The Tax Cuts and Jobs Act includes several tax provisions related to the healthcare industry. In particular, two major tax changes will directly affect physician practices: the pass-through income deduction and the repeal of the ACA individual mandate. Physicians should consider the potential short-term and long-term financial impact of these changes on their practices.
Many physician practices are structured as pass-through entities, which may enable their owners to qualify for a new tax deduction – depending on income level.
The Tax Cuts and Jobs Act includes a big break for owners of certain pass-through entities (e.g., subchapter S corporations, partnerships, some limited liability companies). Owners of eligible pass-through entities will receive a 20% deduction on “qualified business income,” effectively reducing their maximum effective tax rate from 39.6% in 2017 to 29.6% in 2018.
This change benefits physicians and healthcare professionals who annually earn $207,500 or less for a single filer or $415,000 or less for a married couple filing jointly. The deduction begins to phase out gradually when taxable income exceeds $157,500 for a single filer or $315,000 for those who are married filing jointly.
Healthcare professionals with incomes above the phase-out thresholds mentioned above will not be eligible for the 20% pass-through income deduction. In some cases, higher-earning physicians could even see a net increase in their 2018 taxes resulting from other changes in the new 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. However, you should consult with your tax adviser and attorney before making any changes to your business structure or tax election status. There are pros and cons to consider.
Tax change #2: Repeal of the ACA individual mandate
The individual mandate created by the Affordable Care Act will be going away as of 2019. Americans will no longer be required to carry health insurance or be subjected to a tax penalty for not complying. This single change is expected to impact the healthcare industry for years to come.
The Congressional Budget Office estimated in its that the repeal of the individual mandate would increase the number of uninsured Americans by 4 million in 2019, with that number growing to 13 million by 2027. Healthcare providers will have to find ways to adapt.
While hospitals may end up bearing the brunt of the financial impact of uncompensated care resulting from the repeal of the individual mandate, physician practices will also be affected.
Healthcare industry trends such as changing reimbursement models have been making it more and more challenging for physicians to run a profitable practice. With uncompensated care added to the equation, physician practices will have to make some tough decisions regarding payment models.
Other tax changes
The repeal of the ACA individual mandate and the pass-through income deduction will affect the vast majority of physician practices, but those aren’t the only tax changes to be aware of. Contact your tax adviser to learn more about these and other provisions within the new tax law that could affect you or your practice.