Year-End Tax Planning and PPP Loan Considerations for Medical Practices

Although it may seem like everything in the healthcare industry has changed this year, your tax planning and strategy will most likely not change much. While the election may introduce uncertainty about whether some tax rates might change during 2021 or beyond, most medical practices will benefit from sticking to their current plans.

However, that doesn’t mean you should forego year-end tax planning. It’s a good idea to speak with your tax advisor before the end of the year, in case there are moves you should be making now.

Key considerations for tax year 2020 planning for medical practices include the following.

Paycheck Protection Program loan considerations

From a tax standpoint, as it stands right now, Paycheck Protection Program (PPP) loans that are forgiven will not count as taxable income. But businesses also cannot deduct any expenses paid with those funds. This is consistent with other IRS rules related to non-taxable income.

The more important year-end planning consideration for PPP loans is forgiveness. While this is not necessarily related to tax planning, if you received a PPP loan, applying for loan forgiveness may be your most important year-end task.

Talk with your tax and financial advisors about the best PPP forgiveness strategy for your business. Some businesses should apply for loan forgiveness as soon as they’ve spent the funds. Others may benefit from waiting for more clarification on forgiveness, either from their lender, from the U.S. Small Business Association (SBA) or from Congress. The SBA maintains a current FAQ on PPP loan forgiveness.

Lease and loan modifications

Did you work with distributors or manufacturers to modify your equipment leases this year to help with cash flow? If you did, discuss these changes with your tax advisor. In many cases, medical and office equipment leases are capital leases, which are treated like loans for tax purposes. That means any relief you received – such as monthly payment reductions, temporary payment suspensions or payment delays – may count as taxable income.

If you renegotiated the lease on your practice space, this may not affect your taxes, but you should still share the details with your tax advisor. In addition, rent modifications may affect your year-end accounting and financial reports.

If you obtained other types of loan relief from lenders, this may also have accounting, financial and tax implications. Seemingly minor changes to covenants, agreed-upon payment delays, term expansions, agreements to set aside or ignore certain covenant provisions – any one of these may affect Generally Accepted Accounting Principles (GAAP) accounting or taxes. This includes traditional loans, lines of credit and other financing.

This area of finance and tax is complicated, so share any related information with your finance, accounting and tax advisors – even if you think it’s not relevant.

Qualified improvement property eligible for 100% bonus depreciation

Most non-structural improvements you make to the interior of your medical practice are considered qualified improvement property (QIP). The CARES Act fixed a Congressional oversight and QIP is now back to being classified as having a 15-year depreciation (rather than a 39-year period). In addition to the shorter cost-recovery period, this also allows new QIP to be eligible for 100% bonus depreciation under provisions introduced in the TCJA.

These changes apply retroactively to property acquired and placed in service after December 31, 2017. This means that, in addition to changing your 2020 taxes, you may want to amend or refile your 2018 and 2019 taxes (if you haven’t already) to claim the extra depreciation you would have been able to claim if these provisions had been in place for those tax years.

CARES Act changes to interest expense deduction

The internal Revenue Code’s Section 163(j) limitation on allowable deductions for business interest expense has been increased. This provides some temporary relief to organizations whose capital strategy relies on borrowing.

Beginning for tax year 2018, the IRS had limited the deductibility of net interest expense that exceeds 30% of adjusted taxable income (ATI). However, this limitation increased to 50% of the taxpayer’s adjusted taxable income for both 2019 and 2020. This provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act also allows the use of 2019’s adjusted taxable income to calculate the limitation for 2020.

For tax year 2021, the 30% limit returns. In addition, through 2021, ATI is computed without accounting for depreciation, amortization or depletion, but beginning in tax year 2022, those items are included. This could decrease your ATI, and thus limit your interest expense deductibility further.

Implications of the 20% qualified business income deduction

While this isn’t new for 2020, it’s still worth revisiting whether you qualify for the qualified business income (QBI). Because many medical practices are structured as pass-through entities, their owners may be able to take advantage of this tax regulation – depending on income level.

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 $163,300 for single filers or $326,600 for those filing jointly. For those with more than $210,700 for individuals and $421,400 for joint filers, the deduction starts to phase out entirely.

If your medical practice is a pass-through entity and saw higher tax rates during 2019 as a result of this tax change, you may want to consider changing your business tax structure from a pass-through to a subchapter C corporation. Consult a tax advisor and discuss the implications before taking any action. Tax planning for year-end 2020 should also include discussion of salaries, timing and distribution of income to maximize tax benefits.

Other 2020 tax-planning considerations

• The excess business losses limitation is temporarily waived for individuals and households. For tax years 2018, 2019 and 2020, the CARES Act repealed limits imposed by the TCJA on deducting aggregate trade or business losses. It also changed how the overall limitation will be calculated starting in 2021. Knowing this will go into effect next year, you may wish to consider using your losses for this year, or retroactively for the two previous years.
• Parking and commuter subsidies continue to be limited. Calculating these deductions is complex, and potentially onerous. You may want to consider ways to minimize the deduction disallowance, as well as your overall parking expenses during the coming year.

Consult your Kaufman Rossin tax and financial advisors before the end of 2020, so you can prepare your medical practice for 2020 taxes and plan for 2021.