how the government can help tax-exempt organizations
DESCRIPTION
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.TRANSCRIPT
22nd Annual Health Sciences Tax Conference Tax-exempt organizations: how the government can help you December 5, 2012
Tax-exempt organizations: how the government can help you Page 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.
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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.
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Objective
► Introduction ► Tax incentives ► Nonprofit hospital property tax exemption ► Recent state activity affecting health care organizations ► Questions and answers
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Presenters
► Lauren Brosius Director of Accounting Advocate Health Care Oak Brook, IL
► Joseph Christofanelli Ernst & Young LLP Chicago, IL +1 312 879 3139 [email protected]
► Gary Horowitz Ernst & Young LLP Iselin, NJ +1 732 516 4328 [email protected]
► Katherine Kurtzman Ernst & Young LLP Chicago, IL +1 312 879 2183 [email protected]
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A holistic view of the process is key to deriving maximum value from the process
►Conduct ongoing compliance review
►Renegotiate if circumstances change
Comply
►Receive “official” offer; review all terms and conditions
►Clarify and negotiate terms if applicable
►Measure/track realized value
Obtain
►Work with key executives to review
company-wide opportunities (e.g., CapEx, employment changes, training activities)
►Leverage benchmarking
Identify
►Prepare list of applicable programs,
key criteria, and application and decision timetables
►Prioritize the programs using a cost-benefit analysis
Qualify
►Hold project meetings with funders
► Prepare, submit and monitor applications
►Assemble consortium of partner organizations
Pursue
Max. cash flow min. risk of loss
ClientEY Global Team
Identify
Qualify
Pursue Obtain
Comply
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Limitations of decentralization ► Ineffective data collection ► One-off pursuits ► Single department approach for
incentive pursuits ► Tax or human resources (HR) or
government relations or development or real estate, etc.
► Isolated experiences/relationships with public officials
► No leverage of company’s economic impact
► Extraordinary expenditures only ► Value leakage
► Loss of value between negotiation/realization
► Incentives limited to single focus (e.g., real estate or HR or tax)
► Irrelevant incentives or misappropriation of resources to less material incentives
► Limited knowledge transfers
► Streamlined/prioritized data collection ► Opportunity pooling (negotiate for
future project phases and routine capital spending)
► Coordinated department focus ► Company key stakeholders working
together to drive incentives value ► Established, deep relationships and
continuous contact with public officials ► Quantification and leverage of
company’s economic impact ► Extraordinary and routine expenditures ► Maximized value
► Implementation ownership ► Teaming with focused consultants ► Creative approach to identifying
incentives opportunities ► Relevant packages – value determined
with tax profile in mind ► Comprehensive/continuous knowledge
transfer back to company stakeholders
Benefits of an integrated process
Centralization
Common process
Teaming
Value
Knowledge transfer
Approach: benefits of an integrated process (capital expenditures)
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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
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Tax incentives
► Hiring tax credits ► Payroll tax rebates ► Income/franchise
tax credits for capital investment and targeted activities
► Sales and use tax refunds/rebates/ exemptions
► Real and personal property tax abatements/ rebates
► Federal and state zone credits
► New Markets Tax Credit § 45D
► Foreign trade zones
Cash incentives
► Discretionary grants for capital investment
► Infrastructure assistance (roads, water, wastewater, etc.)
► Permit/impact fee waivers
► Community Development Block Grant
► Global FP7 grants ► Global R&D grants
Training benefits
► Training cash grants: performance-based contracts that provide reimbursement of prospective training expenditures
► Training tax credits (retroactive and prospective): dollar-for-dollar reduction in tax liability for qualified expenditures
► In-kind services: no (low) cost service for curriculum development
Financing
► Tax increment financing (TIF)
► Free/discounted land or building
► Forgivable loans ► Industrial
Revenue Bonds (IRBs)
Climate change
► Stimulus funding ► Utility
rebates/discounts ► § 179D deductions ► Energy efficiency
credits and grants ► Credits and grants
for investments in renewable energy property
► Pollution control tax credits and abatements
► Recycling tax credits
Potential incentive opportunities
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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
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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
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Key states for job creation tax credits and grants
AK
ME
RI
VT NH MA
NY
CT PA NJ
DC
DE
WV
NC
SC
GA
FL
OH
IL
KY
IN
MI WI
VA
TN
AL MS
AR
LA TX
MD
Major job creation tax credits
OK
MO KS
IA
MN
ND
SD
NE
NM AZ
CO UT
WY
MT
WA
OR
ID
NV
CA
HI
WY
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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
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Key states for investment tax credits
AK
HI
ME
RI
VT NH MA
NY
CT PA NJ
DC
DE
WV
NC
SC
GA
IL
OH IN
MI WI
KY
TN
AL MS
AR
LA TX
OK
MO KS
IA
MN
ND
SD
NE
NM AZ
CO UT
WY
MT
WA
OR
ID
NV
CA VA
FL
Major investment tax credits
MD
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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
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Key states for employee training incentives
AK
HI
ME
RI
VT NH MA
NY
CT PA NJ
DC
DE
WV
NC
SC
GA
FL
IL
OH IN
MI WI
KY
TN
AL MS
AR
LA TX
OK
MO KS
IA
MN
ND
SD
NE
NM AZ
CO UT
WY
MT
WA
OR
ID
NV
CA VA
MD
Key states with training grants
Key states with training credits
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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
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Key states for location-based incentives
AK
HI
ME
RI
VT NH MA
NY
CT PA NJ
DC
DE
WV
NC
SC
GA
FL
IL
OH IN
MI WI
KY
TN
AL MS
AR
LA TX
OK
MO KS
IA
MN
ND
SD
NE
NM AZ
CO UT
WY
MT
WA
OR
ID
NV
CA VA
Major location-based tax credits
MD
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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
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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.
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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
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Discretionary — sample project time line
Short list of metropolitan areas Select specific metropolitan area
Execute cost analysis Conduct site visits Commence real estate negotiations Execute term sheet Announce new location publicly Finalize lease/purchase agreement Lease commencement date
►Occupancy begins
Realize incentives’ value Implement incentives Draft and submit incentives applications
Finalize written incentives offer Secure initial incentives offers from all competing locations Present economic/fiscal impact results to government Submit detailed project parameters and gap analysis
Discuss project anonymously with government authorities Prepare comparative analysis of incentives’ values
Incentives steps
Real estate steps
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Why businesses are interested in going green
Corporate response to climate
change
Revenue generation ► New products and
services ► Shorter payback
models ► New business models ► Innovation investment
Expectations ► Customers ► Consumers ► Investors ► Employers ► Media
Cost reduction ► High energy cost; expected
increase in cost ► Operational efficiencies ► Information technology
(IT) activity ► Reduced waste ► Cost of carbon
Government regulation ► Environmental laws ► Non-governmental organization
(NGO) operating guidelines ► Federal and state climate
change programs ► Regional initiatives ► Financial reporting
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State and local incentives
► Property tax abatement ► Job creation tax credits ► Renewable energy grants ► Business development
grants ► Sales tax exemptions ► Income tax exemptions
and credits ► Research and
development credits
► Training grants and credits ► Low-interest financing ► Tax increment financing
(TIF) ► Recycling incentives ► Transportation incentives ► Alternative fuel
use incentives
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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
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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
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TIF increment
0
1
2
3
4
5
6
7
5 10 15 20 25
Base TIF increment
Years
US$ Revenues (in millions)
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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
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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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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.
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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
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Top 10 missed opportunities to avoid
1. “But for these incentives … this expansion project or capital spending would possibly happen elsewhere.”
► Beware of premature announcements
► Competitive projects typically yield higher savings
2. Leverage your company’s “economic impact” to a jurisdiction. Never assume you do not qualify. Bundle projects!
► Jobs (new and retained)
► Salaries and wages
3. Negotiate incentives with knowledge of your tax and operational profiles.
► Company direction and priorities
► Target incentives bringing greatest value
4. Capture routine capital spending (2 years+) for potential incentives.
► Expansions and renovations. System upgrades?
► Retention incentives? Leverage multiple facilities?
5. Negotiate and understand potential clawbacks.
► Transfer with mergers and acquisitions?
► Missed targets: renegotiate
6. Analyze opportunities to expand existing incentives agreements.
► Review business case
7. Governments compete for new capital projects!
► Leverage what others have been offered
► Never assume the first offer is the best and final
► Top 10 list matters
8. Collaboration with operations, real estate, HR, etc.
9. Expansions and consolidations need a stronger story.
► Is your company in a targeted industry?
► Has another jurisdiction expressed interest?
10.Most cash grant allocations occur annually! Need to look beyond a regulation or statute
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:
► Illinois update ► Nonprofit hospital property tax exemption
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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?
Questions ?
Thank you for your participation and feedback!