DISCUSSION:
IRS is requesting a calculation of the cost of bad debt using the most accurate system and methodology available to the organization.
The method used must be identified and described. If the hospital uses a cost-to-charge ratio, Worksheet A is provided to make the calculation, but its use is optional.
For example, you may use the cost-to-charge ratio calculated when responding to Part I, Line 7. The IRS is also requesting a description of how the organization
accounts for discounts and payments on patient accounts in determining bad debt expense.
 If the hospital uses a cost accounting method that provides more accurate information, it is recommended that you use that approach for
making the calculation.
While some organizations might use a ratio of cost to charges from the cost report, others may calculate this ratio based on the income
statement (after certain adjustments), and others that have a reliable cost accounting system may develop this ratio from that system. All of these methods are
acceptable and should be described in this section.
In calculating the organization's bad debt expense, be sure to include the organization's proportionate share of bad debt expense for any hospital operated as a
disregarded entity or a joint venture. The filing organization's proportionate share is measured by its capital account percentage listed on Schedule K-1.
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