On April 7, 2008, the Internal Revenue Service (IRS) released for public comment instructions for the new IRS Form 990 annual return filed by most tax-exempt organizations, including nonprofit hospitals and other healthcare organizations. This latest release from the IRS builds on its announcement back in December 2007 of the final version of the redesigned Form 990. After receiving considerable input from the tax-exempt sector and practitioners, the IRS's redesigned Form 990 established a format of a core form and a series of new schedules. The new Form 990 and accompanying instructions will be used for 2008 tax year returns that will be filed by tax-exempt hospitals in 2009, with certain phase-in dates for the separate Form 990 hospital and tax-exempt bond schedules.

The draft Form 990 instructions are organized in a format that includes a general overview of the form or schedule, an explanation of who must file a particular schedule, and line-by-line instructions to aid in answering each question on the form or schedule. In response to comments received by the IRS last year on the redesigned Form 990, the draft instructions include new tools to aid in answering the questions and promote uniform reporting, including a glossary of terms, a sequencing list to help organizations determine the order in which to fill out parts of the Form 990, a compensation table to help organizations determine how and where to report items of compensation and illustrative examples. Of particular interest for tax-exempt hospitals and other healthcare organizations are the draft instructions on governance, executive compensation and the new Schedule H.

Tax-exempt organizations that operate a "hospital" will be required to file the new Schedule H with the Form 990. For the 2008 tax year return, only Part V of Schedule H requiring certain information regarding the organization's "facilities" is required (all other parts of Schedule H will be optional for 2008). The entire Schedule H will require completion beginning with the 2009 tax year return. The draft instructions provide additional clarity and insight in preparing Schedule H along with worksheets that can be used to report community benefit programs and services. Certain highlights of the Schedule H draft instructions are provided below:

Definitions and Filing Requirements:

  • A "hospital" is defined as a facility that is, or is required to be, licensed or certified in its state as a hospital, regardless of whether it is operated directly by the organization or indirectly through a disregarded entity or joint venture taxed as a partnership.
  • A "facility" is a campus, building, structure, or other physical location or address at which the organization provides medical or hospital care, including a hospital, outpatient facility, surgery center, urgent care clinic or rehabilitation facility, whether it is operated directly by the organization or indirectly through a disregarded entity or joint venture taxed as a partnership.
  • If the organization operates multiple "hospitals," it should only complete one Schedule H for all hospitals, with information aggregated. The organization should not, however, include on its Schedule H any information from a hospital operated by a separate tax-exempt or taxable corporation. In the case of group returns, the organization must report information from all hospital facilities operated by a member of the group on Schedule H.

Charity Care/Community Benefit Reporting:

  • Although organizations are encouraged to use the IRS worksheets to report community benefit, alternative or equivalent documentation may be used, provided that the organization follows the methodology for calculating community benefit described in the draft instructions.
  • Organizations must report costs under the most accurate costing methodology, whether that is the cost-to-charge ratio provided in the worksheets, a different cost-to-charge ratio, a cost accounting system, a hybrid or some other method.

Medicare and Bad Debt:

  • HFMA Statement No. 15 is not required to be used by the organization to determine bad debt expense or charity care costs.
  • Bad debt expense cannot be reported in the Part I (Charity Care) Table under any circumstances. Medicare may only be reported to the extent that Medicare revenues and expenses are related either to programs or activities that are reportable as subsidized health services or to Medicare GME that is reportable as health professions education.
  • All other Medicare must be reported in Part III (Bad Debt and Medicare). Only revenues and expenses related to Medicare Parts A and B may be reported in Part III.
  • The IRS is seeking comments on how organizations should report the cost of Medicaid and provider taxes and revenue from uncompensated care pools or programs as costs and revenues associated with charity care or with Medicaid and other means tested government programs. The IRS is contemplating use of either a primary purpose test or a proportionality test for such reporting.

Joint Ventures:

  • Organizations must include 100 percent of the items of each disregarded entity of which it is the sole member, and its proportionate share of each joint venture (taxed as a partnership) for purposes of Schedule H reporting, including reporting of community benefit costs, community building costs, bad debt and Medicare costs.
  • The "proportionate share" of a joint venture is the ending capital account percentage listed on the K-1 for the partnership tax year ending in the organization's tax year that is being reported on the Form 990. If no K-1 is available, the organization may use its business records or a reasonable estimate.
  • Reporting of joint ventures and management companies of which the organization is a partner/shareholder is required only if the organization's officers, directors, trustees, key employees or physicians who have staff privileges with one or more of the organization's hospitals own in the aggregate more than 10 percent of the partnership profits or stock of such corporation.

In an effort to ensure that the Form 990 instructions address the needs of the tax-exempt community, the IRS is requesting public comment on the draft instructions through June 1, 2008 and has indicated that it will post comments that are received on its web site. With each subset of the draft Form 990 instructions, the IRS has highlighted specific items on which it would particularly like to receive comments from the public. The IRS also is seeking comments on whether any of the Schedule H worksheets can be simplified and is interested in comments regarding the types and number of examples used to illustrate various types of community benefit and other activities.

The IRS's April 7th release on the draft Form 990 instructions and address to send comments can be found at this link. The draft Form 990 instructions and worksheets can be found at this link.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.