How Tax Reform May Impact Your Medical Practice
The Tax Cuts and Jobs Act (Act) is the most significant tax reform legislation in decades and the new tax rules will affect almost all taxpayers. Below are some provisions which will specifically impact the healthcare industry both on a business and individual level.
The Act provides tax breaks for most businesses. For owners of pass-through entities, there is a new QBI deduction and for owners of a C Corporation, a reduced corporate tax. Other business changes are also noted below.
- Qualified Business Income (QBI) Deduction
- Owners of pass-through entities (partnerships, S corporations and sole proprietorships) will receive a deduction equal to 20% of qualified business income, subject to limitations.
- QBI deduction is not available to certain professionals (doctors, attorneys, accountants, etc.) unless taxable income is below certain thresholds ($315,000 for joint filers and $157,500 for all others).
- Limitations apply based on wages, unadjusted cost of depreciable property and taxpayer’s taxable income.
- Not applicable to C corporations.
Note: We are waiting for final regulations to determine if entities that service the healthcare industry, such as management service organizations (MSOs), will qualify for this new deduction.
- C Corporations
- Reduction in the maximum corporate tax rate to 21%.
- Bonus depreciation deduction of 100% on new or used property acquired and placed in service after 9/27/2017.
- Expansion of Section 179 depreciation to $1,000,000 per year with a phase-out of $2,500,000 of additions.
- Expands definition of qualified real property.
- Business Interest Deduction
- Limitation equal to business interest income plus 30% adjusted taxable income.
- Excess interest disallowed would be carried forward to succeeding tax years.
- Business interest limitation is not applicable to taxpayers with average annual gross receipts below $25 million for preceding 3 years.
- Net Operating Loss
- Limitation on deductions of net operating loss (NOL) to 80% of taxable income for losses occurring in taxable years beginning after December 31, 2017.
- Existing NOL’s are not subject to the limitation.
- Repeal of the 2-year carryback.
- Other Changes
- Entertainment expenses are no longer deductible.
- Most meal expense remains 50% deductible.
- Staff lunches are now only 50% deductible, down from 100%.
- Reduction in income tax rates with a maximum tax rate of 37%
- Personal exemption eliminated
- Increase in the child care credit to $2,000 of which $1,400 would be refundable
- Nontaxable withdrawals can be made from 529 plans for pre-college education costs up to $10,000 per beneficiary.
- Changes to itemized deductions and increases in the standard deduction
- Increase in Alternative Minimum Tax (AMT) exemption
- Alimony – for divorce decrees entered into after 12/31/2018, the alimony is no longer deductible by payee or taxable to recipient.
- Increase in annual gift tax exclusion increased to $15,000 and the lifetime estate exclusion is increased to $11,180,000.
- Effective 1/1/19, repeal of the Affordable Care Act mandate for minimum health insurance coverage.
Tax reform is certainly bringing about change in all industries, and healthcare is no exception. The advisors within Sax’s Healthcare Practice will provide updates and additional guidance to the new rules as they emerge. If you’d like to learn more about the impact of tax reform on your healthcare organization, please reach out to Sax’s Healthcare advisors as (973) 472-6250.
Helena Lynch is a Senior Tax Manager at Sax LLP and a member of the firm’s Healthcare Practice and specializes in individual and business tax planning. Helena can be reached at [email protected].