Physician Practices: Failing to Plan for 2019 Taxes Could Cost You

This blog post was previously published on November 14, 2018. It was updated on November 14, 2019.

The Tax Cuts and Jobs Act’s provisions related to the healthcare industry mean physicians need to plan more for the potential short-term and long-term financial impact of qualified business income (QBI) that could impact their 2019 tax bill.

Do you qualify for the 20% QBI deduction?

Many physician practices are structured as pass-through entities, which may enable their owners to qualify for the 20% tax deduction for QBI – depending on income level.

Pass-through entities include subchapter S corporations, partnerships and some limited liability companies, but the benefits are severely limited for “specified service trades and businesses” (SSTB), including physicians. Owners of qualifying pass-through entities will receive a 20% deduction on “qualified business income” (QBI), effectively reducing their maximum effective tax rate. But this deduction is limited for medical professionals who make over $160,700 for single filers ($163,300 in 2020) or $321,600 for those filing jointly ($326,600 for 2020).  For those with more than $210,700 for individuals and $421,400 for joint filers, the deduction starts to phase out.

Healthcare professionals with incomes above these phase-out thresholds will not be eligible for the 20% pass-through income deduction. In some cases, higher-earning physicians may have seen a net increase in their 2018 taxes resulting from other changes in the income tax law.

As a result of this tax law change, some owners of pass-through entities may consider changing their business tax structure from a pass-through to a subchapter C corporation. Consult a tax advisor and review the implications before taking any action. Tax planning for year-end 2019 should also include discussion of salaries, timing and distribution of income.

Net interest expense deduction rules are changing; plan ahead

Healthcare organizations whose capital strategy relies on borrowing should consider other options.

As of 2018, for net interest expense that exceeds 30% of adjusted taxable income (ATI), deductibility has been limited. Through 2021, ATI is computed without accounting for depreciation, amortization or depletion, but beginning in 2022 those items are included. This could decrease your ATI, and thus limit your interest expense deductibility further.

Start thinking about your strategy now – 2021 will be here before you know it.

Parking and commuter subsidies are limited and it’s complex

Deductions related to employer-provided parking for employees are limited, even in cases where the company owns the parking lot. The methods for determining nondeductible parking expenses are complex, and potentially onerous; if you didn’t go through this process for your 2018 taxes, be prepared to work with your tax professional on it this year. You may want to consider ways to minimize the deduction disallowance, as well as your overall parking expenses during 2020.

Contact your Kaufman Rossin tax advisor to learn more about these and other provisions within the tax laws that could affect you or your practice.