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Hospital Contributions Toward Electronic Health Record Costs

 

Posted on August 1, 2011 by Sean R. O'Connell, CPA/PFS

 

This year, some of our firm's health care clients have entered into transactions that they had never previously had to account for on their books. "Donation Agreements" with hospitals are providing funds toward the cost of practices' Electronic Health Record (EHR) systems. Denise Short and I have discussed the accounting and tax treatment of these payments.

 

Accounting treatment

Here's the journal entry for the books of the medical practice: 

Account	Debit	Credit
Cash	$245,000
*Non-owner equity		$245,000
To record nonshareholder EHR contribution from not-for-profit hospital

 *Contributions to a corporation by unrelated third parties to induce a particular course of action may be treated as contributions to capital if the benefit to the contributing nonshareholder is sufficiently indirect and intangible.

Government or civic group subsidies are considered contributions to capital by nonshareholders if the following criteria are met::

• The contribution becomes a permanent part of the transferee’s working capital structure;
• The contribution is not compensation for goods or services provided to the transferor;
• The contribution is bargained for;
• The contribution foreseeably results in benefit in an amount commensurate with its value; and
• The asset contributed ordinarily, if not always, is employed or contributed to the production of additional income

 

Income tax treatment

The donation is excluded from income under Internal Revenue Code Section 118. Reg. 1.118-1 provides that the gross income of a corporation does not include contributions to capital that are made by persons who are not shareholders, including governmental units. The basis of the software is to be reduced by the payments of the non-owner.

If IRS were to challenge the treatment of donated software as capital contribution and required inclusion in income, the taxpayer could make and election to expense the software on an amended return under Section 179 (up to $500,000) on its 2011 tax return, if filed within the three-year statute of limitations. Beginning in 2012, however, this election is scheduled to be reduced to $125,000. And, beginning in 2012, such an election would need to be made either:

• On the original return, or
• On an amended return filed by the due date of the original return (including extensions)

 

Medicare and Medicaid incentive payments

In an upcoming PBGH Healthcare Blog post, we will discuss the accounting and tax treatment for Medicare and Medicaid incentive payments. As most of you are aware, once a practice has been able to implement a certified EHR system and successfully demonstrate "meaningful use", they are eligible to receive incentive payments of up to $44,000 per eligible professional (EP) over a 5 year period through Medicare, and up to $63,750 per EP through Medicaid over 6 years.

 

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