Tax Cuts and Jobs Act of 2017: The Impact on Nonprofit Hospitals
By Gina Lucibello, Supervisor, Tax & Business Services
The Tax Cuts and Jobs Act (TCJA) contains a numbers of provisions that could affect the operations of nonprofit hospitals. Following are the key provisions these hospitals should be aware of:
Repeal of the Individual Mandate
The TCJA includes a repeal of the individual mandate enacted under the Affordable Care Act, which made individual taxpayers personally responsible for obtaining health care coverage. The mandate applied a tax penalty if the requirements for minimum essential coverage were not met on a monthly basis. As a result of the appeal, beginning after December 31, 2018, the individual shared responsibility payment is reduced to zero. It is likely that the repeal of the individual mandate will increase the number of uninsured people, therefore creating an increase in the amount of uncompensated care provided by hospitals. Furthermore, since younger and healthier individuals may choose to opt out of health insurance coverage, health insurance premiums could also increase.
Unrelated Business Taxable Income
For tax years beginning in 2018, the TCJA introduced a change to the way unrelated business taxable income (UBTI) is calculated. An exempt organization that carries on more than one unrelated trade or business must report the UBTI separately. This prohibits an organization from using a loss related to one trade or business to offset income from another. This disaggregation of business activities will expose any income-producing trade or business, possibly resulting in increased taxes for exempt organizations. Nonprofit hospitals in this situation will need to assure that unrelated trade or business activities are reasonably defined. Additionally, accurate records must be maintained for each activity, including revenue, expenses, and net operating loss deductions.
As a way to define reasonable compensation, for tax years beginning after December 31, 2017, the TCJA imposes an excise tax equal to the corporate tax rate, which was set at 21% by the legislation, on compensation amounts exceeding $1,000,000 paid to any of the tax-exempt organization’s covered employees. A covered employee is defined as any employee who is one of the five highest compensated employees for the current taxable year or any preceding taxable year beginning after 2016. Since employers will be responsible for the payment of this tax, it will be important for nonprofit hospitals to review the compensation of their employees and budget for the excise tax accordingly.
Nonprofit hospitals will find it critical to carefully review these provisions in the new tax law and consider how these changes will affect their organization.