Property Tax Exemptions on the Radar

Tax-exempt hospitals are entitled to a multitude of federal and state tax benefits, with an estimated total annual value of $12 billion.

By Laura Kalik, JD, LLM in Tax

With numbers this large, just as the federal government has upped the requirements for 501(c) (3) hospitals in the financial assistance and community benefit areas, many jurisdictions are also calling for a return benefit in order to qualify for the property tax exemption. At a minimum, jurisdictions are asking for some kind of compensation to pay for the
benefits provided to the nonprofit. In the case of nonprofit hospitals, some states have enacted legislation that requires a certain amount of charity care or community benefit in order to justify property tax exemptions. Other jurisdictions, however, such as Boston, have entered into arrangements with nonprofits titled “payments in lieu of taxes,” or PILOTs, in which nonprofits compensate local governments for some of the foregone property tax revenue. These payments help subsidize police and fire protection, construction of public schools and other vital operations, and are provided by all types of nonprofit entities, ranging from hospitals to universities.

While common, however, PILOTs are not without controversy. A lack of transparency, the possible political nature of a favorable deal and the question of whether institutions are actually paying their “fair share” are common criticisms of the arrangements.


After the Illinois Department of Revenue denied exemptions to several prominent taxexempt hospitals, arguing that they were not operating in a charitable manner, the state enacted a law in 2012 requiring tax-exempt hospitals to provide a certain level of charity care and community benefits commensurate with the value of their property tax exemption. Today, Illinois-based nonprofit hospitals can enjoy a property tax exemption only if they can prove that various factors – including, among others, charity care, preventive care, medical research and professional training – are equal to the value of the property tax exemption.

In Texas, as well, nonprofit hospitals must provide community benefits as a condition of their state tax exemption. Texas law gives a hospital four alternatives that cover combinations of charity care and governmentsponsored indigent health care in amounts equal to varying sums of net patient revenue.

For jurisdictions that do not have laws in place, critics are starting to challenge such exemptions.

A hospital that loses its tax-exempt status or its property tax exemption could face financial
disaster. Bond covenants could require that tax-exempt bonds be called in, turning longer term liabilities into current liabilities. The hospital’s financial difficulties could also ripple out toward the community it serves as, in many jurisdictions, nonprofit hospitals are major employers, and layoffs might be an unintended consequence. Thus, it is critical that communities and nonprofit hospitals come to an agreement on whether some kind of payment arrangement in lieu of taxes is appropriate and useful.


The Affordable Care Act introduced section 501(r) into the Internal Revenue Code, which requires a 501(c)(3) hospital to prepare a community health needs assessment (CHNA) and have an implementation strategy to address the findings of the assessment. Though the new federal tax requirements for 501(c)(3) hospitals also include financial assistance, billing and collection, and chargespolicy requirements, there is no requirement to provide a dollar amount or percentage of revenue in charity care or community benefits.

With varying policies on the state and federal level, nonprofit organizations must navigate complex waters in order to maintain their exemptions while carrying out their mission.

If you have any questions regarding property tax exemptions, contact a Templeton Advisor at

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Copyright © 2014 BDO USA, LLP. All rights reserved.