The health care industry is rushing to understand how the newly enacted tax reform law could affect organizations. The following are the top ten provisions in tax reform, commonly referred to as the Tax Cuts and Jobs Act (TCJA), that could impact hospitals and health systems.
1. Excise Tax on Certain Compensation
Tax-exempt entities are now subject to a 21% excise tax on compensation that exceeds $1 million if it’s paid to any of their five highest-paid employees in a tax year. The law excludes compensation to licensed medical professionals when services are directly related to performing medical or veterinary services.
2. Unrelated Business Taxable Income
For tax-exempt entities, unrelated business taxable income (UBTI) is now taxed at the 21% corporate tax rate. Organizations that provide employees with transportation fringe benefits, on-premise gyms, and other athletic facilities will be required to treat those costs as unrelated business taxable income. Amounts that have already been paid for these benefits won’t be included.
For tax years beginning after December 31, 2017, UBTI is calculated independently for each unrelated trade or business—including when calculating any net operating loss (NOL) deduction. This means losses from one unrelated business won’t offset income from another unrelated business.
3. The Affordable Care Act Mandates and Reporting
The individual mandate tax was repealed by the TCJA. This will likely result in increased uncompensated care expenses for hospitals as the total number of individuals with health insurance decreases.
The following mandates and reporting structures are still required by the TCJA:
- Employer mandates, penalties, and required informational reporting
- Government-operated exchanges must file the Form 1095-A
- Providers of insurance coverage must file the Form 1095-B
- Applicable large employers must file the Form 1095-C
4. Fringe Benefits
Fringe benefits for qualified transportation costs—such as parking allowances, mass transit passes, and van pooling—are nondeductible to the employer, but are still tax free to employees.
However, the law no longer lets employers claim deductions for the cost of providing employee commuting transportation, such as hiring a car service, unless the transportation is necessary for the employee’s safety.
Employers also can’t exclude moving expenses from an employee’s compensation under the new law, and the individual taxpayer can no longer receive a moving expense deduction.
5. Reduced Corporate Tax Rate
Beginning in 2018, C corporations are subject to a flat 21% tax rate—down from the previous maximum rate of 35%. Fiscal-year corporations need to compute their tax rate using a pro rata allocation that’s based on days for the tax year, including January 1, 2018.
6. Corporate AMT Repealed
The corporate alternative minimum tax (AMT) is repealed beginning in 2018. For hospitals that paid the AMT in earlier years, an AMT credit was allowed under prior law.
The new law allows corporations to use any AMT credit carryovers in their 2018–2021 tax years to offset regular tax liability. Half of any remaining unused credits are refundable through 2020. In 2021, 100% of any remaining credits is refundable.
7. Business Interest Deductions
Under prior law, paid or accrued interest was generally fully deductible, with some restrictions. Now, businesses generally can’t deduct interest expense in excess of 30% of adjusted taxable income, starting with tax years in 2018. Interest expense that’s disallowed under this limitation will carry forward to subsequent years until it’s used.
Taxpayers—other than tax shelters—with average annual gross receipts of $25 million or less for the past three tax years are exempt from the interest deduction limitation. There are some exceptions for real property businesses electing to use slower depreciation methods for their real property.
8. Losses
Under prior law, NOLs could be carried back two years and forward for twenty years. The tax reform law stipulates that losses incurred in years ending after December 31, 2017, won’t have carryback provisions, while NOLs can be carried forward indefinitely. The new law also allows losses arising in tax years beginning after December 31, 2017, to offset up to 80% of the taxable income of the carryforward year.
For example, if a health system has $2,000,000 in losses arising from years prior to 2018, it can generally use those NOLs to offset up to 100% of the taxable income in the carryforward year. If the same health system generates a NOL of $500,000 in 2021, it can use it to offset up to 80% of taxable income in the carryforward year. Over time, this will make it difficult for hospitals to eliminate their tax liability in its entirety with loss carryovers.
9. Accelerated Depreciation Write-Offs
Bonus Depreciation
The new law expands bonus depreciation to include the acquisition of new and used property. Previously, only new property qualified. The extent of the bonus depreciation has also been significantly increased.
For qualified property acquired and placed in service between September 28, 2017, and December 31, 2022, the first-year bonus depreciation percentage has been increased to 100%. In later years, bonus depreciation is reduced to the following percentages:
- 80% for property placed in service in 2023
- 60% for property placed in service in 2024
- 40% for property placed in service in 2025
- 20% for property placed in service in 2026
Properties with longer production periods will also qualify for the bonus periods described above, but their reductions will be delayed by one year. For example, 80% bonus depreciation will apply to long-production property placed in service in 2024.
Section 179 Deduction
The new tax law permanently increases the Section 179 deduction on qualifying property, allowing write-offs of $1 million. It also increases the phaseout threshold amount to $2.5 million. These amounts will be indexed for inflation in future years. To determine eligibility for these higher limits, property is treated as acquired on the date a buyer signs a written, binding contract.
The new law expands the definition of eligible property to include, among other things, improvements to nonresidential real property, including:
- Roofs
- HVAC equipment
- Fire protection systems
- Alarm systems
- Security systems
Like-Kind Exchanges
Like-kind exchanges are restricted solely to the exchange of real property under the new law.
10. Meals and Entertainment
Prior to the TCJA, taxpayers could deduct 50% of expenses for business-related meals and entertainment. Entertainment expenses are now nondeductible under the TCJA, including sporting events, concerts, and golf. Deductions for business-related entertainment expenses are disallowed for amounts paid or incurred after December 31, 2017.
In the past, employers could deduct 100% of employee meals if the meals were provided on their own premise and for their convenience. They were also tax-free to the recipient employee.
Now, meals expenses incurred while traveling for business are still deductible, but the 50% disallowance rule also applies to meals provided at on-premises cafeterias—or otherwise provided on the employer’s premises for the employer’s convenience.
After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.
Other Important Provisions
- Limitations on state and local tax deductions for individuals will result in fewer taxpayers itemizing their deductions. This will reduce tax incentives for charitable giving to tax-exempt organizations.
- Business deductions for lobbying local government are repealed.
- Government agencies are now required to file informational reporting to the IRS on penalties, fines, settlements, or court orders exceeding $600. They may be non-deductible by the entity that’s making the payment under the new law.
- No deduction for settlement of sexual abuse or harassment suits subject to nondisclosure agreements.
- The domestic production activity deduction is repealed.
- Employers are allowed a credit for paid family and medical leave for 2018 and 2019.
- R&D expenses paid or incurred in tax years beginning after December 31, 2021, will be capitalized and amortized over a five-year period.
We’re Here to Help
If you’d like to learn more about how tax reform could impact your health care organization, contact your Moss Adams professional. You can also visit our dedicated tax reform page for more information.