Lucy R. Carter is a member and practice leader of the health care industry team at KraftCPAs. She has more than 35 years of experience in providing tax, litigation support, audit, compliance, management consulting, reimbursement and compensation services to health care and professional service providers. Carter can be reached at (615) 346-2497 or through kraftcpas.com.
The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017, and it delivered on its basic premise of reducing tax rates for both corporations and individuals.
But the law also contains multiple provisions and changes to deductions and reporting that will impact almost every home health agency and individual practitioner—with both positive and negative implications.
Below is a summary of the tax code changes that may impact your home health agency. As we wait for clarification on many of these issues, we advise that you proceed with caution and consult your tax advisor before making any changes.
One of the most publicized aspects of the TCJA is the reduction in federal corporate rates to a flat 21 percent. This rate applies to Section C corporations (versus S corporations that are pass-through entities). Prior to the legislative change, the maximum corporate tax rate was 35 percent.
In order to take advantage of the 21 percent rate, the corporation must have taxable income. If the entity is paying out all of its income as salary, the entity has zero income, and thus, could not take advantage of the 21 percent rate. The alternative would be to pay dividends to shareholders in lieu of salary, thus creating net income in the entity. (Dividends paid to shareholders are not deductible for the corporation, but the shareholder is taxed personally on the dividends received at a maximum rate of 20 percent for qualified dividends.) Without considering the impact of state taxes (both corporate and individual) the combined federal rate may total 41 percent (21 percent plus 20 percent).
The 21 percent bracket may provide relief if the corporation has non-deductible expenses. Two areas of non-deductible expenses that resulted from changes to the law are listed below:
- Non-deductible portion of meal expenses (50 percent). The law changed the deduction for meal expenses provided for the benefit of the employer. Under prior law, these types of meals were 100 percent deductible.
- Entertainment expenses (100 percent non-deductible). The cost of entertaining employees, customers and referral sources is no longer deductible under the new law. Basically, if the event in question requires that you buy a ticket, then it is not a deductible expense.
One of the most confusing aspects of the new tax bill is the calculation and application of the 20 percent deduction for qualified business income (QBI). Pass-through entities include sole proprietorships, partnerships, limited liability companies and S corporations. Generally, net income from these entities is “passed through” and reported on the individual returns of the owners.
If the pass-through entity qualifies, the individual receiving the pass-through income may be entitled to a deduction of 20 percent of the net income allocated to the individual. The 20 percent deduction is reported on the individual tax return (limitations may apply).
The first step in determining if the deduction is applicable lies within the definition of QBI. As defined in the TCJA, taxpayers with pass-through income from the specified service businesses listed below are not eligible for the deduction (income from these entities does not qualify as QBI):
- Actuarial science
- Performing arts
- Financial services
- Brokerage services
- Any trade or business where the principal asset of such trade of business is the reputation or skill of one or more of its employees or owners
If the taxable income for a taxpayer reporting income from a specified service business is below $157,000 (for a single filer; or $315,000 for joint returns), the taxpayer may be eligible for a capped deduction based on 50 percent of wages or 25 percent wages plus 2.5 percent of the acquisition cost of depreciable property.
On January 29, 2018, the American Institute of Certified Public Accountants (AICPA) sent a request to the Department of Treasury requesting immediate guidance on 37 provisions in the new law. One of their major areas of concern is how to define what constitutes a “specified service business.” Based on the list above, it would appear that home health agency revenue will not qualify as QBI.
Additionally, the AICPA raised the following questions regarding this issue:
- Must all similar qualified businesses be aggregate for purposes of the calculation, or is each business evaluated separately? And can separate calculations be made for personal service activity versus the non-personal service activity?
- Does real property rental income qualify as QBI?
- Can income from management companies be considered QBI?
At this point, there are more questions than answers regarding this provision of the law. Without any guidance or regulations regarding the application of this provision, it is difficult to calculate the effect—especially as it relates to health care entities. Until more guidance is available, tread cautiously if you are considering making any decisions to revise your entity structure.
Other Relevant Business Provisions
Several other TCJA provisions may impact your agency. These provisions are effective as of January 1, 2018.
- Section 179 expensing of qualified property is expanded to $1,000,000, and the phase out threshold is increased to $2,500,000.
- Like-kind exchanges are repealed except for real property.
- For qualified property placed in service after September 27, 2017, and before January 1, 2023, 100 percent expensing is allowed (bonus depreciation).
- The deduction for business interest is limited to 30 percent of the entity’s adjusted taxable income (businesses with receipts of $25 million or less are exempt from the limit). Adjusted taxable income will generally be taxable income (adjusted for depreciation and amortization) and interest income and expense.
- The alternative minimum tax (AMT) for corporations is repealed.
- Net operating loss carryforwards are limited to 80 percent of taxable income.
- Eligible employers (employers that allow all qualifying full-time employees at least two weeks of annual paid family and medical leave and allow part-time employees a commensurate amount of leave on a prorated basis) can claim a business credit for 12.5 percent of the wages paid to qualifying employees during any period in which such employees are on family and medical leave. This credit only applies if the payment rate under the program is 50 percent of the normal wages paid to the employee and increases by .25 percent for each percentage point the rate of pay exceeds 50 percent (to a max of 25 percent).
- As previously mentioned, no deduction will be allowed for entertainment expenses. The 50 percent deduction for food and beverage is retained.
- The exclusion from gross income for qualified moving expenses is suspended.
Be advised that, at this point, many questions remain. As 2018 progresses, we expect to receive additional clarification on many of the law’s provisions. New tax forms will be created, and others will be revised. It is important to solicit expert advice as you navigate these complex, sizable changes to the tax code—especially before you make any significant tax-planning decisions.