KPMG report: IRS scrutiny of hospitals’ net operating losses

IRS focus on hospitals reporting significant UBTI losses

IRS focus on hospitals reporting significant UBTI losses

The IRS has put hospitals with loss-generating businesses in its crosshairs.

The Tax Exempt / Government Entities (TE/GE) fiscal year 2020 program letter lists ‘‘Hospital organizations with unrelated business income (UBI)’’ as a new ‘‘compliance strategy’’ for the IRS, with a ‘‘focus on unrelated business taxable income (UBTI) reported on Form 990-T, Exempt Organization Business Income Tax Return, where expenses materially exceed gross income.’’

In other words, the IRS is looking for hospitals reporting significant UBTI losses and examining them. The IRS has not yet released any data regarding the number of hospital UBTI exams that have been opened and closed in the last three years, but these exams appear to have increased significantly.

As with IRS examinations of the UBTI of colleges and universities a decade earlier, the IRS is typically taking one of two positions (or sometimes both, with one as an alternative) in challenging hospitals’ reported UBTI losses:

  • Disallowing expenses based on allegedly improper allocations between related and unrelated business activities
  • Disallowing net operating losses (NOLs) based on the hospital’s alleged lack of a profit motive in carrying out the loss-generating activity

The former approach can turn a UBTI loss from a particular activity into UBTI, while the latter approach can deny a deduction that could be used to offset UBTI. Either way, the end result can be more tax for hospitals.

Hospitals with unrelated business activities that have generated significant losses need to be prepared for both lines of attack.

Read a July 2021 report* [PDF 77 KB] prepared by KPMG LLP: The IRS Is Scrutinizing Hospitals’ Net Operating Losses: Is Your Hospital Ready?

*This report was previously published in BNA Bloomberg’s Tax Management Estates, Gifts, and Trusts Journal and is reproduced with permission of the publisher. 

For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Ruth Madrigal | +1 202 533 8817 | ruthmadrigal@kpmg.com

Preston Quesenberry | +1 202 533 3985 | pquesenberry@kpmg.com

Carrie Garber Siegrist | +1 202 533 3056 | carriesiegrist@kpmg.com

 

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