Nonprofit Hospitals with Affiliates Show Better Performance when they File Separate Tax Returns

What is it about?

Many large, nonprofit organizations, like hospitals, have private foundations or other supporting affiliates. Sometimes they share costs. The Internal Revenue Service (IRS) allows nonprofits to choose whether to file their tax returns separately, or as a combined group. If a nonprofit hospital files separately, it may not show all of its costs. That’s because they’re housed within the supporting affiliates. This can greatly affect the percentage of money spent on programs directly related to the hospitals charitable mission. We find that nonprofit hospitals that file separate tax reports from their affiliates, show significantly higher program ratios than hospitals filing combined group returns. This makes it difficult for donors, grantors, and rating agencies to know the nonprofit’s real performance and to evaluate which organizations are most worthy. Our research helps these reporting users and regulators, such as the IRS, in their decision-making.

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Why is it important?

Current financial reporting makes it difficult for donors, grantors, and rating agencies to know a nonprofit’s real performance and to evaluate which organizations are most worthy. Our research helps these reporting users and regulators, such as the IRS, in their decision-making.