Healthcare Businesses Owners: Don’t Leave Money on the Table
By Benjamin Dailey, Partner, Tax & Business Services
Not all healthcare businesses are excluded from the new Qualified Business Income (QBI) deduction. Many of our clients in healthcare fields are saving money with this new tax deduction. If you think your business does not qualify, it may be worth a second opinion.
In a previous article, we discussed the opportunity for healthcare professionals to take the 20% QBI deduction Congress had intended to deny healthcare professionals the ability to use this deduction, but as with any tax law, there are numerous exceptions. First, a quick review of the QBI deduction and how it can save you money.
Review of the QBI Deduction
The 20% QBI deduction was created by the Tax Cuts and Jobs Act of 2017 (Act) to provide a benefit to non-corporate business owners. The corporate tax rate was slashed from 35 percent to 21 percent, while individuals saw only a small 2-4 percent reduction in tax rates. With surtaxes like the Net Investment Income tax factored in, the individual tax rate is now double what a corporation pays. The QBI deduction was intended to reduce the tax rate on the business incomes of individuals who own pass-through entities such as LLCs and S corporations.
Corporate taxpayers were given a simple, straightforward benefit of a 14% rate reduction. Individuals, on the other hand, must navigate through a maze of rules, exceptions, exclusions, and exceptions to the exclusions in order to get their tax benefit.
Healthcare was one of the industries excluded from the deduction. Congress wrote the new law very broadly to exclude the performance of many healthcare services. This includes income earned by physicians, pharmacists, nurses, dentists, veterinarians, and physical therapists. Those healthcare professionals can still utilize the planning techniques we discussed in our previous article. However, a number of business activities related to healthcare do qualify for the deduction.
If you are involved with any of the following types of healthcare businesses, you should make sure that you have fully explored the opportunity to take advantage of this important tax benefit:
Assisted Living and Senior Housing
- A residential facility offers a mix of services – some qualify for the deduction but others are specified healthcare services that do not qualify.
- Standard domestic services offered to residents like meals, entertainment, cleaning and laundry are activities that qualify for the deduction. Housing management and maintenance will also qualify.
- Medical services provided at the residential facility will not qualify, even though they are not provided at a hospital or doctor’s office. This includes skilled nursing, physical therapy and rehabilitation, and supplies and equipment used in providing that care.
- Having medical services provided by an unrelated third party and billed directly to patients is the cleanest way to structure this arrangement. If medical services and other services are offered through the same company, more work may be needed to secure the deduction on the non-medical services.
Operating Medical Equipment, Laboratory Services, and Testing
- Many businesses that perform services closely related to healthcare do not fall under the same restriction as physicians, nurses, and other providers.
- A key fact is whether the worker performing the test or operating equipment also acts as a healthcare provider, performing such tasks as diagnosing medical problems or counseling doctors and patients about treatment. If they only provide information, but not medical advice or analysis, the business probably qualifies for the deduction.
- Whether a business provides healthcare services is a question of fact. If a healthcare business does not diagnose, treat, or manage any aspect of patient care it’s a good candidate for the QBI deduction.
Outpatient Surgical Centers
- Operating a facility that is used to provide medical care is an activity that can qualify for the deduction. The regulations give us a helpful example of a business that manages an outpatient surgical facility operation, performs all the administrative functions, and ensures compliance with all federal and state laws for medical facilities.
- However, be careful about rules that can “taint” the otherwise-qualified income when a non-qualifying medical service provider and an otherwise-qualifying healthcare business are commonly controlled.
- A surgical facility owned by a group of doctors may not be able to take the QBI deduction on income earned when the owners use that facility, even if they pay the same rates as non-owners.
Retail Sales of Pharmaceuticals, Medical Devices and Other Products
- A pharmacist who fills orders for prescription drugs, checks for drug interactions, and makes recommendations on dosing and alternatives to the ordering physician is considered to be a healthcare service provider, and the income earned from these activities does not qualify for the deduction.
- Retail sales of pharmaceuticals, medicine, and medical devices is not by itself a healthcare business. A taxpayer may have multiple businesses within the same legal entity. In situations where there are two distinct business activities, it is important to keep separate records to support the amount of qualified vs. non-qualified income. With good records, each business can be evaluated separately, and the eligible business activity can receive the tax deduction.
The Qualified Business Income (QBI) deduction is one of the biggest tax breaks available in a tax law change that did not provide many benefits for individuals. This is our second year working with the Tax Cuts and Jobs Act, and we are still finding business owners who are not taking advantage of this tax cut. The tax professionals at Marcum can help you review your business activities and advise you if you are missing out on this opportunity.