Nonprofit Management and Property Tax Exemptions

Are large nonprofit organizations in danger of losing their property tax exemption?

Across the United States, municipalities are re-evaluating their policies that allow property tax exemption for nonprofit organizations. All along, nonprofits have benefited from not paying sales, real estate, and income taxes since these organizations facilitate valuable community services that would not otherwise be provided by business or government. A charitable organization's profits are expected to be invested back into the community.

The impetus of this current discussion, of course, is fiscally related. As government organizations (mostly local municipalities) continue to experience unstable tax revenues and budget shortfalls, and as homeowners and businesses continue to pay higher taxes, the spotlight has shifted to the larger nonprofits and whether or not they are paying their fair share. The question is, should non-profits continue to be exempt from property and other taxes? 

Some legislators don’t think so.

The background on nonprofit tax exemptions

Historically, some larger nonprofits (mostly universities and hospitals) have negotiated payment in lieu of taxes (PILOT) to assist their local communities in meeting their obligations. These PILOT payments are typically negotiated at a value significantly below what these organizations would have paid if they were a proprietary business given their significant real estate holdings. Currently the focus is on local property tax exemption, but given the historical IRS and Congressional scrutiny involving the nonprofit hospital industry and their benefit to the community (as well as the scrutiny over compensation levels), many nonprofits should be concerned about this potential added cost and their ability to continue to provide much needed services.

If legislative bodies move to strip tax exemptions, added cost could be incurred by these nonprofits with a possible corresponding reduction in community services.  And, here’s the impact to me and you: The change will translate into less money for our communities as nonprofits are forced to cut back on much needed but unprofitable services. In other words, these organizations may have fewer resources to disseminate for programs, improvements, or other sponsorships within the community.

 

State proposal to end tax exemptions for nonprofits could affect hundreds

One of the more outspoken proponents for slashing exemptions is the Governor of Maine, Paul LaPage. This article reports that if Page’s budget proposal passes, Maine would be the first state to mandate taxes for certain nonprofits.  According to the article, the Northeast would be hit the hardest as this region has a higher than average number of large nonprofits not paying real estate taxes.  What does this mean for the many other community focused organizations across the United States?  

For now, absolutely nothing.

We bring this topic to light simply because anyone in the nonprofit sector should be aware of it and hopefully engaged in its dialogue. There is no reason to believe that this State proposal will move to the national level. And even if it does, the discussion will be more than likely focused on the larger nonprofits.

Most nonprofit hospitals and universities are owned and governed by the community through a Board of Directors, which is elected by the community. These organizations typically have sophisticated board leadership and management to work through these situations. Another recent article involves an ongoing situation between a New Jersey municipality and a large health care system. This issue will more than likely be resolved and decided in tax court.

Many of our clients are nonprofit, community-focused organizations that not only provide a valuable service to the community but also provide employment and serve as a key economic engine to their region. For our clients who won’t be affected by these potential policy changes, file this away in the “good to know” category for future reference. For those clients who may be affected by this potential legislature, we are available to discuss and advise you on your specific needs and situation. 

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