In Part VI provide the text of the footnote to the organization's financial statements that describes bad debt expense. In addition, describe the costing methodology used in determining the amounts reported on lines 2 and 3, or the rationale for including other bad debt amounts in community benefit.

This question and its instructions would benefit from further clarification by the IRS.

DISCUSSION:There are four separate requests included in line 4.

1. Footnotes
IRS is probing whether bad debt is accounted for on the financial statement. Include the footnote from the organization's financial statements on bad debt expense, if applicable, or the footnotes related to "accounts receivable, "allowance for doubtful accounts," or similar designations. If the hospital's financial statement does not include a footnote regarding bad debt, state that on the form and explain how the audited financial statements account for bad debt, if at all.

2. Methodology for calculating bad debt
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. A description is also requested of how the organization accounts for discounts and payments on patient accounts in determining bad debt expense.

3. Methodology for determining the amount of bad debt likely attributable to charity care
Describe the method used to determine what amount of bad debt is reasonably attributable to patients who likely would qualify under the charity care policy if sufficient information had been available to make a determination of their eligibility.

4. Rationale for including amounts of bad debt as charity care
This is the opportunity to explain to the IRS what amounts of bad debt should be treated as community benefit and the rationale for doing so.

NARRATIVE REQUIRED: Yes. Part VI, line 1. If your financials include a footnote describing bad debt expense. The requested footnote information should be reported.


1. Footnotes
If your financials include a footnote describing bad debt expense. The requested footnote information should be reported.

Here is what the text of a footnote describing bad debt expense might look like:

The Hospital reports accounts receivable for services rendered at net realizable amounts from third-party payers, patients and others. The Hospital provides an allowance for uncollectible accounts based upon a review of outstanding receivables, historical collection information, and existing economic conditions and trends.

2. Costing Methodology:
The ratio of patient care cost to charges is applied to the bad debt attributable to patient accounts to calculate the estimated cost of bad debt attributable to patient accounts that is reported on line 2. Discounts and payments on patient accounts are recorded as an adjustment to revenue, not bad debt expense.

3-4 Rationale for Bad Debt Amount Attributable to Community Benefit:
It is our belief that xxx amount of bad debt should be included as community benefit. As a tax-exempt hospital we must provide necessary services regardless of the patient's ability to pay for the service provided. As a not-for-profit, patient care is provided to all, regardless of ability to pay for that care. Making quality patient care available to all in our community, regardless of their economic means, qualifies bad debts as a community benefit. As part of our community needs assessment, we studied the income characteristics of the uninsured population in our community. As part of this study, we also looked at what portion of uninsured individuals in the hospital's service area would be eligible for the hospital's financial assistance policy. We applied this percentage to our total amount of bad debt for self-pay patients to estimate the portion of self-pay bad debt that was likely attributable to individuals eligible for the hospital's financial assistance policy. We subtracted the actual amount of financial assistance provided from this figure. The remainder is the estimated amount entered on Part III, line 3 and should be counted as community benefit.

To access the instructions for Schedule H click here.

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