- Tax incentives - Nonprofit hospital property tax exemption - Recent state activity affecting health care organisations

1. 22nd Annual Health Sciences
Tax Conference
Tax-exempt organizations:
how the government can help you
December 5, 2012

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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3. 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
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mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any
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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.
Page 3 Tax-exempt organizations: how the government can help you

4. Presenters
► Lauren Brosius ► Gary Horowitz
Director of Accounting Ernst & Young LLP
Advocate Health Care Iselin, NJ
Oak Brook, IL +1 732 516 4328
gary.horowitz@ey.com
► Joseph Christofanelli
► Katherine Kurtzman
Ernst & Young LLP
Ernst & Young LLP
Chicago, IL
Chicago, IL
+1 312 879 3139
+1 312 879 2183
joseph.christofanelli@ey.com
katherine.kurtzman@ey.com
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5. Objective
► Introduction
► Tax incentives
► Nonprofit hospital property tax exemption
► Recent state activity affecting health care organizations
► Questions and answers
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6. A holistic view of the process is key to deriving maximum
value from the process
Identify
► Work with key executives to review
company-wide opportunities (e.g., CapEx,
employment changes, training activities)
► Leverage benchmarking
Comply Qualify
► Conduct ongoing compliance review
► Prepare list of applicable programs,
► Renegotiate if circumstances change key criteria, and application and
Identify
decision timetables
► Prioritize the programs using a
cost-benefit analysis
Comply ClientEY Global Qualify
Team
Obtain Max. Cash Flow
Pursue
► Receive “official” offer; review all Min. Risk of Loss
► Hold project meetings with funders
terms and conditions
► Prepare, submit and monitor applications
► Clarify and negotiate terms if applicable
Obtain Pursue ► Assemble consortium of
► Measure/track realized value
partner organizations
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7. Approach: benefits of an integrated process
(capital expenditures)
Limitations of Benefits of an
decentralization integrated process
Centralization
► Ineffective data collection ► Streamlined/prioritized data collection
► One-off pursuits ► Opportunity pooling (negotiate for
► Single department approach for incentive pursuits future project phases and routine
capital spending)
► Tax or human resources (HR) or government Common process
relations or development or real estate, etc. ► Coordinated department focus
► Isolated experiences/relationships with ► Company key stakeholders working together
public officials to drive incentives value
► No leverage of company’s ► Established, deep relationships and continuous
economic impact Teaming contact with public officials
► Extraordinary expenditures only ► Quantification and leverage of company’s
economic impact
► Value leakage
► Extraordinary and routine expenditures
► Loss of value between negotiation/realization
► Incentives limited to single focus ► Maximized value
Value
(e.g., real estate or HR or tax) ► Implementation ownership
► Teaming with focused consultants
► Irrelevant incentives or misappropriation of
resources to less material incentives ► Creative approach to identifying
incentives opportunities
► Limited knowledge transfers
Knowledge transfer ► Relevant packages – value determined with tax
profile in mind
► Comprehensive/continuous knowledge transfer
back to company stakeholders
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8. 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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9. Potential incentive opportunities
Tax incentives Cash incentives Training benefits Financing Climate change
► Hiring tax credits ► Discretionary grants for ► Training cash grants: ► Tax increment financing ► Stimulus funding
► Payroll tax rebates capital investment performance-based (TIF) ► Utility rebates/discounts
► Income/franchise tax ► Infrastructure assistance contracts that provide ► Free/discounted land or ► § 179D deductions
credits for capital (roads, water, reimbursement of building
prospective training ► Energy efficiency credits
investment and targeted wastewater, etc.) ► Forgivable loans
expenditures and grants
activities ► Permit/impact ► Industrial Revenue
► Training tax credits ► Credits and grants for
► Sales and use tax fee waivers Bonds (IRBs)
(retroactive and investments in renewable
refunds/rebates/ ► Community Development
prospective): dollar-for- energy property
exemptions Block Grant
dollar reduction in tax ► Pollution control tax credits
► Real and personal property ► Global FP7 grants liability for qualified and abatements
tax abatements/ rebates
► Global R&D grants expenditures ► Recycling tax credits
► Federal and state zone
credits ► In-kind services: no (low)
cost service for
► New Markets Tax Credit
curriculum development
§ 45D
► Foreign trade zones
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10. 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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11. 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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12. Key states for job creation tax credits and grants
Major job creation tax credits
WA
ME
MT ND
VT
OR MN NH MA
ID NY
SD WI MI
WY
WY RI
PA CT
IA NJ
NV NE OH MD DE
IN
UT IL
DC
CA CO MO WV
KS VA
KY
NC
TN
AZ OK
NM AR SC
AL GA
MS
AK
TX LA
HI
FL
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13. 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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14. Key states for investment tax credits
Major investment tax credits
WA
ME
MT ND
VT
OR MN NH MA
ID NY
SD WI MI
WY RI
PA CT
IA NJ
NV NE OH MD DE
IN
UT IL
DC
CA CO WV
KS MO VA
KY
NC
TN
AZ OK
NM AR SC
AL GA
MS
AK
TX LA
HI
FL
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15. 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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16. Key states for employee training incentives
WA
ME
MT ND
VT
OR MN NH MA
ID NY
SD WI
MI
WY
RI
PA CT
IA NJ
NV NE
OH
IN MD DE
UT IL
CA CO WV DC
KS MO VA
KY
NC
TN
AZ OK
NM AR SC
MS AL
GA Key states with
AK training grants
TX LA
HI Key states with
FL
training credits
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17. 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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18. Key states for location-based incentives
Major location-based tax credits
WA
ME
MT ND
VT
OR MN NH MA
ID NY
SD WI MI
WY RI
PA CT
IA NJ
NV NE OH MD DE
IN
UT IL
DC
CA CO WV
KS MO VA
KY
NC
TN
AZ OK
NM AR SC
AL GA
MS
AK
TX LA
HI
FL
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19. 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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20. 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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21. Discretionary — best practices
► 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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22. 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
Real estate steps  Finalize lease/purchase agreement
 Lease commencement date
► Occupancy begins
 Realize incentives’ value
Incentives steps  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
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23. Why businesses are interested in going green
Government regulation
• Environmental laws Revenue generation
• Non-governmental organization (NGO) • New products and services
operating guidelines • Shorter payback models
• Federal and state climate change programs • New business models
• Regional initiatives • Innovation investment
• Financial reporting Corporate
response
to climate
Cost reduction change Expectations
• High energy cost; expected increase in cost • Customers
• Operational efficiencies • Consumers
• Information technology (IT) activity • Investors
• Reduced waste • Employers
• Cost of carbon • Media
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24. State and local incentives
► Property tax abatement ► Training grants and credits
► Job creation tax credits ► Low-interest financing
► Renewable energy grants ► Tax increment financing (TIF)
► Business development grants ► Recycling incentives
► Sales tax exemptions ► Transportation incentives
► Income tax exemptions and credits ► Alternative fuel use incentives
► Research and development credits
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25. 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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26. 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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27. TIF increment
Revenues (in millions)
US$ 7
Base
6
TIF increment
5
4
3
2
1
0
5 10 15 20 25
Years
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28. 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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29. 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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30. 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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31. 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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32. Top 10 missed opportunities to avoid
1. “But for these incentives … this expansion project or capital spending would 6. Analyze opportunities to expand existing incentives agreements.
possibly happen elsewhere.”
► Review business case
► Beware of premature announcements
► Competitive projects typically yield higher savings 7. Governments compete for new capital projects!
2. Leverage your company’s “economic impact” to a jurisdiction. Never ► Leverage what others have been offered
assume you do not qualify. Bundle projects!
► Never assume the first offer is the best and final
► Jobs (new and retained)
► Top 10 list matters
► Salaries and wages
3. Negotiate incentives with knowledge of your tax and operational profiles. 8. Collaboration with operations, real estate, HR, etc.
► Company direction and priorities 9. Expansions and consolidations need a stronger story.
► Target incentives bringing greatest value
► Is your company in a targeted industry?
4. Capture routine capital spending (2 years+) for potential incentives.
► Has another jurisdiction expressed interest?
► Expansions and renovations. System upgrades?
10. Most cash grant allocations occur annually! Need to look beyond a
► Retention incentives? Leverage multiple facilities?
regulation or statute
5. Negotiate and understand potential clawbacks.
► Transfer with mergers and acquisitions?
► Missed targets: renegotiate
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33. Advocate Health Care
► Illinois update
► Nonprofit hospital property tax exemption
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34. 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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35. 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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36. Page 36 Tax-exempt organizations: how the government can help you

37. 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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38. 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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39. 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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40. 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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41. 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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42. 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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43. Future outlook
► 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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44. 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?
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45. Questions?
Page 45 Tax-exempt organizations: how the government can help you

46. Thank you for your participation and feedback!