Big Changes for Health Care Entities TA X C U T S & J O B S A C T O F 2 0 1 7
OUR GOAL FOR TODAY Develop an awareness of the recent law changes that will affect healthcare organizations
OUR GOAL FOR TODAY The Good News The Bad News & More
What Didn t Make the Cut The Good News!
WHAT DIDN T MAKE THE CUT? Clarification of unrelated business income tax treatment of entities exempt from tax under section 501(a) (House) Exclusion of research income from unrelated business taxable income limited to publicly available research (House) Simplification of excise tax on private foundation investment income (House)
WHAT DIDN T MAKE THE CUT? Private operating foundation requirements relating to operation of an art museum (House) Exception to the private foundation excess business holdings rules for philanthropic business holdings (House) Section 501(c)(3) organizations permitted to make statements relating to political campaign in ordinary course of activities in carrying out exempt purpose (House)
Additional reporting requirements for donor advised fund sponsoring organizations (House) WHAT DIDN T MAKE THE CUT? Name & logo treated as unrelated business income (Senate) Repeal of tax-exempt status for professional sports leagues (Senate)
Modification of taxes on excess benefit transactions (intermediate sanctions) (Senate) WHAT DIDN T MAKE THE CUT? Reduction in minimum age for allowable in-service distributions (House) Termination of private activity bond (House) No tax-exempt bonds for professional stadiums (House)
Modification of rules governing hardship distributions (House) WHAT DIDN T MAKE THE CUT? Modification of rules related to hardship withdrawals from cash or deferred arrangements (Senate) Modification of nondiscrimination rules for certain plans providing benefits or contributions to older, longer service participants (House)
Limitation on exclusion for employer-provided housing (House) WHAT DIDN T MAKE THE CUT? Repeal of exclusion for employee achievement awards (House) Sunset of exclusion for dependent care assistance programs (House)
Repeal of exclusion for educational assistance programs (House) WHAT DIDN T MAKE THE CUT? Repeal of exclusion for qualified tuition reductions (House) Repeal of exclusion for adoption assistance programs (House)
Repeal of deduction for student loan interest (House) WHAT DIDN T MAKE THE CUT? Repeal of deduction for qualified tuition & related expenses (House) Repeal of deduction for student loan interest (House)
WHAT DIDN T MAKE THE CUT? Repeal of exclusion for interest on U.S. savings bonds used for higher education expenses (House) Termination of New Markets Tax Credit (House)
What Made the Cut The Bad News for Exempt Healthcare!
Excise Tax on Compensation in Excess of $1M EXCISE TAX ON EXECUTIVE COMPENSATION Follows corporate rate (21%) Five highest-paid employees Taxable compensation Includes nonqualified deferred compensation from ineligible deferred compensation includible when there is not substantial risk of forfeiture (457(f))
Excise Tax Parachute payments 3x greater than the five-year salary average (excluding retirement benefits) Exempts not highly compensated employees from the definition of parachute payments Exempts professional medical services COMPENSATION & EMPLOYEE BENEFITS
COMPENSATION & EMPLOYEE BENEFITS Exclusion for qualified moving expense reimbursement repealed Exception for active duty members of the Armed Forces
UNRELATED BUSINESS INCOME FOR CORPS Corporate Tax Rates Taxable Income Income Tax All Income 21%
UNRELATED BUSINESS INCOME FOR TRUSTS Trust Tax Rates Taxable Income Income Tax Not over $2,550 10% $2,551 $9,150 $255 + 24% of the excess over $2,550 $9,151 $12,500 $1,839 + 35% of the excess over $9,150 > $12,500 $3,011.50 + 37% of the excess over $12,500
UNRELATED BUSINESS INCOME Silo Income/Loss by Activity Loss from one activity cannot offset income from another Activity Definition PTP Investment K-1 Investment Royalties Rents Other? Effective years beginning after December 31, 2017
UNRELATED BUSINESS INCOME UBI Increased by Certain Fringe Benefits Qualified transportation, and Qualified parking Guidance needed to determine what is included? Out of pocket payments to third party vendors Cost or FMV of owned property Effective beginning December 31, 2017
Corporate alternative minimum tax repealed Bonus depreciation 100% through 2022, then scaled back through 2026 UNRELATED BUSINESS INCOME Business Provisions that might impact your organization Section 179 expensing $1M
NOL deduction 80% taxable income (generated after 12.31.2017) Net interest expense limitation No entertainment deductions UNRELATED BUSINESS INCOME Business Provisions that might impact your organization
TAX-EXEMPT BONDS Repeals the exclusion from gross income for interest on advance refunding bonds
PRIVATE ACTIVITY BONDS Repeal of Tax Credit Bonds Clean renewable energy bonds Qualified energy conservation bonds Qualified zone academy bonds Qualified school construction bonds Direct-pay bonds
Increase limitation to 60% Standard mileage rate, not adjusted for inflation No deduction for payments made in exchange for college athletic seating rights CHARITABLE CONTRIBUTIONS
Increased standard deductions ITEMIZED DEDUCTIONS $10,000 limit on state & local tax deduction Medical expense deduction Impact on charitable giving?
ESTATE TAX Increase exclusion to $10M Inflation adjustment $11.2M 2018 Regulations for differences between the basic exclusion amount in effect At the time of decedent's death At the time of any gifts made by the descendent Effective for estates of decedents dying & gifts made after December 31, 2017
Decline in Charitable Giving? HOW WILL THIS IMPACT MY ORGANIZATION? 2017 2018 2018 Itemized Deductions: Sales Tax $ 2,000.00 $ - $ - Real Estate Taxes $ 15,000.00 $ 10,000.00 $ 10,000.00 Home Mortgage Interest $ - $ - $ - Charity $ 7,000.00 $ 7,000.00 $ - Increased Standard Deduction $ - $ 7,000.00 $ 14,000.00 Total Itemized Deductions $ 24,000.00 $ 24,000.00 $ 24,000.00
DONOR STRATEGIES? Bunching of itemized deductions Donor advised funds Qualified charitable distributions (QCDs)
BUNCHING ILLUSTRATION BUNCHING 2018 2019 2020 2021 Itemized Deductions: State income tax $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 Real Estate Taxes $ - $ - $ - $ - Home Mortgage Interest $ 8,600.00 $ 7,400.00 $ 8,600.00 $ 7,400.00 Charity $ 20,000.00 $ - $ 20,000.00 $ - Increased Standard Deduction $ - $ 6,600.00 $ - $ 6,600.00 Total Itemized Deductions $ 38,600.00 $ 24,000.00 $ 38,600.00 $ 24,000.00 $ 125,200.00 WITHOUT BUNCHING 2018 2019 2020 2021 Itemized Deductions: State income tax $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 Real Estate Taxes $ - $ - $ - $ - Home Mortgage Interest $ 8,000.00 $ 8,000.00 $ 8,000.00 $ 8,000.00 Charity $ 10,000.00 $ 10,000.00 $ 10,000.00 $ 10,000.00 Increased Standard Deduction $ - $ - $ - $ - Total Itemized Deductions $ 28,000.00 $ 28,000.00 $ 28,000.00 $ 28,000.00 $ 112,000.00
DONOR ADVISED FUND ILLUSTRATION Even Charitable Over 5 Years Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 State Tax Deduction 10,000 10,000 10,000 10,000 10,000 Interest Expense 0 0 0 0 0 Charitable 20,000 20,000 20,000 20,000 20,000 Total 30,000 30,000 30,000 30,000 30,000 150,000 Fund DAF in Year 1 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 State Tax Deduction 10,000 10,000 10,000 10,000 10,000 Interest Expense 0 0 0 0 0 Charitable 100,000 0 0 0 0 Additional standard deduction 14,000 14,000 14,000 14,000 Total 110,000 24,000 24,000 24,000 24,000 206,000
W/O QCD W/ QCD RMD Income 12,000 0 Itemized Deductions: State income tax 10,000 10,000 Real Estate Taxes 0 0 Home Mortgage Interest 0 0 Charity 12,000 0 Increased Standard Deduction 2,000 14,000 Total Itemized Deductions 24,000 24,000 QCD ILLUSTRATION
What Made the Cut The Good News for Taxable Healthcare!
21% Flat Tax Rate
Bonus Depreciation DEPRECIATION PROVISIONS Cost recovery 100 percent through 2022 for qualified property placed in service after September 27, 2017 80, 60, 40 & 20 percent for property placed in service in 2023 2026, respectively Definition of qualified property expanded by removing requirement that original use begin with taxpayer Specified property included & excluded (Previously 40, 30 & 20 percent bonus depreciation for qualified property in 2018 2020, respectively; property must be new to qualify)
Section 179 Expensing DEPRECIATION PROVISIONS Cost recovery Up to $1 million Phaseout beginning at $2.5 million of assets placed in service Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems (Previously up to $520,000; phaseout beginning at $2,070,000 of assets placed in service)
Deduction generally limited to sum of Business interest income BUSINESS INTEREST EXPENSE DEDUCTION Floor plan financing interest 30 percent of adjusted taxable income Taxable income +/- Items of income, gain, deduction or loss not properly allocable to trade/business + Business interest expense - Business interest income + Net operating loss + Pass-through business deduction + Depletion, depreciation & amortization (taxable years beginning before January 1, 2022, only)
Excess carried forward indefinitely BUSINESS INTEREST EXPENSE DEDUCTION Limit does not apply to Businesses with average annual gross receipts $25 million (affiliated group basis) Regulated public utility business (including electric cooperatives) Following businesses may elect not to be subject to limitation provided they use ADS method for depreciation Real property businesses Farming businesses (including agricultural & horticultural cooperatives)
Pass-Through Business Deduction QUALIFIED BUSINESS INCOME DEDUCTION Sunsets 12/31/2025 Deduction = 20 percent of Domestic qualified business income from partnership, S corporation or sole proprietorship Qualified REIT dividends Qualified cooperative dividends Qualified PTP income Available to individuals, trusts & estates Aimed at maintaining tax rate benefit of flowthrough structure Sunsets December 31, 2025 Limitations apply
Domestic: effectively connected with conduct of trade/business within U.S. & Puerto Rico QUALIFIED BUSINESS INCOME DEDUCTION Sunsets 12/31/2025 Qualified business income: net amount of items of income, gain, deduction & loss with respect to any qualified trade or business, except Reasonable compensation Guaranteed payments Investment income Short-term & long-term capital gain/loss Dividend income Interest income (Note overall loss treated as loss for purposes of calculation in subsequent year)
QUALIFIED BUSINESS INCOME DEDUCTION Sunsets 12/31/2025 Limitations: Apply when taxable income exceeds $157,500 single ($315,000 MFJ) & phase out over next $50,000 ($100,000) of taxable income 1) Wage limitation: Greater of 50 percent of W-2 wages paid with respect to business OR 25 percent of W-2 wages paid plus 2.5 percent of unadjusted basis (immediately after acquisition) of all qualified property 2) Not allowed for specified service trade or businesses once income exceeds threshold amounts
Specified service business: Any trade or business involving performance of services in fields of QUALIFIED BUSINESS INCOME DEDUCTION Sunsets 12/31/2025 Health Law Accounting Actuarial science Performance arts Investing & investment management, trading or dealing in securities, partnership interests or commodities Consulting Athletics Financial services Brokerage service Principal asset is reputation or skill of one or more of its employees or owners
Need further guidance in several areas QUALIFIED BUSINESS INCOME DEDUCTION Sunsets 12/31/2025 Definition qualified trade or business Application of grouping elections Clarification on how definition of specified service trade or business applies Whether wages paid by an affiliated management company count for purposes of wage limitation
Entertainment Expense Entertainment expenses no longer deductible Meals Expenditures Business meals remain 50% deductible Convenience meals now subject to 50% limit; previously fully deductible OTHER CONSIDERATIONS FOR TAXABLE ENTITIES
Carried Interest Partnership profits interest in connection with performance of services Long-term capital gain rate after three-year holding period with respect to any applicable partnership interest Like-Kind Exchange Deferral of gain limited to real property not held primarily for sale Cash Method of Accounting Allowed for C Corporations with <$25mil in gross receipts (Previously <$5mil) OTHER CONSIDERATIONS FOR TAXABLE ENTITIES
Pass-through vs C Corp ENTITY STRUCTURE COMPARISON Pass-through entity 37% top rate with no QBI deduction 29.6% top rate with full QBI deduction No deduction for state income tax C corporation 39.8% top rate if all profits are distributed (blended rate: 21% corp rate; 23.8% max dividend rate) Full deduction for state income tax
Pass-through vs C Corp ENTITY STRUCTURE COMPARISON Long-term distribution plans Pass-through favors high distribution rate C corp favors low distribution rate Long-term succession plans Buyers want assets, not C corp shares Customized modeling essential
PLANNING STRATEGIES FOR BUSINESSES Consider strategies to accelerate deductions & defer income for permanent tax savings Capital repair expensing & partial dispositions Accounting method changes R&D credit studies Cost segregation studies
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