Georgia Senate Bill 258: The General Assembly's Attempt to Sustain Georgia's Tax-Exempt, Rural Hospitals with a State Income Tax Credit
by R. Jeremy Wilson, CPA, CFP

Reprinted with permission of The Georgia Society of CPAs



While the increased costs to individuals and small businesses attributed to the Affordable Care Act are well-documented, many other consequences lack the same publicity. One major concern is the additional pressure facing Georgia hospitals, particularly those in rural communities. Of course, Georgia's rural hospitals are familiar with financial constraints; however, the current environment is more difficult. Due to declining reimbursements and rising costs, these hospitals are struggling to keep up. With a large portion of the population still uninsured and underinsured, as a result of increasing deductibles, the collectability of patient bills remains uncertain. Exacerbating this situation is Georgia's refusal to expand the Medicaid program - to the point many experts have predicted the extinction of the standalone, rural hospital. With several rural hospitals closing since 2013, and many others on the precipice of closure, the ominous prediction is coming true in certain communities.

Complex problems often require creative solutions. Rural hospital experts posit that Senate Bill 258, which was enacted in April of this year (the Bill), is an unorthodox alternative to partially mitigate the lack of Medicaid expansion. The Bill creates a tax credit program designed to drive private contributions to rural hospitals. Thus, while Georgia has not expanded Medicaid, the General Assembly has effectively earmarked money for rural hospitals. Modeled closely after the Qualified Education Expense Credit, the Qualified Rural Hospital Organization Expense Credit (QRHOEC) allows contributors to receive a credit on their Georgia income tax return for contributions made to a Qualified Rural Hospital Organization (QRHO). In general, the Bill defines a QRHO as a hospital authority or Section 501(c)(3) hospital operated in a county with a population of less than 35,000. Individuals receive a credit equal to 70 percent of the amount contributed, not to exceed $2,500 for single filers ($5,000 for joint filers). Additionally, C-Corporations receive a credit of 70 percent of the contribution, not to exceed 75 percent of the corporation's Georgia income tax liability. Each QRHO is limited to receiving $4 million of credits annually, and the aggregate cap for the program is $50 million of credits in 2017, $60 million in 2018 and $70 million in 2019. Many rural hospitals see this as an opportunity to cultivate new donors and increase the giving of existing donors.

At a 70 percent credit rate, many potential donors realize a net cash loss on the contribution. In other words, to receive a $2,500 tax credit, the donor must contribute $3,571. In addition to the Georgia tax credit, donors also receive a deduction on their federal returns (though the contribution is added back to calculate Georgia taxable income). Thus, a shortfall exists in the tax benefit as compared with the cost of the contribution. However, for certain individuals, the charitable contribution cost is completely erased by tax benefits of the federal deduction and the Georgia credit. Specifically, those individuals subject to the alternative minimum tax (AMT), but below the level of phasing out itemized deductions, pay for their donations through the tax benefits of the QRHOEC. This result is derived from the donor converting a portion of the state income taxes paid deduction (which is not an allowable AMT deduction) to a charitable contribution (which is an allowable AMT deduction). By way of illustration, assume a single taxpayer with the following:




Income:
Deductions:
State Income Taxes Paid
Property Taxes Paid
Mortgage Interest
Charitable Contributions
Tax Liabilities:
Federal Income Tax
Alternative Minimum Tax
Net Investment Income Tax
Georgia Income Tax
Total Taxes

Salary $ 250,000

($ 11,700)
($ 6,500)
($ 15,000)
($ 10,000)

$ 50,400
$ 1,100
$ 500
$ 11,700
$ 63,700

Now, assume the taxpayer maximizes the QRHOEC, by contributing $3,571 to a QRHO, resulting in a $2,500 credit against his or her Georgia income tax liability. Thus, the income, deduction and tax liability composition would be as follows:




Income:
Deductions:
State Income Taxes Paid
Property Taxes Paid
Mortgage Interest
Charitable Contributions
Tax Liabilities:
Federal Income Tax
Alternative Minimum Tax
Net Investment Income Tax
Georgia Income Tax
Total Taxes

Salary $ 250,000

($ 9,300)
($ 6,500)
($ 15,000)
($ 13,600)

$ 50,000
$ 300
$ 500
$ 9,300
$ 60,100

In this example, contributing approximately $3,600 to a QRHO reduces the combined tax liability of the donor by approximately $3,600. Thus, the cost of the contribution is completely offset by the combined tax benefit. While the QRHOEC is not financially beneficial for all taxpayers, it certainly warrants discussion with clients fighting an AMT liability.
In the coming months, the Department of Community Health (DCH) will issue regulations and guidance to implement the Bill. Specifically, DCH must define appropriate measures to determine eligibility - including financial metrics and required action plans of the QRHOs. For certain hospitals, their status as a going concern has been questionable - to the point of including disclosures within the financial statements. With the Bill including a requirement of financial viability, DCH must find a way to balance the requirements outlined by the General Assembly with the need for these very hospitals to benefit from the QRHOEC.

For many years, Georgia's rural hospitals have been an integral lifeline of the communities served, but now these hospitals need a financial lifeline. If they can maximize this opportunity, the rural hospital community stands to generate total contributions in excess of $257 million over the three-year term. When asked why a representative from one of Georgia's wealthiest suburbs would support such a measure, State House sponsor, Geoff Duncan (R-Cumming) cited his philosophy on philanthropy - "it's not about how much you have, but how much you give." Georgia's rural hospitals and the populations served are counting on this very attitude - with the help of a tax incentive - to drive sustaining contributions and increase their chances of survival.



R. Jeremy Wilson, CPA, CFP is a partner-in-training in the Atlanta office of Draffin & Tucker, LLP, focusing on comprehensive tax planning for executives and family businesses. With over 60 years of experience, Draffin & Tucker is a full-service, regional accounting firm with a specialization in the healthcare industry. For more information, please visit www.draffin-tucker.com.


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