The Tax Cuts and Jobs Act has some clear winners and losers – and a lot of grey area in between. The healthcare industry is one of those in the grey. The good news is that while hospitals will have several complex tax provisions to consider, it should be – somewhat – more straightforward for physicians.
My Kaufman Rossin colleague, Tax Services Director Evan S. Morgan, CPA, has extensive experience with the taxation of healthcare organizations. He offers the following overview to help physicians understand two major tax changes that could have a significant impact on their practice.
Pass-through income deduction
The new tax legislation includes a big break for owners of certain pass-through entities. Pass-through entities include subchapter S corporations, partnerships and some limited liability companies. Many physician and dental practices are structured as pass-though entities. Owners of certain 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 will benefit 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.
The new tax law disallows this 20% deduction for taxpayers with income above the threshold in “specified service trades or businesses.” This definition includes healthcare professionals. As a result, healthcare professionals with incomes above the phase-out thresholds mentioned above will not be eligible for the 20% pass-through income deduction. This means many higher-earning specialists and two-physician households will likely not qualify. In some cases, higher-earning professionals could even see a net increase in their 2018 taxes resulting from other changes in the new income tax law.
Some owners of pass-through entities may consider changing their business tax structure from pass-through entities to subchapter C corporations as a result. Subchapter C corporations are taxed at a flat 21% under the new tax law, but there is a second level of taxation on qualified dividends paid to shareholders. Before you change your tax structure though you should understand the pros and cons. You should consult with your tax adviser and attorney before making any changes to your business structure or tax election status.
Repeal of the ACA individual mandate
Effective in 2019, the new tax law repeals the Affordable Care Act’s individual mandate, which requires Americans to carry health insurance and imposes a tax penalty on those who do not. Consequently, it’s expected that the rate of uninsured patients will increase significantly for healthcare providers, who will have to find ways to adapt.
The Congressional Budget Office estimated in its November 2017 analysis 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. The CBO report stated “if the individual mandate penalty was eliminated, but the mandate itself was not repealed, the results would be very similar.”
Hospitals may end up bearing the brunt of the financial impact of uncompensated care resulting from the repeal of the individual mandate, but physicians will be affected, too.
Changing reimbursement models have been making it more and more challenging for physicians to run a profitable practice. Add uncompensated care to the equation, and physicians will have some tough decisions to make surrounding payment models for their practice.
The repeal of the ACA individual mandate and the pass-through income deduction will affect the vast majority of physicians and medical 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.