LOANS VS COMPENSATION A bona fide loan does not give rise to taxable income to the recipient/employee Advances to recipients/employees for future services are taxable and should be included in income in the year which they are received Include in W-2 (subject to P/R taxes) or 1099 Regardless of any contingent obligation to repay 32// experience direction 16

17 PHYSICIAN LOANS VS COMPENSATION Commonly asked questions Employee vs Independent Contractor Determination - Most likely an employee if Physician does not have a private practice Hospital pays straight wages to physician Hospital provides supplies and professional support staff Hospital bills for physician services Percentage division of physician fees with the hospital or vice versa Hospital regulation of, or right to control physician Physician s uniform bearing hospital name or insignia 33// experience direction PHYSICIAN LOANS VS COMPENSATION Commonly asked questions (cont.) Relocation Costs Signing Bonus Income Subsidy Physicians in residence Stipend Student Debt 34// experience direction 17

18 PHYSICIAN LOANS VS COMPENSATION Physician Contracts Things to Consider What is your intention? If Loan are you confident you meet the tests to pass the debtor/creditor test? If Compensation has it been correctly reported? 35// experience direction DISCLOSURES These discussions & conclusions are based on facts as stated & existing authorities as of date of this communication. Our advice could change as result of changes in applicable laws & regulations. We are under no obligation to update this communication if such changes occur. Any advice should be based on your unique facts & circumstances as you communicated them to us & should not be used or relied on by anyone else. This advice is not intended or written to be used for the purpose of avoiding penalties that may be imposed. 36// experience direction 18

19 Questions? Thank you for attending! If you have further questions Amber Sherrill, CPA Director