Navigating the Ins and Outs of Tax Compliance

NYU Langone Health’s Ed Berkovitz guards the institution’s nonprofit status and finds ways to save the organization money

The pace of healthcare industry consolidation shows no sign of slowing down. And today, decisions about joining forces with another healthcare organization and how to integrate the entities afterward are some of the toughest tests for leaders.

Indeed, mergers and acquisitions present many challenges for executives of institutions across the country, but one sometimes overlooked issue—tax compliance—should get more scrutiny, explains Ed Berkovitz, director of tax reporting and compliance for NYU Langone Health. Tax compliance is particularly important when a nonprofit organization affiliates or merges with other healthcare organizations.

Ed Berkovitz, NYU Langone Health

Ensuring that a nonprofit hospital system, for example, maintains its tax-exempt status when it merges with other healthcare organizations can take considerably more effort than many leaders suspect. The consequences of failing to comply with tax regulations in such a case could put the organization at a risk of challenges to its tax-exempt status by various federal, state, and local regulators.

Berkovitz focuses on tax compliance matters for NYU Langone Health, a nonprofit health system that operates more than two hundred locations in the New York metropolitan area. The organization has grown rapidly in the past decade through affiliation and merger and acquisitions, and that has been a major area of focus in Berkovitz’s seven-plus years with the organization. While he can turn to others inside the institution and to outside consultants for help with accounting and legal questions, as a one-person department he bears the primary responsibility for tax compliance.

Though preparing annual tax compliance is a major responsibility, Berkovitz sets his sights on several other issues, including property and sales tax, post-issuance tax-exempt bond compliance, opportunities for tax credits, and reporting of charitable care. All of these matters impact tax reporting and compliance, and this wide scope of issues justifies having an executive dedicated to them, he says.

“The key reason for having a dedicated tax staff is to understand the issues better,” Berkovitz says. “Consultants may not be at the table when some of these issues arise.”

For example, when considering an acquisition or new venture, several tax issues have to be addressed immediately after a deal is finalized. Property, income, and sales tax implications must be considered, as well as possibilities for the application of potential tax credits and incentives. “We would have to work with our suppliers and vendors to make sure that the sales tax exemptions were applied to our activities where applicable,” Berkovitz says about the process following a merger.

Contracts for major ticket items would undergo particular scrutiny. Additionally, acquisition of property requires additional scrutiny to determine the applicability of property tax exemptions. Berkovitz would look carefully at the terms of the acquisitions, leases, and property uses to determine the necessary steps to seek property tax exemptions.

Tax considerations also crop up as nonprofits use tax-exempt bond financing. The terms of these bonds permit certain uses for the funds. For instance, the bond might be earmarked for renovation of a space in an office park for a specific use, such as an outpatient clinic, or to buy equipment such as an MRI machine or computers.

To comply with the terms of the bond, the organization would have to maintain regular records demonstrating that the space and equipment were being used as per the bond covenants. Recordkeeping may include the site’s floor plans and an accounting of how areas within are being used. A historical analysis of properties financed by tax-exempt bonds covering the life of the bond and any refinancings must be maintained, which may require going back to the original transfer deed, Berkovitz explains.

Keeping many types of documentation up to date is crucial to maintaining nonprofit status. With for-profit organizations now having a significant presence in the healthcare industry, regulators are looking closely at whether nonprofits deserve tax exemptions. “They are asking, ‘How is a nonprofit hospital different from a for-profit hospital?’” Berkovitz says. As a result, nonprofits have to be diligent in making the case for their continued tax-exempt status by scrupulously documenting items such as the level of charity care that they provide and any research and educational activity they conduct.

Another significant compliance area involves the unclaimed property reporting. Despite not being specific to tax-exempt organizations, it does garner Berkovitz’s attention. When vendors or patients fail to cash checks for payments or refunds, after a specified holding period the payments are considered unclaimed property by state governments. This can happen, for example, if a patient is issued a refund for an overpayment but does not cash the check. “The potential in terms of dollar amounts is significant,” Berkovitz says.

Healthcare organizations are required to account for this unclaimed property and try to contact the property owner. If they are unable to locate the property owner, then they are required to report and remit the unclaimed property to the appropriate state agencies. The state is then responsible for holding those funds in trust for the rightful owners. States may seek accounting records related to unclaimed property going back a couple of decades, Berkovitz says, and if the records aren’t available, then they use various extrapolation methods to determine the amount due. “I call it a tax on sloppy record keeping,” Berkovitz says.

Berkovitz also has opportunities to save the organization money by identifying eligible tax credits and applying for them. For example, when considering a new project, they seek to understand whether any tax credits or incentives would be applicable. The organization has also benefited from clean energy credits by switching to alternative energy sources. “We were able to use energy credits for a natural gas cogeneration plant that has made us more resilient in the face of a natural disaster,” he says.

It’s clear that Berkovitz’s efforts go well beyond oversight of annual tax filings. His sharp focus on tax issues benefits the organization by protecting its nonprofit status and even generating ways to offset expenses through tax credits and incentives. Given the current healthcare business environment, any large institution would be prudent to have somebody keeping watch over this key financial terrain.

Photo by Andrew Neary/NYU Langone Health