Healthcare Industry Tax Update including 2017 Tax Cuts and Jobs Act

Transcription

1 Healthcare Industry Tax Update including 2017 Tax Cuts and Jobs Act May 30,

2 Agenda 1. Tax Cuts and Jobs Act A. Tax exempt Organizations B. Taxable Organizations 2. Internal Revenue Code Section 501(r) 3. Federal Form 990, Schedule H and community benefit 4. Other tax items 5. Useful websites 1 Highlights affecting Federal tax-exempt healthcare organizations 1. New Code section 4960 imposes on tax exempt employers a 21% excise tax on the amount of (i) remuneration (other than excess parachute payments) in excess of $1 million paid to any covered employee and (ii) any excess parachute payment made to any covered employee. A. Covered employee i. One of the 5 highest paid employees in the taxable year, or ii. Was a covered employee of the tax exempt organization or any predecessor for any preceding year beginning after December 31, 2016 iii. May have more than 5 covered employees 2 1

3 Highlights affecting Federal tax-exempt healthcare organizations B. Exception: Remuneration paid to a licensed medical professional (including a veterinarian) excludes the amount that is paid for the performance of medical or veterinary services. i. Dual services clinical / administrative / teaching C. Remuneration includes deferred compensation when there is no longer a substantial risk of forfeiture i. NQDC Code Section 457(f) plans ii. SERP 3 Highlights affecting Federal tax-exempt healthcare organizations D. Excess parachute payment i. Employee s separation from the employer in an amount that equals or exceeds three times the individual s 5 year average total compensation, with certain exceptions. E. Payments from related organizations Forms W 2 i. Excise tax is pro rata by entity ii. New excise tax is payable regardless of Code Section 4958 and the rebuttable presumption of reasonableness and FMV. 4 2

4 Highlights affecting Federal tax-exempt healthcare organizations F. Effective for taxable years beginning after December 31, G. Guidance being issued in June of i. Is the Form W 2 the identification mechanism? ii. Fiscal year v. calendar year end reporting employers iii. When do we remit the excise tax? iv. How do we remit and report the excise tax? v. Review current compensation + current year deferred comp vestings budget now!!! 5 Highlights affecting Federal tax-exempt healthcare organizations 2. Amounts paid or incurred by employers relating to certain employee fringe benefits will be treated as unrelated business income (21% tax). Employee fringe benefits include: A. Any qualified transportation fringe benefit B. Any parking facility used in connection with qualified parking C. Any on premises athletic facility i. Fitness center/gym ii. Pool iii. Tennis court iv. Golf course v. Available to all employees? General public? 6 3

5 Highlights affecting Federal tax-exempt healthcare organizations 3. Unrelated business Income ( UBI ) A. Activities which constitute an unrelated trade or business must now be reported separately on a Federal Form 990 T. B. Aggregating (or netting) a taxpayer s unrelated trade or business activities and corresponding income/losses are no longer permitted. 7 Highlights affecting Federal tax-exempt healthcare organizations C. UBI tax rate was changed to a flat rate of 21% D. UBI three factors i. Trade or business; ii. Regularly carried on; and iii. Not substantially related to your tax exempt purpose. 8 4

6 Highlights affecting Federal tax-exempt healthcare organizations 4. Net operating losses A. NOLs generated for years post December 31, 2017 will be limited to 80% of a taxpayer s taxable income in each year. B. NOLs incurred prior to years beginning after December 31, 2017 remain unlimited. C. Generally, NOLs can no longer be carried back but can be carried forward indefinitely. 9 IRS Publication 598 (rev. March 2012) Tax on Unrelated Business Income of Exempt Organizations Provides various examples; including, but not limited to. 1. Nonpatient laboratory testing. 2. Qualified sponsorship payment. 3. Certain hospital services to <100 bed hospital; IRC Section 501(e)(1)(A) at or below cost. 4. Health club program. 5. Dual use of facilities. 6. Advertising. 7. School facilities for other activities (e.g. summer tennis programs). 10 5

7 Considerations 1. Choice of entity Tax exempt entity Single member LLC C corporation 2. Federal UBI corporate income tax rate is the same as for profit C corporation income tax rates. 3. State considerations; corporate rate versus the UBI rate. 4. How much is too much UBI for tax exemption purposes? Many practitioners apply a 20% rule 11 Recommendations 1. If a reasonable basis exists, treat the income as related income as opposed to UBI. Do not give the IRS an annuity. 2. If UBI exists do not incur large net operating losses. 3. Identify directly connected expenses, allocate indirect expenses using a reasonable method and ensure indirect expenses are related to the UBI activity. 4. Review new activities using the 3 part UBI test, modifications and exclusions. 5. Maintain UBI workpapers. 12 6

8 Highlights affecting Federal taxable healthcare organizations 1. Lowers the Federal corporate income tax rate to a flat rate of 21%; including professional corporations. 2. Repeals the Federal corporate alternative minimum tax. 3. Certain qualified business assets acquired and placed in service after September 27, 2017 may be fully expensed and increases the Internal Revenue Code Section 179 limitation to $1 million. 13 Highlights affecting Federal taxable healthcare organizations 4. Disallows certain entertainment expense deductions but retains the 50% deduction for business related meals. 5. Net operating losses incurred for years post December 31, 2017 will be limited to 80% of a taxpayer s taxable income in each year. Net operating losses incurred prior to years beginning after December 31, 2017 remain unlimited. Generally, losses can no longer be carried back. 6. Increases the gross receipts threshold for the availability of a taxpayer to elect the cash method of accounting for certain corporations and partnerships. 14 7

9 Other Highlights 1. Moving expenses. 2. Employee achievement awards. 3. Employee loans from retirement plans. 4. Excise tax on large endowments. 5. Athletic event tickets. 15 Qualified Business Income (QBI) Deduction ( 199A) The bill provides a deduction of 20% of qualified business income Deduction is taken on the owner s income tax return as a below the line deduction, in addition to standard or itemized deductions If fully available, this deduction makes the effective top rate on pass through income 29.6% 16 8

10 Section 199A Planning Specified service businesses (doctors, lawyers, consultants) are not eligible to take the new Section 199A deduction against income from their practice Sec. 199A deduction is not available for wages If the taxpayers also own a related partnership, owning the real estate that the practice operates from, there may be a planning opportunity 17 Section 199A Planning Taxpayer, a doctor, owns a medical practice organized as an S corporation. Taxpayer also owns a partnership, P, that owns the real estate that the medical practice operates from. Pass through income from the medical practice will not be eligible for the Sec. 199A deduction, however net income from the real estate business would qualify. Taxpayer should evaluate the rent paid from the practice to the landlord and consider lowering compensation or increasing rent (subject to FMV constraints) in an effort to maximize the potential Sec. 199A deduction. 18 9

11 Section 199A Planning Assume medical practice has $1,000,000 of net income before rent and shareholder wages. Shareholder wages prior to the tax law change were $300,000 and rent paid to landlord partnership is $250,000. Remember, net income from medical practice will NOT be eligible for Sec. 199A deduction After reviewing relevant factors, it is determined that FMV rental would be $575,000 and reasonable compensation for the shareholder can be reduced to $175,000 How would this impact the Sec. 199A deduction? 19 Section 199A Planning Before After Medical Real Estate Medical Real Estate S Corporation income before rent and salary 1,000,000 1,000,000 Officer comp (300,000) (175,000) Rent to landlord (250,000) (575,000) Net income from S corporation 450, ,000 Gross rents received 250, ,000 Rental expenses (100,000) (100,000) Net rental income 150, ,000 Section 199A deduction (w/o considering limitation) 30,000 95,

12 PART II INTERNAL REVENUE CODE SECTION 501(R) 21 Affordable Care Act, March 23, Tax exempt hospitals must attach their audited financial statements (or internal financials if not audited) to their Form 990 annually. 2. IRS mandatory review of every hospital s Schedule H once every 3 years. 3. Treasury prepares a report to Congress. 4. IRC Section 501(r)

13 IRC Section 501(r) Timeline 23 IRC Section 501(r) Timeline 24 12

14 IRC Section 501(r) 1. Code Section 501(r)(3); community health needs assessment ( CHNA ) and written implementation strategy once every 3 years and make widely available. 2. Code Section 501(r)(4); Financial Assistance Policy; make widely available; adopt by authorized body and translated. 3. Code Section 501(r)(5); Limitation on Patient Charges amounts generally billed ( AGB ). 4. Code Section 501(r)(6); reasonable efforts prior to engaging in extraordinary collection actions (ECAs ). 25 Be careful! Corporate structure and type of entity is important for Section 501(r) 1. Applies to tax exempt hospital facilities. 2. Substantially related entity. A. Generally, must follow the hospital's FAP. i. A single member LLC of which the hospital facility is the sole member. ii. A partnership or LLC taxed as a partnership of which the hospital facility owns a capital or profits interest; unless the income (loss) from the activity is treated as being derived from an unrelated trade or business by the hospital

15 Healthcare Joint Ventures flow through entities 1. Pre ACA Control of the joint venture Ownership of 50.1% or greater Operational documents operating agreement Charitable purposes clause Jeopardy tax exempt status clause Veto power 2. Post ACA Same as the above Hospital as the member Code Section 501(r) Schedule H operating a hospital facility 27 IRC Section 501(r) Additional key terms and concepts 1. Provider listing (IRS Notice ) 2. Plain Language Summary ( PLS ) 3. Limited English proficiency ( LEP ) 4. Billing and collection practices Notification period 120 days first post discharge billing statement Application period 240 days first post discharge billing statement Provide 30 day written notice and a copy of the PLS 28 14

16 The IRS is Checking Compliance! 1. Fiscal Year 2017 began on October 1, 2016, and ended on September 30, Completed 1,193 reviews and referred 388 hospitals for field examination. Lack of a community health needs assessment under Code Section 501(r)(3) No financial assistance and/or emergency medical care policies under Code Section 501(r)(4). Billing & collection requirements under Code Section 501(r)(6). 29 Rev Proc ; 501(r) deficiency 1. Form 990 reporting for the tax year in which the failure is discovered. 2. A description of the failure; 3. A description of the correction of the failure; and 4. A description of the practices and procedures, if any, whether revised or newly established to minimize Code Section 501(r) deficiencies prospectively

17 Form Form

18 Form Form

19 Recommendations 501(r) 1. Perform a mock IRS compliance check. A. Re convene the working group. B. Review what s on your website. C. Is the availability of financial assistance conspicuously displayed? D. Provider list updated? E. AGB updated and consistently applied? F. LEP translations has your PSA changed? G. Board or committee involvement. 35 PART III FEDERAL FORM 990, SCHEDULE H COMMUNITY BENEFIT 36 18

20 Community Benefit Why is community benefit important? Supports Federal, state and local tax exempt status. Federal exempt from income tax; issue taxexempt debt and receipt of charitable contributions and grants. State exempt from income tax and sales/use tax. Local exempt from property (real estate) taxes. 37 Hospital Tax-Exempt Status Senator Charles Grassley and the Senate Finance Committee 5% Test. Community benefit standard Definition of community benefit Means tested programs ( ability to pay ) 38 19

21 FORM 990 Schedule H; Hospitals Community benefit ( CB ) defined IRS definition Catholic Health Association ( CHA ). American Hospital Association ( AHA ). Total benefits to the community (AHA modified). Community benefit reported on Form 990, Schedule H IRS CB on Part I, lines 7e and 7f. Bad debt and Medicare shortfall; Part III. 39 Community Benefit 1. Cost, not charges. 2. Applies only to IRC Section 501(c)(3) taxexempt hospitals; not government and forprofit hospitals. 3. Schedule H information is reported in the aggregate for hospital facilities; not separately for each hospital facility (e.g. group Form 990s or single legal entity concepts). 4. Community benefit considerations, including demographics, medical residency programs and the Affordable Care Act

22 Form 990,Schedule H, Part I, Line 7 41 Form 990, Schedule H, Part III 42 21

23 IRS Report to Congress January Community Benefit Trends Financial assistance at cost generally continues to trend downward in 2017; similar to 2016 and 2015 due to the Affordable Care Act and individual mandate. Medicaid shortfall continues to trend upward. Subsidized health services continues to trend upward. Can t control demographics! 44 22

24 Community Benefit Statement Form 990, Schedule O Tell your story qualitatively v. Schedule H, quantitatively Elements of a Community Benefit Statement 1. Background and history 2. Tax exempt status, Rev. Rul Mission and values 4. Affiliations and Awards 5. Clinical Centers of Excellence 6. Community benefit programs and activities 45 OTHER TAX ITEMS PART FOUR 46 23

25 Mergers/Acquisitions/Sales in HC Form 990 reporting 1. Be careful lobbying safe harbor!!!! 2. Core Form, Part III, Question #3 3. Core Form, Part VI, Question #4 4. Schedule N A. Part I; Liquidation, termination or dissolution OR B. Schedule N; Part II; Sale, exchange, disposition or other transfer of > 25% of the assets of an organization 47 ACA Tax Provisions suspended 1. Health insurance provider fee suspended collection of fee for 2017 and 2019 but not Fee based on market share placed on certain writers of health insurance in U.S. 2. Cadillac tax until % excise tax placed on rich health plans with premiums in excess of certain dollar thresholds. 3. Medical device excise tax until % excise tax on sale price assessed on manufactures and importers

26 IRS Tax Map 2017 Charitable Hospitals Exempt Organization Tax Topics Index Affordable Care Act Tax Topics Index Related Topic Links Legal Guidance, including 501(r) spitals_o_5a htm 49 New IRS online tool for EO s May 2018 Tax Exempt Organization Search (TEOS) replaces EO Select Check More information and easier to access TEOS is mobile friendly; smartphones and tablets Forms 990 and 990 T (501(c)(3 s)) only Determination letters January nonprofits/tax exempt organization search 50 25

27 Federal Forms 990 High Level Areas Form 990, Part I, Summary Form 990, Part VI, Governance Form, 990, Part VII, Officers, Directors, etc. Schedule F, Activities Outside the U.S. Schedule H, Hospitals Schedule J, Compensation Information Schedule O, Supplemental Information 51 Public Disclosure Who s looking at Federal Forms 990? IRS. State taxing authority. Employees current & former. Newspapers. Competitors. Unions. The General Public; including donors. Accountants, attorneys and others

28 OTHER USEFUL WEBSITES PART FIVE 53 Other Useful Websites IRS GuideStar Charity Navigator HFMA AHA Becker s Healthcare Dive

29 Presenter Scott J. Mariani, JD Partner Practice Leader, Healthcare Services Group WithumSmith+Brown, PC Mobile (973) Direct (973) Thank you! WithumSmith+Brown 56 28