Nonprofit Property Tax Exemption Audits
Hospitals do not understand what is covered under the nonprofit property tax exemption.
Hospitals are typically the most complex nonprofit property tax exemption. The exemption includes:
- Property owned and leased by nonprofit hospitals
- Property leased to a public hospital district
The property must be used for qualified hospital purposes.
Differences in definitions for exempt hospital property cause confusion.
Definitions used to determine eligibility for property tax exemptions frequently differ from those used by other government agencies or within the hospital industry.
For nonprofit exemptions, a "hospital" is generally defined as property used for 24-hour inpatient care, ambulatory surgery centers, emergency rooms, and property used for the necessary administration of inpatient care. (See definition contained in RCW 84.36.040 and WAC 458-16-270; Board of Tax Appeals decisions; and Superior Court Decisions.) For more information, contact our Property Tax Division at (360) 570-5870
Applications for exemption or changes in use are not made timely.
To claim an exemption, hospitals must file an application with the Department by March 31 or within 60 days of acquisition or conversion to an exempt use.
Changes in the use of exempt property must be reported to the Department's Property Tax Division prior to each assessment year.
Applications may be filed up to three years late but may take longer to process. Historical records may be difficult to locate, and historical uses of property are difficult for the Department to confirm.
Hospital property usage is not properly documented.
Keep an accurate and current description of all programs and usage of hospital property.
Changes in property use must be reported to the Department.
Use of hospital facilities for non-hospital use does not generally qualify for property tax exemption.
Using hospital facilities for non-hospital use may affect the exempt status, as noted by the following examples. To avoid the problems, limit (to the extent possible) commercial, physician, retail, and other external uses of exempt hospital property.
Using hospital facilities for outpatient clinic care does not qualify as a hospital use.
Exemptions are available for:
- Charitable clinics providing free or low-cost care (RCW 84.36.030)
- Nonprofit cancer clinics (RCW 84.36.046)
Private physician practices
Using hospital facilities for private physician practices does not qualify as a hospital use.
Retail pharmacies serving clinic patients and the general public do not qualify for exemption.
- Pharmacies limited only to inpatient service are generally exempt
- Limiting retail pharmacy use maximizes your exemption
Hospital labs that only serve qualified patients are typically exempt.
Labs that provide services to physician offices and clinics do not qualify for exemption.
Commercial laboratories contracting with hospitals also do not qualify for exemption.
Lease agreements do not pass on an exemption to the hospital.
Hospitals must receive the benefit of the property tax exemption.
If a lease requires the hospital to pay property taxes, the lessor must pass any reduction or exemption of property taxes on to the hospital. A statement from the lessor stating that the benefits of an exemption will be passed to the hospital helps to resolve any questions that may arise.
The Department must confirm property is used for exempt activities. Commonly, we review records to confirm inpatient care, administrative functions, and exclusive use of property for qualified activities. Current and accurate records in the areas noted below will help ensure an accurate determination of your exemption.
Floor plans and site plans
Accurate and current floor plans are essential in determining how much of a building and the associated land qualify for exemption. We commonly calculate how many square feet of property are exempt.
Building use and changes in use
An accurate and current description of all programs is necessary to determine how much property is exempt. Changes in the use of property must be reported to the Department.
Charity care records are not typically necessary to administer the exemption for hospitals, but are important for determining exemptions for charitable clinics and social service programs, which are exempted under RCW 84.36.030. Sliding fee scales for services are also commonly requested.
Mixed use of property
To qualify for exemption, hospital property must be exclusively used for qualified activities.
When property is used for both qualifying and disqualifying uses, the exemption must be denied.
To avoid problems, limit mixed uses of exempt hospital property and maintain accurate floor plans and descriptions of property use.
Physically separating exempt uses and disqualifying uses makes it possible for the Department to grant an exemption.
We can segregate property that partially qualifies for exemption, as long as the exempt areas are exclusively used by the hospital.
Hospital depreciation schedules may be inaccurate or incomplete.
Depreciation schedules should include detailed descriptions, including:
- Description of assets
- Date of purchase
- Cost (including freight and installation)
- Itemized sales tax, if possible
- Location of the asset
- A list of vehicles and their use
- Trade-in allowances and their amounts
- Details for grouped or generic assets such as miscellaneous equipment
Depreciation schedules also must include a description of assets fully depreciated but still in use.
Retired assets no longer in existence at the location being audited should be removed from the depreciation schedule to avoid over assessment.
Listings of personal property may be incomplete or inaccurate.
Personal property listings should include detailed descriptions of the property, including:
- Ensuring leased personal property is listed as leased, instead of listed as owned by the hospital. Equipment that was previously leased but currently owned must also be listed.
- Details for grouped or generic assets, such as miscellaneous equipment.
- Listing homemade or self-manufactured assets.
- Listing vehicles and their use.
Exempt nonprofit hospitals may not be required to file an annual affidavit with their county assessor. Check with your county assessor to determine your reporting requirements.
Equipment is not listed on the depreciation schedule.
A detailed listing and description of equipment that is not listed on the depreciation schedule should be provided. The list should also contain a description, the date of purchase, and cost. Some examples include:
- Leased equipment with the name of the leasing company
- Expensed equipment
- "Homemade" or "self-manufactured" items
Fully depreciated assets (Note if an asset is no longer in use and the reason for it.)
"Fixed assets" balances do not match the depreciation schedule amounts.
Provide an explanation of why balance sheets do not match the depreciation schedule amounts.
Leasehold improvements are not properly documented on the depreciation schedule.
All leasehold improvements must be clearly described and itemized. Necessary details include the year of acquisition and the cost, including freight and installation.
Amounts spent on supplies are not properly documented on the schedule.
Amounts spent on consumable supplies for the year, such as office supplies, cleaning supplies, etc., must be clearly detailed, and copies of receipts or invoices preserved.
Tools and spare parts are not noted on the depreciation schedule.
Provide a detailed list of all tools and spare parts not listed on the depreciation schedule or expensed listing.