December 21, 2022
Recent state law developments could affect tax-exempt organizations
The following state tax developments could affect tax-exempt organizations operating in those jurisdictions. Given the possible effects on their operations, tax-exempt organizations should consider monitoring state tax developments regularly.
Georgia announces changes to certain tax credits
Qualified rural hospital organization expense credit
The Georgia Department of Revenue proposed updated rules that would conform the current qualified rural hospital organization expense tax credit to state law and legislation enacted in May 2022 (H.B. 1041). The modifications provide: (1) credit amounts based on taxpayer type, (2) the total amount of preapproved credits per calendar year; (3) reporting rules for rural hospital organizations; and (4) a new effective date (January 1, 2023).
Conservation tax credit
The Georgia Department of Revenue, Income Tax Division updated its conservation tax credit regulations to reflect legislation (H.B. 586) enacted in May 2022. The legislation extended the credit's sunset date five years, to December 31, 2026, and limits the total tax credits allowed to $4m per calendar year for qualified donations of real property for conservation use occurring from June 1, 2022 through December 31, 2026.
Law enforcement donation credit
The Georgia Department of Revenue proposes to adopt a rule (Prop. Rule 560-7-8-.69) to provide guidance on implementing and administrating the qualified law enforcement donation credit, which was added under legislation (S.B. 361) enacted in May 2022.
New York modifies how charities file
New York State requires online filing for all charities
The New York State Charities Bureau reminded charities that, beginning in tax year 2021, they must submit their annual filing, the New York CHAR 500, online.
New York City hospitals scrutinized by watchdog group
A report by the Lown Institute seeks to evaluate whether certain tax-exempt hospitals in New York City spend more on "programs that provide direct and meaningful benefit" to their communities than they receive in federal, state and local tax exemptions. The report has been criticized for applying a definition of community benefit that is narrower than the IRS community benefit standard and therefore potentially reaching inaccurate conclusions.
Michigan lists community foundations for 2022 business credit
In Revenue Administrative Bulletin 2022-13, the Michigan Department of Treasury (DOT) provides a list of names and contact information for community foundations that DOT certified for tax year 2022. The publication accords with a provision of the Michigan Business Tax Act (MBTA) allowing qualifying businesses to elect to file returns under the MBTA and claim tax credits for contributions to community foundation endowment funds certified by the DOT. The Michigan Business Tax (MBT) regime is only available to taxpayers that have certificated credits and elect to file under the MBT, as opposed to under the corporate income tax.
Missouri Supreme Court holds entity with 'civic exemption' also entitled to charitable exemption
In Beyond Housing Inc., et al. v. Director of Revenue, the Missouri Supreme Court held that nonprofit taxpayers could claim sales and use tax exemptions in addition to their civic exemptions "because the definitions of charitable and civic organizations in [Missouri state law] do not create mutually exclusive categories of exemptions and the organizations' primary purpose in developing [a town center] is to benefit persons with low incomes in a specific area."
Illinois legislature proposes bill to create tax credit for donations to endowment funds
The Endow Illinois Tax Credit Act (H.B. 5817), introduced recently in the state legislature, would create an income tax credit for taxpayers who make an endowment gift to a permanent endowment fund. If the bill were enacted, the Illinois Department of Revenue would award credits (for 50% of a taxpayer's endowment gift), subject to a cap on total available credits. The proposal was sent to the Illinois House Rules Committee on November 16, 2022.
Indiana reminds exempt organizations about annual tax reporting changes
The Indiana Department of Revenue is reminding nonprofit organizations in the state about recent law changes that affect their annual tax reporting and how the Department of Revenue will access sales tax exemption certificates beyond 2023. For example, due to a law change earlier in 2022, Indiana nonprofits must file annual information reports every five years, rather than annually.
Idaho reminds taxpayers they may claim charity tax credit without itemizing
The Idaho State Tax Commission has reminded taxpayers that, even if they don't itemize, they may claim a credit on their Idaho income tax returns for monetary contributions to certain Idaho charities. The credit is available to C and S corporations, other business entities, individuals and nonbusiness entities such as estates and trusts. The state provides a list of charities to which cash contributions may be made to receive the credit.
Pennsylvania senior living facility failed five-factor public charity test
In an unpublished opinion, the Commonwealth Court of Pennsylvania held that a senior living community was not entitled to state tax exemption as a charity (Friends Boarding Home of Western Quarterly Meeting v. Pennsylvania). The court concluded that Friends did not qualify as an institution of purely public charity under Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (HUP). HUP had established a five-factor test for an entity to qualify as a "purely public charity" in Pennsylvania: (1) advance a charitable purpose; (2) donate a substantial portion of its services; (3) benefit a substantial and indefinite class of persons who are legitimate subjects of charity; (4) relieve a governmental burden; and (5) operate entirely free from private profit motive. All five factors must be satisfied, and Friends did not meet the test, the court held.
Although Friends provided financial assistance to some residents, its subsidies were narrowly distributed and relatively small. Further, the fees that Friends charged its residents were comparable to those charged by for-profit entities, and Friends required some of its residents to move out because they could not afford the fees. The court also rejected the contention that Friends' operating deficits indicated that it provided substantial charity care.
These recent developments demonstrate state efforts to both more closely regulate tax-exempt organizations and provide them with additional tax benefits and incentives. Tax-exempt organizations should continue to monitor state tax law developments through legislation, state court rulings, and regulatory guidance to ascertain and respond to new requirements and legal challenges.
The Lown Institute report on New York hospitals reflects the increasing scrutiny of tax-exempt hospitals by regulators, the media and watchdog groups. To withstand this scrutiny, exempt hospitals should confirm that they meet their IRC Section 501(r) and Schedule H reporting requirements, carefully and comprehensively document the community benefit they provide, and fully report their community benefit on Schedule H.
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor