HAC Tax-Exempt Organization Accounting 3 — Questions and Answers
Question 1: A tax-exempt hospital leases office space to a for-profit physician group at fair market value. The rental income is:
- Always subject to unrelated business income tax
- Exempt from UBIT as passive rental income (Correct answer)
- Taxable because it benefits a private party
- Subject to UBIT only if it exceeds $1,000
Correct answer: Exempt from UBIT as passive rental income
Passive rental income from real property is generally excluded from unrelated business taxable income under IRC Section 512(b)(3).
Question 2: Under the intermediate sanctions rules (IRC Section 4958), an 'excess benefit transaction' occurs when:
- A disqualified person receives compensation exceeding fair market value (Correct answer)
- A 501(c)(3) earns more revenue than its expenses
- The organization invests in securities beyond its endowment policy
- A board member votes on a transaction in which they have no interest
Correct answer: A disqualified person receives compensation exceeding fair market value
An excess benefit transaction occurs when a tax-exempt organization provides an economic benefit to a disqualified person that exceeds the value of services provided.
Question 3: Which of the following is considered a 'disqualified person' under IRC Section 4958 intermediate sanctions rules?
- A part-time hospital volunteer
- The chief executive officer of the organization (Correct answer)
- A patient receiving charity care
- An unrelated third-party vendor
Correct answer: The chief executive officer of the organization
Disqualified persons include those in a position to exercise substantial influence over the organization's affairs, such as the CEO.
Question 4: A healthcare nonprofit's endowment is invested in publicly traded stocks. The unrealized gains at year-end should be reported on the Statement of Financial Position as:
- Not reported until realized
- A liability for deferred taxes
- An increase in net assets (Correct answer)
- Revenue in the current period
Correct answer: An increase in net assets
Under ASC 958, unrealized gains on investments are reported as changes in net assets in the period they occur, increasing total net assets on the balance sheet.
Question 5: A tax-exempt hospital provides $2 million in charity care. For Form 990 Schedule H reporting, charity care is measured at:
- Charges (list prices) forgiven
- Cost of providing the care (Correct answer)
- Medicare reimbursement rates
- Medicaid reimbursement rates
Correct answer: Cost of providing the care
For Schedule H community benefit reporting, charity care is measured at the cost of providing care, not the forgiven charges.
Question 6: Which statement correctly describes the public support test for a 501(c)(3) public charity healthcare organization?
- It must derive at least 33.3% of support from the general public or government sources (Correct answer)
- It must generate 100% of income from patient services
- It must have a board composed entirely of public members
- It must spend 5% of assets annually on charitable activities
Correct answer: It must derive at least 33.3% of support from the general public or government sources
Under IRC Section 509(a)(1) and (2), public charities must meet a public support test, generally requiring at least one-third of total support from public or governmental sources.
Question 7: A nonprofit healthcare system acquires a for-profit hospital. The acquisition creates goodwill of $10 million. Under GAAP, this goodwill is:
- Amortized over 40 years
- Tested annually for impairment and not amortized (Correct answer)
- Immediately expensed as a nonoperating cost
- Deductible for federal income tax purposes
Correct answer: Tested annually for impairment and not amortized
Under ASC 350, goodwill for public companies and nonprofits following ASC 958 is tested annually for impairment rather than amortized (unless the private company alternative is elected).
HAC Tax-Exempt Organization Accounting 3
A tax-exempt hospital leases office space to a for-profit physician group at fair market value.
The rental income is: