3.07 (R) [INFO] Topic 3. Governance and Tax Status
Topic 3. What is the relationship between governance and a healthcare organization's tax status? Organizational governance structures/frameworks are related to the organization's tax status. The tax status of an organization affects its governance because a specific tax status may have specific governance requirements. As with the organization's business structure, the organization's tax status is a legal status. There are many business/organizational tax status designations at both the state and federal level. For the purposes of this course, only three categories of business/organizational tax status designations will be discussed: 1) for-profit; 2) non-profit; and 3) government. Note [FUN]: Links within this section lead to external [FUN] readings not needed for the certificate work. You do not have to visit these external links. Do so only if you have the interest and the time. Note [CERT]: Pay attention to the text in bold. It just may be included on the [CERT] Lesson Three Quiz. As stated in the last section (Topic 2), the United States Census Bureau publishes a number of valuable tables. Among these are the Statistics of U.S. Businesses (SUSB) tables where the businesses are organized/categorized by their North American Industry Classification System (NAICS) code. The SUSB Glossary provides a definition of all terms used in the SUSB tables. One of the provided tables is: Number of Firms, Number of Establishments, Employment, and Annual Payroll by Legal Form of Organization and Enterprise Employment Size for the United States, NAICS Sectors: 2015 The SUSB tables identify seven (7) different business structures. The Census Bureau calls a firm's (business') business structure in a given state a Legal Form of Organization (LFO). For the last section (Topic 2), only four of the seven Census Bureau LFOs were relevant (Corporation, S-Corporation, Partnership, Sole Proprietorships). The remaining three LFO structures are: "Non-profits - An organization that does not distribute surplus funds to its owners or shareholders, but instead uses surplus funds to help pursue its goals. Most non-profit organizations are exempt from taxes. Government - A business that taxpayers primarily fund. Most government businesses are out of scope to the Statistics of U.S. Businesses (SUSB) program. Other (trusts, estates, cooperatives with undetermined tax status, etc.)" Some of the Sector 62 (Health Care and Social Assistance) data from the above Census Bureau table are displayed in the table attached as a pdf below (NAICS62byTax.pdf). This Census Bureau table does not display Subsector-Level data, only Sector-Level data. Each firm included in the table had at least one paid employee sometime during the year. The attached table shows that in 2015 there were 5,921,348 firms (businesses). Of these, 11.1 percent (659,175) are in Sector 62 (Health Care and Social Assistance). The most common tax status for Sector 62 is the For-Profit (89.69 percent). In the following attached table, the definition of the tax status heading is as follows: For-Profit includes the Corporation, S-Corporation, Partnership, and Sole Proprietorships LFO Non-Profit is the Non-profits LFO Government is the Government LFO Other is the Other LFO
NAICS62byTax.pdf PDF File
Therefore, this section discusses (in a brief and very simplified way): For-Profit Non-Profit Government For-Profit The Business Dictionary defines a for-profit organization as: "A business or other organization whose primary goal is making money (a profit), as opposed to a non profit organization which focuses a goal such as helping the community and is concerned with money only as much as necessary to keep the organization operating." A For-Profit organization pays a variety of taxes at the state level. Generally, these taxes - called business taxes - include those on business income, sales, and property. These taxes may vary by state and by business structure. For example, information on for-profit business taxes required in: California can be found at the California Franchise Tax Board, Businesses website Massachusetts can be found at the Mass.gov, Business Taxes website New Jersey can be found at the New Jersey Division of Taxation, Businesses Formation website A For-Profit organization pays a variety of taxes at the federal level. Generally, these taxes include those on business income. These taxes vary by business structure. Information on federal business taxes can be found at the Internal Revenue Service (IRS), Tax Information for Businesses website. The governance structure for businesses/organizations which are for-profit was discussed in the last section (Topic 2). Part of the governance process of a for-profit is ensuring that the organization is in compliance with all state and federal for-profit tax requirements. Non-Profit The Business Dictionary defines a non-profit organization as: "Associations, charities, cooperatives, and other voluntary organizations formed to further cultural, educational, religious, professional, or public service objectives. Their startup funding is provided by their members, trustees, or others who do not expect repayment, and who do not share in the organization's profits or losses which are retained or absorbed. Approved, incorporated, or registered NPOs are usually granted tax exemptions, and contributions to them are often tax deductible." A Non-Profit organization does not pay business taxes at the state level. However, the state must first officially recognize that organization as a non-profit before it is exempt from state business taxes. Such recognition can occur only after the organization has been formed as a legal entity in the state. After it is recognized as a legal entity (legal business), then the organization/business can file for non-profit status. The requirements for the non-profit status may vary by state. For example, information on non-profit requirements in: California can be found at the California Attorney General, Charities website. A record of all California non-profits can be found at the California Registry of Charitable Trusts website. Massachusetts can be found at the Mass.gov, Attorney General, Registering a Public Charity website. A record of all Massachusetts non-profits can be found at the Massachusetts Non-Profits and Charities Document Search website. New Jersey can be found at the New Jersey Division of Taxation, Non-Profit Organizations website. A record of all New Jersey non-profits can be found at the New Jersey Division of Consumer Affairs, Search for a Charity website. A Non-Profit organization does not pay business taxes at the federal level. However, the federal government must first officially recognize that organization as a non-profit before it is exempt from federal business taxes. Such recognition can occur only after the organization has been formed as a legal entity in a state. After it is recognized as a legal entity (legal business), then the organization/business can file for non-profit status at the federal level. The requirements for the non-profit status may vary by business structure. It should be noted that technically the term "non-profit" applies only to the organization's state-level exemption from business taxes. At the federal level, the organization is designated a "tax-exempt" organization. In common use, however, the term "non-profit" is used to describe an organization exempt from business taxes at both the state and federal level. Being a state-level non-profit does not, however, guarantee that an organization will be approved as a federal-level tax-exempt organization. Information on tax-exempt requirements can be found at the Internal Revenue Service (IRS), Tax Information for Charities and Other Non-Profits website. A record of all federal tax-exempt organizations can be found at the Internal Revenue Service (IRS), Tax Exempt Organization Search website. Tax-exempt organizations file a 990 form with the IRS; more information about this filing can be found at the Internal Revenue Service (IRS), About Form 990, Return of Organization Exempt from Income Tax website. Non-profits typically accept donations from the general public. There are many good resources which the general public can use (in addition to information provided by the non-profit itself) to determine if a donation will be used as the donor intends. These include: Charity Navigator GuideStar Charity Watch GiveWell Foundation Center, 990 Finder A non-profit usually has one of the business structures discussed in the last section (Topic 2). The most common business structure for a non-profit is a corporation. Part of the governance process of a non-profit is ensuring that the organization is in compliance with all state and federal non-profit requirements. Government The Internal Revenue Service (IRS) defines a government entity in the following way: "Federal and state governments are established and recognized by the U.S. Constitution and state constitutions. Federally recognized Indian tribal governments are recognized by the U.S. Constitution, treaties, statutes and court decisions. Other entities may be recognized as governments by state law, court decision, or an examination of facts and circumstances that indicate it has the characteristics of a government, such as powers of taxation, law enforcement and civil authority." However, when most people think of government as a tax status, they use the term "public sector". The Business Dictionary defines the public sector as: "The part of national economy providing basic goods or services that are either not, or cannot be, provided by the private sector. It consists of national and local governments, their agencies, and their chartered bodies. The public sector is one of the largest sectors of any economy; in the US, for example, it accounts for about 20 percent of the entire economy." The organizations in the public sector are owned and operated by the local, state, or federal government. Employees of these organizations are government (public) employees. Included in this category are military personnel, firefighters, police officers, town clerks, and public school teachers. There are, however, other organizations in the for-profit or non-profit tax sectors which receive a large amount of their revenue from the local, state, and/or federal government. The employees of these organizations are not considered government (public) employees, but their jobs are very dependent on money provided by the government. Employees of public universities are in this category. Many would include employees of Federally Qualified Health Centers (FQHCs) in this category. More information about these centers which are often referred to as Community Health Centers (CHCs) can be found at the Health Resources and Services Administration (HRSA) Health Center Program website. Also included in this category are the employees of organizations to which the government has sub-contracted specific work. The United States General Services Administration (GSA) maintains the Federal Procurement Data System (FPDS) and from that produces the Top 100 Contractors Report. The report for 2017 shows that the contractor receiving the most money from the federal government in 2017 was the Lockheed Martin Corporation ($50,696,022,242). The three contractors receiving the most money in 2017 from the Department of Health and Human Services were: Merck & Co. Inc. ($1,767,482,997) Leidos Holdings Inc. ($1,149,697,817) Pfizer Inc. ($1,131,228,762) Public sector healthcare organizations are often those related to public health such as local health departments and the Commissioned Corps of the U.S. Public Health Service. The National Association of County and City Health Officials (NACCHO) provides a Directory of Local Health Departments. Also included are public hospitals, medical facilities in the Veterans Health Administration (VHA), and military hospitals. The American Hospital Association (AHA) reports that in 2018 there were 956 registered state and local government community hospitals and 209 registered federal government hospitals. New York City Health and Hospitals is the largest public sector healthcare organization/system in the United States. The location of VHA medical facilities can be found on the VHA, Locations website. The United States Military Health System (MHS): "is one of America's largest and most complex health care institutions, and the world's preeminent military health care delivery operation. Our MHS saves lives on the battlefield, combats infectious disease around the world, and cares for 9.4 million beneficiaries in one of the nation's largest health benefit plans" The location of military hospitals and clinics can be found at the MHS Tricare Find a Military Hospital or Clinic website. One of the most famous military hospital facilities is the Walter Reed National Military Medical Center (WRNMMC). Note [FUN]: The video for Topic 3 - Therapy Dogs at Walter Reed - is a YouTube video produced by the U.S. Navy which provides a brief overview of the daily routine the hospital's therapy dogs. The governance of government organizations is generally defined by state and federal Constitutions, laws, statutes, and court decisions. Part of the governance process of a government organization is ensuring that the organization is in compliance with the relevant state and/or federal requirements. The Centers for Disease Control and Prevention (CDC) describes the governance structure of state health departments at its Health Department Governance website. The governance structure of the Commissioned Corps of the U.S. Public Health Service is outlined at its About Us, Leadership/Organizational Structure website. The governance structure of the Veterans Health Administration (VHA) is described in the VA Functional Organizational Manual. The governance structure of the Military Health System (MHS) can be found at the About the MHS website.
