December 8, 2020

Taxes, the Possible Unexpected Consequence of Telehealth

By Mary Antonetti, Partner, Tax & Business Services

Taxes, the Possible Unexpected Consequence of Telehealth Healthcare

As we all batten down the hatches for the second wave of the COVID-19 pandemic, routine activities such as picking up coffee on the way to work or stopping by the doctor’s office are, once again, no longer status quo. Rather, we are more likely to brew a cup of coffee at home, perhaps while still in our pajamas, logging onto a telehealth visit with our medical provider on our smartphone.

Telehealth is not new, but it has seen a rapid expansion during the pandemic. In some cases, taking your practice “virtual” is equivalent for tax purposes, but not in all cases, especially when it comes to tax-exempt organizations.

At this time in history when we are in desperate need of our heroic healthcare workers, we all agree that taking care of the sick is a noble act. However, that does not always make it charitable in nature, which is typically the basis for exemption.

The mere provision of healthcare is not an exempt purpose. The exempt purpose of most healthcare organizations includes the provision of medical care to the organization’s patients. The determination of which individuals are patients to a particular organization has been the subject of much discussion.

While “patient” is not a defined term in the Internal Revenue Code, the IRS began to define the term starting in 1968, long before the evolution of telehealth.

Guidance suggests that an in-person meeting between a healthcare provider and an individual for diagnosis treatment or care is sufficient to create a provider/patient relationship. However, the historical guidance has not evolved into a virtual world. At this point, no definitive guidance has been issued expanding the definition of patient to firmly include individuals serviced outside the world of brick and mortar.

Since no definitive guidance has been issued on unrelated business income (UBI) and telehealth, an organization must look to the general rules. Tax-exempt organizations are exempt from income taxes for activities related to their exempt purpose; however, they do pay income taxes on UBI. Generally, unrelated business income is income from a trade or business, regularly carried on and not substantially related to the exempt purpose of the organization. If an organization provides services to an individual who is its patient, the income is generally part of the exempt purpose of the organization. However, if the same service is provided to a non-patient, the revenue may result in unrelated business income.

For example, if a tax-exempt hospital operates a pharmacy and fills prescriptions for a patient admitted to the hospital, the revenue is most likely excluded from UBI. If a person working in a local business stopped at the hospital pharmacy to get a prescription filled rather than visit a for-profit pharmacy farther away, this sale may result in unrelated business income. Similarly, depending on your relationship to the individuals being seen through telehealth, the income may generate UBI.

Each organization must look at its own situation to determine if its business interactions are equivalent to patient relationships. For example, your adventure into telehealth may be limited to providing services to individuals with whom you have already have an established provider/patient relationship. These are individuals who historically have walked through your doors to be seen but, because of the current environment, have opted to be seen in a virtual environment. In this case, it may be reasonable to conclude that these interactions are between your staff and your patients. If, on the other hand, you have expanded to provide consultations to patients of other unrelated healthcare providers, is the service you are providing to your patient? Many factors will need to be considered to determine if you have established a patient relationship.

Perhaps you have gotten to this point and thought, “We are safe! We are only providing services to the same people we have been helping for years. I don’t believe there are any tax implications.” This may be true for federal purposes, but the virtual environment has generated a variety of state tax issues. You may be a healthcare provider who has chosen to shelter in place in the mountains or at a beach house. With technology, they can “see” patients from anywhere. The moving of your employees to different states could create requirements for you to register as doing business in that state. Where once you operated in one state, you may now have withholding and other obligations in various states due to your remote workforce.

The rules in each state relating to virtual workforces and online services are different. They are also evolving as this pandemic continues. Many states are in need of funds and are looking closely at this new realty to determine if their laws still make sense. If you are seeing patients located in different states or have employees living in different states, it is important that you perform a study to make sure you are properly operating in each state.


While the expansion of telehealth has created many opportunities, there are also some pitfalls to avoid. With the shift in how you operate, it is important to continually look at the changes and speak with your tax professional. Digital access to healthcare and the expansion of telehealth is a positive evolution. It will help bring care to individuals who may not otherwise be able to receive such care. But for practitioners who do not seek out professional advice, it could also bring unexpected tax consequences.