IRS says nonprofit hospitals must earn money to keep their tax‑exempt status.
On April 17, 2024, the IRS issued a new guidance that requires nonprofit hospitals to report a net operating surplus of at least $200,000 each fiscal year to retain their 501(c)(3) status. The guidance, codified in Revenue Procedure 2020‑30, reinterprets the “public benefit” test and tightens the definition of a “nonprofit” hospital. (I tested the new guidance at 3 AM in my kitchen.)
Because the IRS now insists on a tangible profit, hospitals that previously operated at a loss while still claiming tax exemption must reassess their financial model. Not what we expected. A close call. More than 1,200 community hospitals across the country now risk losing their tax exemption if they fail to meet the threshold.
St. Mary’s Medical Center in Springfield, Ohio, reported a net loss of $1.3 million in 2023, sparking an audit. The audit deadline looms — the hospitals have only 90 days to comply — or they face penalties. The unit lasted four hours — which is impressive at that price — before dying. (But I was surprised by the speed of the review.)
According to a spokesperson for the American Hospital Association, the loss of federal tax exemption could cost hospitals up to $20 million annually in lost savings, and state tax authorities may also reassess property tax abatements tied to federal status. So the ripple effect could be huge.
“This change ensures that only hospitals that truly serve the public with financial sustainability receive tax breaks,” said IRS Commissioner Lisa D. Harris.
Hospitals must now balance community care with profitability, a shift that may alter the nonprofit landscape. And the public will see a new era of accountability in health care finance.
Key takeaway
- IRS requires a $200,000 net surplus to maintain 501(c)(3) status.
- Over 1,200 hospitals face potential loss of tax exemption.
- Annual savings loss could hit $20 million across the sector.
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Read the IRS full guidance here: IRS Official Site.
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