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Healthcare Business News

IRS proposes excluding some grants from community benefit reports

By Joe Carlson
Posted: December 21, 2013 - 12:01 am ET

A little-noticed proposal from the Internal Revenue Service may cause many hospitals to look a lot less charitable than they did in years past.

The IRS this month rolled out a draft of its 2013 instructions for not-for-profit hospital tax returns that changes how grants are recorded. The change means hospitals would no longer be able to count much of their grant-funded work to prove that they deserve their tax exemptions in exchange for the community benefit they provide.

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“That's a huge change,” said Ivy Baer, senior director and regulatory counsel with the Association of American Medical Colleges, whose members would be significantly affected. “We are glad to know that these are draft instructions and we will have a chance to make our voice heard.”

But not much time. Tax-filing season is scheduled to start during the last week of January 2014. The 23-page draft instructions were published Dec. 9.

Verite Healthcare Consulting President Keith Hearle, who helped the IRS write the instructions for the first-ever Schedule H in 2008, said the change would “remove a source of distortion” and make the form more reliable when comparing teaching hospitals and nonteaching hospitals.

Expenses counted toward community benefit commonly include local outreach efforts, health-education programs and the millions of dollars in free and discounted healthcare provided to uninsured and Medicaid patients each year. In the past, hospitals could label grant-funded programs such as medical research as community benefit.

But for the 2013 tax year, the IRS is proposing that any money that must be spent on a specific grant program—known as a “restricted grant”—no longer counts toward the community benefit total. “If a hospital didn't get a grant, they wouldn't provide the research. So the grant creates the expense,” Hearle said.

Baer, however, said the change would create a disincentive for hospitals to accept grants that benefit their communities. “It is enabling you to do things that you otherwise would not be able to do.”

Follow Joe Carlson on Twitter: @MHJCarlson

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