HAC Tax-Exempt Organization Accounting 2 — Questions and Answers
Question 1: Under IRC Section 501(c)(3), which activity could jeopardize a healthcare organization's tax-exempt status?
- Providing charity care to uninsured patients
- Distributing net earnings to board members as bonuses (Correct answer)
- Operating a community health education program
- Accepting grants from government agencies
Correct answer: Distributing net earnings to board members as bonuses
IRC 501(c)(3) prohibits any part of net earnings from inuring to the benefit of private shareholders or individuals, including board members.
Question 2: A tax-exempt hospital receives $500,000 in investment income from its endowment. How is this income treated for federal tax purposes?
- Fully taxable as unrelated business income
- Exempt from federal income tax as passive investment income (Correct answer)
- Subject to a 21% excise tax
- Taxable only if it exceeds 10% of total revenue
Correct answer: Exempt from federal income tax as passive investment income
Passive investment income such as dividends, interest, and capital gains from an endowment is generally exempt from federal income tax for 501(c)(3) organizations.
Question 3: Which IRS form must a tax-exempt healthcare organization file annually to maintain its exempt status?
- Form 990 (Correct answer)
- Form 1120
- Form 1065
- Form 8829
Correct answer: Form 990
Tax-exempt organizations must file Form 990 (Return of Organization Exempt From Income Tax) annually with the IRS.
Question 4: A nonprofit hospital conducts a health fair open to the public at no charge. This activity is best classified as:
- Unrelated business income
- Program service revenue
- A related exempt activity (Correct answer)
- A lobbying expenditure
Correct answer: A related exempt activity
A free public health fair directly furthers the organization's charitable healthcare mission and is a related exempt activity.
Question 5: What is the primary purpose of IRS Schedule H (Form 990) for tax-exempt hospitals?
- To report lobbying activities
- To disclose community benefit spending and charity care (Correct answer)
- To calculate unrelated business income tax
- To report foreign financial accounts
Correct answer: To disclose community benefit spending and charity care
Schedule H requires tax-exempt hospitals to report community benefit activities, charity care, and financial assistance policies.
Question 6: Which type of healthcare organization is generally NOT eligible for 501(c)(3) tax-exempt status?
- A nonprofit community clinic serving low-income patients
- A for-profit hospital that donates 5% of profits to charity (Correct answer)
- A nonprofit research hospital affiliated with a university
- A faith-based healthcare system serving the public
Correct answer: A for-profit hospital that donates 5% of profits to charity
For-profit hospitals cannot qualify for 501(c)(3) status regardless of charitable donations because they are organized for profit.
Question 7: When a tax-exempt healthcare organization incurs lobbying expenses, those expenses are:
- Always deductible as ordinary business expenses
- Subject to limitations and could trigger excise taxes if excessive (Correct answer)
- Completely prohibited and result in automatic revocation
- Deductible up to 50% of total operating expenses
Correct answer: Subject to limitations and could trigger excise taxes if excessive
Lobbying is permitted for 501(c)(3) organizations as long as it is not a substantial part of activities; excessive lobbying can trigger excise taxes under IRC Section 4911.
HAC Tax-Exempt Organization Accounting 2
Under IRC Section 501(c)(3), which activity could jeopardize a healthcare organization's tax-exempt status?