The Tax Cuts and Jobs Act (TCJA) passed last December includes a broad range of tax changes impacting both individuals and business entities. In this article, we will address some of the changes that directly impact healthcare companies and physician practices.
One of the most complex and confusing changes in the new tax law is the individual deduction related to pass-through income (Section 199A deduction). We will address the implication of this change and its impact on healthcare companies in a subsequent article in the January 2019 issue of Nashville Medical News.
A key component of the Accountable Care Act (ACA) was the individual mandate to acquire and/or provide health insurance coverage. TCJA effectively eliminates the mandate through elimination of the individual responsibility payment effective Jan. 1, 2019.
The goal of the mandate was to provide an offset to the unfavorable economics of expanded higher cost healthcare by requiring and bringing in a younger, healthier population to health plans. The downside of this change is an anticipated 13 million fewer Americans being insured by 2027 (CBO projections). The projected reduction is due to anticipated higher premiums (10 percent above what was projected prior to the new tax law) and the non-acquisition of health insurance by the young and healthy.
On the plus side, the CBO projects $340 billion dollars in savings over 10 years through the repeal of subsidies.
The bottom line for healthcare practices is that self-pay and patient-responsible balances are likely to increase. Maintaining cash flow will require establishing consistent processes and monitoring collection of these balances.
Corporate Tax Rate & Alternative Minimum Tax (AMT)
The corporate tax rate for C-Corporations is reduced to 21 percent for years beginning after Dec. 31, 2017 (previously a flat rate of 35 percent for personal service corporations). The rate reduction has caused some entities to question whether they should convert their pass-through entities to a C-Corporation to take advantage of the low rate.
Keep in mind that to take advantage of the lower corporate rate, the corporation must retain taxable income, which may not meet the goals of a practice or healthcare entity. For C-Corporations, the 21 percent rate will be beneficial to cushion the tax implications of debt repayment and non-deductible expenses.
The TCJA contains several new provisions that benefit the deduction of capital assets.
- 100 percent expensing (bonus) for certain business assets, which was effective Sept. 27, 2017. Used property qualifies under TCJA (under the old rules, only new property qualified for bonus depreciation). This change phases out between 2023 and 2026 with a 20 percent decrease annually. The downside for Tennessee taxpayers is that bonus depreciation is not recognized at the state level.
- Section 179 expensing of capital assets has been increased from $510,000 to $1 million. Likewise, the threshold for phase out has been increased from $2 million to $2.5 million.
- Depreciation for luxury autos (i.e. passenger auto) has been increased for automobiles placed in service after Dec. 31, 2017. For example, first-year depreciation under prior law was capped at $3,160. The deduction under TCJA is capped at $10,000 ($18,000 if bonus depreciation is claimed).
- Qualified improvement property (QIP) is defined as an interior improvement to an existing non-residential building (exceptions are elevators, enlargement, and structural changes). QIP will qualify for Section 179 expense, and should qualify for 15-year depreciation and bonus depreciation (technical correction pending).
Business Interest Limitation
Under prior law, interest expense has generally been allowed as a deduction in the year in which it was paid or accrued. TCJA limits the deduction for interest expense on business returns to interest income plus 30 percent of:
Net taxable income + Depreciation and amortization + Interest expense
If your annual gross receipts are below $25 million, you will be exempt from this limitation and any disallowed interest can be carried forward indefinitely.
Under TCJA, no deduction is allowed for:
- Entertainment, amusement or recreation expenses;
- Membership dues for a club organized for pleasure, recreation, or other social purposes (i.e. country clubs, golf and athletic clubs, airline clubs, hotel clubs, dining clubs); and
- Facilities used in connection with any of the above.
Exceptions to the above include:
- Recreational expenses for employees;
- Employee, stockholder, and business meetings;
- Meetings of business leagues, chambers of commerce, boards of trade, etc.;
- Professional organizations (TMA, NAM, NMGMA); and
- Civic clubs of public service organizations (Rotary, Kiwanis, etc.).
Business Meals Expense
Under TCJA, the 50 percent limit for the deduction of food and beverage is generally retained. However, meals provided on premises for the convenience of the employer (i.e. meals provided to physicians to facilitate office coverage of patients) are no longer 100 percent deductible. The 50 percent limit will apply until 2025. After that, on-site meals will be non-deductible.
Two examples of meals that are 100 percent deductible are:
- Meal expense treated as compensation, and
- Expenses for recreation, social, or similar activities primarily for the benefit of employees (i.e. holiday parties).
Limitation on Deducting Business Losses
TCJA limits the amount that can be deducted by a member in an LLC or a shareholder in an S-corporation to $500,000 for married filing jointly and $250,000 for all other taxpayers. The deduction threshold limits the losses that can be used by the taxpayer to offset wages or other sources of income. Any amount above the threshold can be carried forward to future years, subject to the TCJA’s 80 percent limitation on net operating loss carried forward.
Article originally published in the Nashville Medical News.