Children's Hospitals Today - Winter 2018 - 16

FEATURE / OPERATIONS

TAKING ACTION

8 governance
considerations
Board members should be
familiar with provisions in the
tax reform act.
1. Board education: General
counsel should brief the board
on the provisions that affect the
industry and providers.
2. Tax-exempt status: The board
will have new responsibilities
to assure the hospital's claim to
charitable, tax-exempt status.
3. Compensation: The board
should engage with the executive
compensation committee and
review compensation policies.
4. Business judgment rule: Any
decision to pay compensation
subject to the excise tax should
satisfy requirements of the
business judgment rule.
5. Development and retention:
The excise tax may prompt the
board to become more engaged
in efforts related to executive
development and retention.
6. Asset diversity: The board
should give more consideration
in the strategic planning process
for growth through for-profit
entities and other investments.
7. Tax-exempt financing:
Finance advisors should update
the board on the municipal bond
market, capital structure and
access to tax-exempt financing.
8. Tax planning: The board
should reaffirm a commitment
to tax planning and ensure
corporate compliance initiatives
are in line with tax-exempt status.
-Michael Peregrine

16

One caveat in the final law was to limit
this tax only to those institutions with
more than 50 percent of their students
located in the United States. There are ambiguities regarding calculating aggregate
assets held by related organizations, computation of net investment income and
defining exempt-use assets. Regulations
should provide more detail.

Unrelated businesses
Many exempt organizations generate some
unrelated business income. Under the new
law, this income may trigger more unrelated business income tax (UBIT). On the
positive side, if UBIT is triggered, it will
now be taxed at the lower corporate rate of
21 percent instead of the higher corporate
tax rates in effect prior to the Act.
A tax-exempt organization could aggregate all profits and losses from its unrelated
businesses and pay tax only on resulting
net income. But going forward, losses from
one activity cannot offset profits from another. This "siloing" of unrelated business
activities sounds easier on paper than actual implementation will prove in practice.
It may be difficult to draw the line between
where one activity ends and another begins, particularly in expense allocation.
Like the executive compensation changes, this has the effect of putting exempt organizations at a competitive disadvantage
with for-profit corporations, which can offset profits and losses from across the business. Tax-exempt organizations with a variety of unrelated business activity should
consider if now is the time to incorporate a
taxable subsidiary to conduct such operations, which would permit this aggregation
and put them on par with the private sector.

Communicating value
Leaders at exempt organizations should be
prepared with proactive defenses of their
exempt operations. As discussed above,
tax-exempt organizations merely looking
at the specific changes in the tax laws and
how they affect day-to-day operations are
not listening to Congressional and public

CHILDREN'S HOSPITAL S TODAY Winter 2018

concerns about the tax-exempt sector.
Going forward, boards of directors and
executive leadership of tax-exempt organizations will be called upon to invest greater
effort toward communicating the worth of
their purposes and activities for internal
and external audiences. For health care
organizations, for example, the key will be
how the delivery of health care services
through a tax-exempt, nonprofit model is
distinguishable from the delivery of such
services in a proprietary model. Hospitals
can take on this effort in several ways:
 Emphasize the achievement of
charitable purposes through the
strategic plan
 Include language in board resolutions
about how specific actions serve
charitable purposes
 Highlight emphasis on research
and education
 Confirm that the compliance officer
monitors compliance with the various
Section 501(r) requirements for
charitable hospitals
 Negotiate service agreements, joint
venture agreements and major
transaction documents to preserve
the tax-exempt organization's control
over exempt purposes and prevent
unreasonable benefits to private parties
Tax-exempt organizations with highly
paid executives should be able to defend
not only why such compensation is fair
market value and in the best interest of the
organization, but why paying a 21 percent
excise tax on top of such amounts benefits
the organization. As has always been the
case, corporate minutes supporting any
activities that are commercial in nature
should explain how such activities directly
further charitable purposes. Focusing
primarily on the financial aspects of such
arrangements is not sufficient.

The bigger picture
The last several months have provided
insight into the current political attitude



Table of Contents for the Digital Edition of Children's Hospitals Today - Winter 2018

Contents
Children's Hospitals Today - Winter 2018 - Intro
Children's Hospitals Today - Winter 2018 - Cover1
Children's Hospitals Today - Winter 2018 - Cover2
Children's Hospitals Today - Winter 2018 - Contents
Children's Hospitals Today - Winter 2018 - 2
Children's Hospitals Today - Winter 2018 - 3
Children's Hospitals Today - Winter 2018 - 4
Children's Hospitals Today - Winter 2018 - 5
Children's Hospitals Today - Winter 2018 - 6
Children's Hospitals Today - Winter 2018 - 7
Children's Hospitals Today - Winter 2018 - 8
Children's Hospitals Today - Winter 2018 - 9
Children's Hospitals Today - Winter 2018 - 10
Children's Hospitals Today - Winter 2018 - 11
Children's Hospitals Today - Winter 2018 - 12
Children's Hospitals Today - Winter 2018 - 13
Children's Hospitals Today - Winter 2018 - 14
Children's Hospitals Today - Winter 2018 - 15
Children's Hospitals Today - Winter 2018 - 16
Children's Hospitals Today - Winter 2018 - 17
Children's Hospitals Today - Winter 2018 - 18
Children's Hospitals Today - Winter 2018 - 19
Children's Hospitals Today - Winter 2018 - 20
Children's Hospitals Today - Winter 2018 - 21
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Children's Hospitals Today - Winter 2018 - 32
Children's Hospitals Today - Winter 2018 - Cover3
Children's Hospitals Today - Winter 2018 - Cover4
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