8 Ways to Manage Property Tax Exemptions in the Healthcare Industry
Dec. 19, 2017
By W. Ted Clark; Scott R. Ford, CPA; and Moiz Mohammed, CMI, MRICS
Across the nation, tax assessors increasingly are focused on property taxes in the healthcare industry. Why? Property tax is a prime source of income for local governments that face fiscal pressure, and healthcare properties receive billions in exemptions each year.
In addition, property tax law is complicated and constantly changing across states. Several high-profile court cases in the past decade have set precedent for more scrutiny of tax exemptions and not-for-profit status.1
Particularly if a healthcare organization has a regional or national footprint, it can be beneficial to spend time and resources on understanding property taxes and making the most out of exemptions.
Healthcare Property Tax 101
Property tax is “ad valorem,” which means it's based on the value of the property. It is the primary source of income for local governments such as cities, counties, school districts, and special districts. It’s also the one tax based on an opinion of value – and therefore negotiable. Property tax laws vary greatly by state and can be administered at either a local or state level, depending on the state and property type.
Property is anything capable of private ownership. It’s typically classified as real estate, real property, or personal property, either tangible or intangible. All property is taxable, unless exempt. Every state has numerous exemptions, whether general or specific to property type or industry. Most states have specific healthcare exemptions.
Although timing varies by state, spring is usually the time for identifying and filing potential exemptions as well as preparing and submitting business personal property returns and renditions. In the summer, most states go through evaluation and appeals, including informal negotiations with assessors, formal review boards, and formal litigation if necessary. In fall and winter, states typically send tax bills and accruals, and jurisdictions will begin collecting, performing value verification, and processing payments.
Property Tax Exemption Rules: Complex and Ever-Changing
As tax laws are transformed and reinterpreted, healthcare organizations must constantly survey the property tax landscape. And, just because a hospital is a tax-exempt organization for income tax purposes, it is not necessarily exempt from property taxes.
Hospitals are eligible for exemptions from property taxes in most states, but no state allows full property tax exemptions to for-profit hospitals. Many states also impose other limitations to gaining tax-exempt status.
Thirty-two states have exemptions that apply only to hospitals or healthcare centers. For example, Washington, Kansas, and New York require that property must be used primarily or exclusively for hospital purposes to be considered exempt. Indiana and Colorado require that the property be owned by a hospital and used for charitable purposes. Nevada exempts the land and buildings owned by hospitals but does not exempt personal property, which can be granted exemption only under a statute that applies to charitable organizations. Alabama exempts all property used for hospital purposes, up to $75,000.
Eighteen states do not have a property tax exemption specifically for hospitals. Hospitals in those states must rely on a statute that exempts charitable institutions or personal property in general. Usually, these provisions require that the property be used and the organization owning it be exclusively or primarily for charitable purposes. Some states impose additional restrictions. Iowa, for example, allows an exemption only for a maximum of 320 acres of real property held by charitable institutions and used for tax-exempt purposes.
A majority of states require some measure of community benefit for property tax exemption. Twenty-nine states require hospitals to qualify as tax-exempt organizations under Internal Revenue Code (IRC) Section 501(c)(3). Eighteen states require an independent community benefit that often deviates significantly from the federal income tax standard. California accepts a wide variety of activities as evidence of community benefit. Florida, by contrast, conditions property tax exemption on qualification under IRC Section 501(c)(3) but also requires all not-for-profit hospitals to provide a separate, state-level community benefit, defined as providing charity care and participating in the Medicaid program.
Stay on Top of the Game With These Property Tax Tips
Healthcare organizations can manage property tax exemptions for maximum benefit by taking these actions:
- Keep a calendar. Know specific state dates for returns, exemptions, value notices, appeal deadlines, and tax bills.
- Identify potential exemptions by state and type prior to Jan. 1. Determine healthcare-specific, general, and business personal property exemptions, including intangible property such as embedded warranties and embedded software.
- Identify ghost assets. Healthcare companies often dispose of assets but keep those assets in their records. If it’s in the books, it will be taxed.
- Review classification of assets for appropriate depreciation schedules. The healthcare industry is full of high-tech equipment. Make sure that all equipment has life cycles appropriately defined.
- Identify property and equipment with obsolescence issues. Economic obsolescence is a loss in value caused by adverse conditions external to the assets, such as poor market demand for the product or service, industrial reorientation, or governmental regulation. Functional obsolescence is the loss in value or usefulness of an asset caused by inadequacies when compared to a more efficient or less costly replacement asset.
- Prepare value analysis on all significant properties. Typically, more than 70 percent of property tax liability is found in less than 30 percent of healthcare properties. Simply prioritizing high-value properties provides a lot of impact. Consider, for example, devices for diagnostics and monitoring, surgical robots, medical imaging systems, nuclear medicine equipment, pharmaceutical and biotechnology research equipment, and genetic testing equipment.
- Be proactive with assessors. It’s better to work with rather than against assessors on exemptions, valuations, and other issues. Contact them in person, or at least send cover letters and reports with returns and applications.
- Hire or develop dedicated property tax professionals with healthcare experience. A complicated tax in a complex industry calls for extra attention. If possible, get support from specialists in the field.
Healthcare organizations may see property taxes as fixed costs. They are not. With due diligence to property tax exemptions, healthcare entities can boost their bottom line.
1 See, for example, Kevin Spiegel and Dean Uminski, “IL Court Ruling Affects Not-for-Profit Hospitals,” Crowe Horwath LLP Tax News Highlights, Jan. 14, 2016, https://www.crowehorwath.com/insights/tax-alert/tax-news-highlights-il-court-ruling-nfp-hospitals.aspx, and Tim Darragh, “Morristown Hospital Loses Property Tax Court Case; Judge Says Facility Does Not Meet Non-Profit Status,” NJ Advance Media for NJ.com, June 26, 2015, http://www.nj.com/morris/index.ssf/2015/06/morristown_medical_center_loses_tax_case_raising_f.html