By Jack Cumming
Not long ago, I wrote an article about money questioning whether the nonprofit corporate form is best for senior living enterprises that aren’t dependent on philanthropy for their existence. That can be a sensitive topic. And while I got several comments, no one wanted to raise questions publicly. I waited to give people time to come forward in the LinkedIn discussion link, but no one has. Not even a “like” or “dislike.” It’s a touchy subject indeed.
I understand. Speaking out contrary to convention can be contentious. It takes courage for people to say what needs to be said. Nevertheless, my confidential correspondence shows that there is widespread interest. And I don’t want to deprive readers of the valuable discussion taking place behind closed doors in whispered conversations.
Federal Taxation
By way of full disclosure, the “correspondent” of this article is an amalgam of reactions I’ve received to the earlier article. My amalgamated correspondent didn’t seem to realize that in many jurisdictions, though not all, federal tax exemption results in property tax exemption at the state and local level. He (or it could be a she or both) wrote that he has “no blanket resistance to the idea that for-profit firms can provide strong CCRC-type services well. But [he] emphatically objects to the concluding thought that tax-exemption is a ‘subsidy.’ Recall,” he continues, “that corporate taxes are assessed against profits, not income.” His view is that tax exemption is “a way to encourage organizations that provide some useful benefit to the community.”
If we look only at federal income taxes, it’s puzzling why the Section 501(c) exemptions exist at all. Any organization can avoid taxes and become a true, rather than just a statutory, nonprofit by avoiding making a profit. The financial benefit for businesses kicks in when the Federal trigger is extended to exempt the business from paying local taxes. That also makes nonprofit businesses, including housing for affluent seniors, less popular with local officials. Exemption withholds needed funds from local communities, municipalities, and school districts.
Local Taxation
This extension of the federal rulings to local governments is not universal. There are states where nonprofit senior living is not exempt from local taxes. Also, some jurisdictions have nonprofits pay “fees” in lieu of taxes, though those payments are seldom the same as local taxes and, thus, are inherently inequitable. Those “fees” are called PILOT fees with PILOT standing for “Payments In Lieu Of Taxes.”
This local impact of federal tax exemption raises the issue of social responsibility. In helping to fund local community governments, taxpaying senior living enterprises contribute to the social welfare of their neighbors. Can that be? If voting and jury duty are obligations of civic responsibility, then certainly paying taxes to support local services is socially responsible. Is it possible that for-profits are more socially responsible than mission-centered nonprofits? No wonder there’s controversy.
More Controversy
At this point, my correspondent stepped up the potential for controversy. In justifying his opinion that exemption from federal income tax has minimal financial impact, this correspondent adds the interesting observation that “any benefit the governing nonprofits get from being tax-exempt is surely dwarfed by the loss to the treasury that occurs because residents are able to deduct a portion of their monthly rent as pre-paid health insurance; I presume that’s true at any for-profit CCRC as well.”
Here, too, there’s widespread confusion. There are no clear rules governing how this payment, which is deemed deductible as an advance funded medical expense, should be computed. While the deduction may make some sense for those Type A communities, which hold actuarial reserves for entrance fee obligations, it makes no sense otherwise since most Type B and Type C communities cover their medical costs with fees at the time of service.
To the extent that monthly fees cover bundled medical costs that would otherwise, i.e. on a fee-for-service basis, be deductible, it’s only reasonable that they are treated consistently. What can be confusing, though marketing folks love it, is the comparable treatment of a portion of any entrance fee. The rationale is that the entrance fee includes a portion for the present value (i.e. the discounted value using compound interest and actuarial techniques) of future medical expenses.
Without actuarial determination, the tax deduction becomes a purely political benefit accorded to the industry without much rational scrutiny. There have been a couple of adjudicated tax cases but the confusion persists. Accountants, also, tend to take a more arithmetic approach to the calculation of the medical portion than do actuaries. There’s a link to a comprehensive accounting analysis at the end of this article.
We Deserve Ours
At this point, our intrepid correspondent proposes the “everybody does it” rationale as a final defense of nonprofit qualification for affluent elder housing. His observation goes, “The list of things that the federal tax code encourages is long; everyone can find things in the list that offend their concept of what is deservedly beneficial. Providing secure residential facilities to senior citizens probably bothers some people (remember ‘greedy geezers’)”, he states before continuing, “But in the list of ‘subsidies’ it ranks pretty low.”
This is a credible argument. Lobbying and political jockeying have given us an excessively complex tax code. Few people feel that they are equitably taxed. In the overall scheme of loophole tax code provisions, IRS National Office rulings, and the like, tax abatement for enterprises housing old people may seem relatively minor. The trouble is that leadership that can’t be trusted to have integrity in something like taxation is unlikely to have integrity in something affecting the welfare of a frail, failing, defenseless old person.
Is There a Nonprofit Advantage?
Perhaps that’s the point. It’s about trust. A nonprofit corporate form doesn’t automatically ensure executive integrity. A for-profit form doesn’t elevate executive greed above social responsibility. It’s time to rethink whether nonprofit is an advantage. That is a topic that is occupying me just now. The correspondence underlying this article shows that many are having similar thoughts. Of course, giving up tax exemption for LeadingAge members would be like asking Philip Morris to give up smoking. Have you heard that PM is going “predominantly” cold turkey by 2025? Maybe it’s time for us. (Source: New York Times, May 11, 2021, page A5)
For an accountant’s take on the deductible portion of Entrance Fees, click here.
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