exemption is a fiscal exemption which lessens taxable earnings, or grants absolute
freedom from the obligation of paying taxes. Tax exempt status can have the
influence of complete relief from taxation, reduced tax rates, or tax being
levied on only a portion of items or services. The monetary exemption is mainly
granted (but not limited to) to non-profit and charitable organizations. In the
United States of America, tax exemption generally implies that the benefiting non-profit
organization is exempt from federal income tax under Section 501(c)(3) of the U.S
Internal Revenue Code (Internal Revenue
Service, 2017). That mentioned, this paper will propound comprehensively on
the rationale by governments and tax institutions for granting organizations
tax-exempt status. Particulars such as the benefits and the burdens of tax-exempt
status for hospitals will also be identified.
qualify for 501(c)(3) tax-exempt benefits, a nonprofit and charitable
organization must meet the following conditions set by Congress:
The beneficiary must be
organized and conducted exclusively for religious, educational, scientific, or
other charitable purposes.
Net income may not be
directed to the benefit of any private individual or shareholder.
No substantial part of
its business may be attempting to influence law formulation or enactment.
The charity may not engage
in political campaigns.
purposes and activities may not be illegal or violate fundamental public policy.
main reason for governments giving authorization for tax exempt status to these
charitable organizations is to relieve itself of the load of providing the
services to her citizens. One main example of a clear beneficiary of tax
exemption is hospitals and healthcare centers. The government accords
healthcare institutions tax-exempt status as a trade-off for the healthcare establishment
providing health services to those citizens that cannot meet the expense and
would otherwise depend on the government for their health care services. The organizations
are thus to a certain degree supported by the government, and by extension
tax-payers – and therefore, the citizenry should expect to gain benefits in
return. Another rationale for empowering hospitals with tax exempt benefits is
to recompense the organization for providing healthcare to the needy citizens
without directly charging them.
Other large non-profit and
charitable organizations, that are benefiting from tax exempts, are those that
work out financial engagements to the cities where they are located to help pay
for municipal services like sewerage, schooling, fire and security. Considering
that these establishments offer services to the citizens on behalf of the
government, they also benefit directly from federal income tax exemption under
Section 501(c)(3) of the U.S Internal Revenue Code (IRS, 2017).
Hospitals sit at the helm of the
main beneficiaries of tax exemption, considering their big role in offering
healthcare services as a public charitable organization (Grants Northwest, 2018). The benefits of tax-exempt status for
hospitals includes the practice serving as a means of encouraging the development
of more charity in healthcare, offering timely and quality services to the
people, owing to the existence of contractual agreement with the government.
Nonprofit hospitals benefiting from tax exemption are also more efficient, as
juxtaposed with their for-profit counterparts, owing to the organizational
arrangement. Another advantage is that donations from individuals and foundations
are deductible from the donor’s federal and state income taxes as charitable
contributions, with fewer restrictions than donations to private foundations. (IRS, 2017).
The tax exemption does not always
bring good yields to the beneficiaries, as it has some burdens too. Nonprofit hospitals
lack access to equity capital as they are not legally allowed to issue ownership shares that would
potentially give their holders a right to share in net income and the running
of the hospital. They also suffer from inconsistency of charitable exemptions
and deductions; thus their operations are rendered unsteady.
In conclusion, the tax exemption is hereby
proven to be a subsidy for good works to the citizenry, and should not be
approached simplistically by either the policy makers or the nonprofit
foundations. Viewed from the approach of the good generated to the country, it
is a positive outcome of capital formulation in the nonprofit sector, and requires
sound and rationalized policy framework to ensure continued provision of basic
services such as health care, education, research, and aid to the poor-that charitable
foundations often provide.