TCJA Impact on Physicians and the Healthcare Industry
The Tax Cuts & Jobs Act of 2017 (TCJA) was the biggest tax reform legislation since 1986 and included many significant changes that have had a major impact on high-income individual taxpayers such as physicians and healthcare professionals.
Three provisions that are particularly significant to these taxpayers include:
- The pass-through qualified business income deduction (QBI);
- The repeal of the Affordable Care Act’s individual health insurance mandate; and
- The decrease in the corporate tax rate from 35 percent to 21 percent.
Pass-through qualified business income deduction (QBI)
The TCJA includes a significant tax break for owners of certain pass-through entities. Pass-through entities include S corporations, partnerships and some limited liability companies. Many physician and other types of healthcare practices are structured as pass-through entities. Under the TCJA, owners of these entities can receive a 20% deduction on qualified business income, effectively reducing their maximum effective tax rate from 39.6% to 29.6%, beginning in the 2018 tax year. For 2020, the QBI deduction benefits physicians and healthcare professionals who annually earn $213,300 or less for a single filer, or $426,600 or less for a married couple filing jointly. The deduction begins to phase out gradually when taxable income exceeds $163,300 for a single filer or $326,600 for those who are married filing jointly.
The TCJA disallows the 20% deduction for taxpayers with incomes above those thresholds in specified service trades or businesses, including healthcare. As a result, healthcare professionals with incomes above the phase-out thresholds mentioned above are not eligible for the 20% pass-through income deduction. Thus, many higher-earning medical specialists and two-physician households will likely not qualify.
Repeal of the ACA individual health insurance mandate
Effective in 2019, the TCJA repealed the Affordable Care Act’s individual health insurance mandate, which required all Americans under 65 to have health insurance or pay an annual penalty. It was estimated in a 2017 report by the Congressional Budget Office that the repeal of the individual mandate would increase the number of uninsured Americans by 13 million by 2027.
Of course, an increase in the number of uninsured Americans will contribute to an increase in uncompensated care (charity care and bad debt) for physicians, hospitals and healthcare systems. Hospitals may end up bearing the majority brunt of the financial impact of uncompensated care resulting from the repeal of the individual mandate, but physicians will be affected as well.
Change in business tax structure
One of the most heralded components of the TCJA was the decrease in the federal corporate tax rate from 35 percent to 21 percent. This is a potential enticement for some owners of pass-through entities to consider restructuring their businesses as C corporations. They should be aware, however, that C-corporations bear a second level of taxation on qualified dividends paid to stockholders. Before finalizing a decision on tax structure, business owners should understand the pros and cons of such a move. Be sure to consult with your Marcum tax advisor before making any changes.
The changing insurance reimbursement models have been making it increasingly difficult for physicians to operate profitably. Add in uncompensated care, and physicians may have some tough decisions to make surrounding payment collection for their practices. We suggest discussing your business plan with a Marcum professional. The pass-through income deduction, the repeal of the individual health insurance mandate and the decrease in the corporate tax rate have had an effect on nearly all physicians and healthcare systems.
Contact your Marcum tax advisors to learn more about how these and others provisions of the law affect healthcare practices.