| (III) The fair market value generally can be ascertained
by competent appraisal. If no appraisal is made, the cost of repairs
to the damaged property is acceptable as evidence of the loss of value
if the repairs restore the property to its condition immediately before
the casualty and, as a result of the repairs, the value of the property
has not been increased. The amount of the allowable loss is then deducted
from the cost basis of the asset before the casualty, to arrive at
the adjusted cost basis of the asset. Any insurance proceeds received
or recoverable must be deducted from the amount of the casualty loss
to determine the gain or the loss.
(IV) Actual costs incurred in the restoration of an
asset are added to the adjusted cost basis of the asset to arrive
at the revised cost of the restored asset and capitalized over the
remaining useful life of the restored asset.
(V) When the repairs materially improve or add to the
value or utility of the property or appreciably prolong its useful
life, the repairs must be depreciated over the estimated life of the
(VI) When the contracted provider maintains a self-insurance
reserve fund, the amount of the casualty loss recognized as an allowable
cost is limited to the lesser of the decrease in fair market value,
as adjusted, of the damaged or destroyed asset or the amount of cash,
and/or investments, comprising the accumulated balance of the self-insurance
(VII) When an asset is sold before the end of its useful
life and a gain is realized (the sales price is greater than the remaining
allowable depreciation), no additional depreciation or expense is
(11) Interest expense. Reasonable and necessary interest
on current and capital indebtedness is an allowable cost. In the case
of allowable interest incurred on a loan, in order to be determined
necessary, the loan must have been made to satisfy a financial need
for a purpose reasonably related to contracted client care.
(A) For cost-reporting purposes, allowable interest
expenses are limited to that net portion of interest accrued which
has not been reduced or offset by interest income. Refer to §355.104(5)
of this title (relating to Revenues). To be allowable, the following
requirements must be met:
(i) the loan must be supported by evidence in writing
of an agreement that funds were borrowed and that payment of interest
and repayment of the funds are required and systematically made. Refer
to §355.105(b)(2)(B)(ii) of this title;
(ii) the loan must be made in the name of the contracted
provider entity as maker or comaker of the note; and
(iii) the proceeds of the note or loan must be used
for allowable costs.
(B) Interest expense on a demand note is allowable
if the loan is the result of an arm's-length transaction.
(C) Where the lender is a related party, allowable
interest is limited to the prevailing national average prime interest
rate in effect at the time at which the loan contract was finalized,
as reported by the United States Department of Commerce, Bureau of
Economic Analysis, in the Survey of Current Business.
(D) Interest costs incurred during the period of construction
or enlarging of a building must be capitalized as part of the cost
of the building.
(E) Reasonable finance charges and service charges,
together with interest on indebtedness, are allowable costs.
(F) Other fees associated with obtaining an allowable
loan, such as broker's fees to solicit financing, lender's fees, attorney's
fees, and due diligence fees, are allowable costs.
(G) Interest expenses on funds borrowed for purposes
of investing in operations other than contracted services, on loans
pertaining to unallowable items, and on borrowed funds creating excess
working capital are unallowable costs.
(12) Tax expense and credits.
(A) Generally, taxes assessed against the contracted
provider, in accordance with the levying enactments of Texas and lower
levels of government and for which the contracted provider is liable
for payment, are allowable costs. Tax expense based on fines and penalties
are unallowable costs.
(B) Employment-related taxes such as Federal Insurance
Contribution Act (FICA), Workers' Compensation and Unemployment Compensation,
are allowable costs. Refer to paragraph (1) and (1)(A) of this subsection.
(C) Franchise taxes are allowable costs. A franchise
tax is a periodic assessment, as defined by the Texas Comptroller
of Public Accounts and paid to the Texas State Treasurer, levied on
the operation of a business in the State of Texas. Franchise taxes
do not refer to franchise fees, which are the costs associated with
a company's granting the right to sell its products or services in
a specified territory.
(D) Unallowable taxes include:
(i) federal income taxes and excess profit or surplus
revenue based taxes, including any interest or penalties paid thereon.
However, fees for preparation of business tax reports and business
returns required by law are allowable;
(ii) state or local income and excess profit or surplus
revenue based taxes. However, fees for preparation of business tax
reports and/or business returns are allowable;
(iii) taxes in connection with financing, refinancing,
or refunding operations, such as taxes on the issuance of bonds, property
transfers, issuance or transfer of stocks. Generally, these costs
are either amortized over the life of the securities or depreciated
over the life of the asset. They are, however, unallowable as tax
(iv) taxes from which exemptions are available to the
(v) special assessments on land which represent capital
improvements should be capitalized and depreciated over their estimated
useful lives and are not allowable as tax expenses;
(vi) taxes, such as sales taxes, levied against the
client and collected and remitted by the contracted provider; and
(vii) self-employment taxes.
(13) Insurance expense. This section covers the following
types of insurance: property damage and destruction; fire and casualty;
malpractice and comprehensive general liability; errors and omissions
insurance covering boards of directors; theft insurance (fidelity
bonds and burglary insurance); workers' compensation; transportation
equipment insurance; life insurance for owners, officers, and key
employees; health; disability; and unemployment compensation.
(A) Purchased and commercial insurance. The reasonable
costs of insurance purchased from a commercial carrier or a nonprofit
service corporation are allowable if resulting from an arm's-length
transaction. The commercial carrier or nonprofit service corporation
must meet the standards as set by the Texas Department of Insurance.
Costs of insurance purchased from a limited purpose insurer are allowable
if they are not in excess of the cost of available comparable commercial
insurance premiums and meet the reasonable cost provisions. If comparable
insurance premiums are not available, the limited purpose insurer
or captive insurance company must obtain an evaluation of the adequacy
and reasonableness of its insurance premium by an independent actuary,
commercial insurance company, or broker.
(B) Self-insurance. Self-insurance is a means whereby
a contracted provider undertakes the risk to protect itself against
anticipated liabilities by providing funds in an amount equivalent
to liquidate those liabilities. Self-insurance can also be described
as being uninsured. To qualify as an allowable self-insurance plan,
a contracted provider must enter into an agreement with an unrelated
party that does not provide for the shifting of risk to the unrelated
party designed to provide only administrative services to liquidate
those liabilities and manage risks. Self-insurance costs for contracted
providers who have received certificates of authority to self-insure
from the Texas Workers' Compensation Commission are allowable costs.
Self-insurance costs in excess of costs for similar, comparable coverage
by purchased and/or commercial insurance premiums are subject to a
cost ceiling in accordance with subparagraph (E)(i) - (iv) of this
paragraph. Documentation substantiating the cost of comparable coverage
by purchased and/or commercial insurance premiums must be obtained
and maintained as specified in §355.105(b)(2)(B)(ix) of this
(i) Costs related to self-insurance are allowable on
a claims-paid basis. Contributions to the self-insurance fund or reserve
which do not represent payments based on current liabilities are not
considered actual incurred expenses and are not allowable costs. For
cost-reporting purposes, self-insurance costs are reported on a cash
basis. For cost-reporting purposes, compensation paid to employees
who have been injured on the job is allowable and should be reported
as compensation according to the type of compensation expense incurred
in accordance with paragraphs (1) and (2) of this subsection.
(ii) For cost-reporting purposes, allowable employee-related
paid claims, such as health insurance and workers' compensation costs,
may either be directly charged to the business component in which
the employee worked or may be allocated across all business components
as an administrative expense. The method chosen to report these costs
must remain consistent each year. Changes in the method for reporting
those costs must be approved in accordance with §355.102(j) of
(C) Determining self-insurance or purchased commercial
insurance. There may be situations in which there is a fine line between
self-insurance and purchased or commercial insurance. This is particularly
true of "cost-plus" type arrangements. As long as there is at least
some shifting of risk to the unrelated party, even if limited to situations
such as provider bankruptcy or employee termination, the arrangement
will not be considered self-insurance. Contributions to a special
risk management fund or pool that is operated by a third party that
assumes some of the risk and that has an annual actuarial review are
allowable costs. Examples of such special risk management funds and
pools include the Texas Council Risk Management Fund and the Texas
Municipal League Intergovernmental Risk Pool.
(D) Reporting of insurance costs. All allowable insurance
premium costs should be reported on cost reports, with amounts accrued
for premiums, modifiers, and surcharges during the cost-reporting
period being adjusted by any refunds and discounts actually received
or settlements paid during the same cost-reporting period.
(E) Losses in excess of coverage. When a contracted
provider is not fully insured by a purchased commercial insurance
policy, i.e., the provider's coverage includes coinsurance provisions
and/or deductibles, the amount of allowable insurance costs reported
for each cost-reporting period is subject to a cost ceiling.
(i) The cost ceiling for employee-related insurance,
such as health insurance, or workers' compensation coverage, is either
the amount that would have been incurred had the provider purchased
full coverage for its entire business entity through a commercial
insurance policy or an amount equal to 10% of the payroll for employees
eligible for such coverage. This cost ceiling is applied separately
to employee-related insurance and to workers' compensation coverage.
(ii) The cost ceiling for non-employee-related insurance,
such as malpractice insurance, comprehensive general liability insurance,
or property insurance, is the amount that would have been incurred
had the provider purchased full coverage for its entire business entity
through a commercial insurance policy.
(iii) If, during a cost-reporting period, a provider
incurs allowable paid claims in excess of the applicable cost ceiling,
the provider reports on its current cost report allowable insurance
costs up to the amount of the applicable cost ceiling, with the allowable
costs in excess of the applicable cost ceiling being carried forward
to future cost-reporting periods. When, during a future cost-reporting
period, a provider incurs allowable insurance costs in an amount less
than the applicable cost ceiling, the provider reports on its cost
report the allowable insurance costs (paid claims) incurred during
that cost-reporting period plus any allowable carry forward amount
up to the amount of the applicable cost ceiling, with any excess carry
forward being carried forward to future cost reporting periods.
(iv) Documentation requirements are stated in §355.105(b)(2)(B)(ix)
of this title.
(F) Absence of coverage. Where a contracted provider,
other than a governmental provider, has no insurance protection, the
reporting of the provider's paid claims must follow the guidelines
stated in subparagraph (E) of this paragraph. For governmental providers,
allowable paid claims for cost-reporting purposes include all claims
paid during the cost-reporting period only if the provider demonstrates
that it has a claims management and risk management program.
(G) Life insurance costs.
(i) In general, premiums related to insurance on the
lives of owners, officers, and key employees where the contracted
provider is a direct or indirect beneficiary are unallowable costs.
(ii) Life insurance costs are allowable if:
(I) a contracted provider is required by a lending
institution or other lender to purchase such insurance to guarantee
the outstanding loan balance;
(II) the lending institution or other lender must be
designated as the beneficiary of the insurance policy; and