Assignment: The Government Grants
Why does the government grant tax-exempt status to corporations? The first reason is to relieve the government of the burden of providing the services itself. For instance, states grant healthcare organizations tax-exempt status, and in exchange the organizations provide healthcare services to state residents who cannot afford healthcare services. In the absence of this arrangement, the government presumably would provide these healthcare services itself. The second reason the government grants tax-exempt status to corporations is to reward the corporation for performing services that enhance community values and goals. For instance, governments reward healthcare organizations with tax-exempt status because the organizations provide uncompensated health-promotion programs to the com- munity, which benefit the overall well-being of the community.
vAlue of tAx-exemPt stAtus
Although the potential exposure of a corporation to taxes and fees depends on a number of variables, including accounting practices, Witek, Milligan, and Ryan (1993) made the following general comments regarding valuing tax-exempt status. Federal income tax payments (approximately 34 percent, applied to net income) are generally the largest tax liability. State income tax payments average 6 percent, though not all states have a state income tax. Real estate and personal property taxes are significant tax liabilities; they are based on fair market value for land and appraised value for buildings and major equip- ment. In addition to eliminating tax liabilities, tax-exempt status also exempts the organi- zation from paying most business fees and licenses. One of the most valuable benefits of tax-exempt status is the ability to issue tax-exempt bonds, whose yields are 4 to 5 percent below taxable bond yields.
Therefore, the value of tax-exempt status is the total value of taxes and business licenses and fees exempted and the value of access to tax-exempt bond markets. In 2013, these exemptions amounted to $12 billion for the nation’s approximately 5,000 community, tax-exempt hospitals (Rosenthal 2013).
QuAlIfyIng for tAx-exemPt stAtus
The IRS has developed the primary criteria for a corporation with tax-exempt status, designated under Section 501(c)(3) of the tax code. To qualify for tax-exempt status, corporations must
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