Tax Reform Watch: Will the Qualified Business Income Deduction Apply to the Healthcare Industry?– February 06, 2018 by Kathy Walsh

Those in the healthcare industry, as any other, will be impacted by the new Tax Cuts and Jobs Act (TCJA), which goes into effect for the 2018 tax year. The most significant question mark for medical practices and practitioners is the new 20% deduction for qualified business income of pass-through entities.
 
While the deduction is exciting, the industry may not benefit. A separate section of the Internal Revenue Code lists the types of businesses that do not qualify for the 20% deduction — and that list includes healthcare, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.
 
This begs many questions. Will this language be broadly interpreted or will we get specific guidance? Can a medical practice operating as a flow-through entity qualify? How will the related-party rules play into this?
 
The best answer to all of the questions, at least for now, is we must wait. As a new area of law, we simply need more guidance from the IRS before anyone in the healthcare industry can make practical, well-informed decisions. The good news is that it’s early in the year, so there is time before any decisions need to be made. However, there are many areas of the new law that may need technical corrections, or at least additional guidance. The IRS, short on resources, is not promising when those may come.
 
One other area to note in the new law as it relates to many clients in the healthcare industry is the 3.8% NII tax. While the law did not remove the tax, other changes in the law will result in more investment income being subject to it, namely because: 

  • The loss of investment expenses also means a loss of the deduction against investment income, and
  • The $10,000 limit on state taxes also limits the state tax deduction against investment income.  

Contact your tax advisor to discuss specific planning opportunities. We’ll continue to monitor and communicate any updates with respect to the TCJA and its impact to the healthcare industry.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.