Big Changes for Health Care Entities
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Big Changes for Health Care Entities TAX CUTS & JOBS ACT OF 2017
Transcript of Big Changes for Health Care Entities
Big Changes for Health Care EntitiesTAX CUT S & JOBS ACT OF 2017
OUR GOAL FOR TODAY
Develop an
awareness of the
recent law changes
that will affect
healthcare
organizations
OUR GOAL FOR TODAY
• The Good News
• The Bad News
& More
What Didn’t Make the Cut
The Good News!
WHAT DIDN’T MAKE THE CUT?
• Clarification of unrelated business income tax treatment of entities exempt from tax under section 501(a) (House)
• Exclusion of research income from unrelated business taxable income limited to publicly available research (House)
• Simplification of excise tax on private foundation investment income (House)
• Private operating foundation requirements relating to operation of an art museum (House)
• Exception to the private foundation excess business holdings rules for philanthropic business holdings (House)
• Section 501(c)(3) organizations permitted to make statements relating to political campaign in ordinary course of activities in carrying out exempt purpose (House)
WHAT DIDN’T MAKE THE CUT?
WHAT DIDN’T MAKE THE CUT?
• Additional reporting requirements for donor advised fund sponsoring organizations (House)
• Name & logo treated as unrelated business income (Senate)
• Repeal of tax-exempt status for professional sports leagues (Senate)
WHAT DIDN’T MAKE THE CUT?
• Modification of taxes on excess benefit transactions (intermediate sanctions) (Senate)
• Reduction in minimum age for allowable in-service distributions (House)
• Termination of private activity bond (House)
• No tax-exempt bonds for professional stadiums (House)
WHAT DIDN’T MAKE THE CUT?
• Modification of rules governing hardship distributions (House)
• Modification of rules related to hardship withdrawals from cash or deferred arrangements (Senate)
• Modification of nondiscrimination rules for certain plans providing benefits or contributions to older, longer service participants (House)
WHAT DIDN’T MAKE THE CUT?
• Limitation on exclusion for employer-provided housing (House)
• Repeal of exclusion for employee achievement awards (House)
• Sunset of exclusion for dependent care assistance programs (House)
WHAT DIDN’T MAKE THE CUT?
• Repeal of exclusion for educational assistance programs (House)
• Repeal of exclusion for qualified tuition reductions (House)
• Repeal of exclusion for adoption assistance programs (House)
WHAT DIDN’T MAKE THE CUT?
• Repeal of deduction for student loan interest (House)
• Repeal of deduction for qualified tuition & related expenses (House)
• Repeal of deduction for student loan interest (House)
WHAT DIDN’T MAKE THE CUT?
• Repeal of exclusion for interest on U.S. savings bonds used for higher education expenses (House)
• Termination of New Markets Tax Credit (House)
What Made the Cut
The Bad News for Exempt Healthcare!
EXCISE TAX ON EXECUTIVE
COMPENSATION
Excise Tax on Compensation in Excess of $1M
• Follows corporate rate (21%)
• Five highest-paid employees
• Taxable compensation
• Includes nonqualified deferred compensation from ineligible deferred compensation includible when there is not substantial risk of forfeiture (457(f))
COMPENSATION& EMPLOYEE
BENEFITS
Excise Tax
• Parachute payments 3x greater than the five-year salary average (excluding retirement benefits)
• Exempts not highly compensated employees from the definition of parachute payments
• Exempts professional medical services
COMPENSATION & EMPLOYEE
BENEFITS
Exclusion for qualified moving expense reimbursement repealed
Exception for active duty members of the Armed Forces
UNRELATED BUSINESS INCOME FOR CORPS
Corporate Tax Rates
Taxable Income Income Tax
All Income 21%
UNRELATED BUSINESS INCOME FOR TRUSTS
Trust Tax Rates
Taxable Income Income Tax
Not over $2,550 10%
$2,551–$9,150 $255 + 24% of the excess over $2,550
$9,151–$12,500 $1,839 + 35% of the excess over $9,150
> $12,500 $3,011.50 + 37% of the excess over $12,500
UNRELATED BUSINESS INCOME
Silo Income/Loss by Activity• Loss from one activity cannot
offset income from another
• Activity Definition• PTP Investment
• K-1 Investment
• Royalties
• Rents
• Other?
Effective years beginning after December 31, 2017
UNRELATED BUSINESS INCOME
UBI Increased by Certain Fringe Benefits
• Qualified transportation, and• Qualified parking
• Guidance needed to determine what is included?
• Out of pocket payments to third party vendors
• Cost or FMV of owned property
Effective beginning December 31, 2017
UNRELATED BUSINESS INCOME
Business Provisions that might impact your organization
Corporate alternative minimum tax repealed
Bonus depreciation – 100% through 2022, then scaled back through 2026
Section 179 expensing – $1M
UNRELATED BUSINESS INCOME
Business Provisions that might impact your organization
NOL deduction 80% taxable income (generated after
12.31.2017)
Net interest expense limitation
No entertainment deductions
TAX-EXEMPT BONDS
Repeals the exclusion from gross income for interest on advance refunding bonds
PRIVATE ACTIVITY BONDS
Repeal of Tax Credit Bonds
• Clean renewable energy bonds
• Qualified energy conservation bonds
• Qualified zone academy bonds
• Qualified school construction bonds
• Direct-pay bonds
CHARITABLE CONTRIBUTIONS
Increase limitation to 60%
Standard mileage rate, not adjusted for inflation
No deduction for payments made in exchange for college athletic seating rights
ITEMIZED DEDUCTIONS
Increased standard deductions
$10,000 limit on state & local tax deduction
Medical expense deduction
Impact on charitable giving?
ESTATE TAX
Increase exclusion to $10M• Inflation adjustment $11.2M 2018
Regulations for differences between the basic exclusion amount in effect
• At the time of decedent's death
• At the time of any gifts made by the descendent
Effective for estates of decedents dying & gifts made
after December 31, 2017
HOW WILL THIS IMPACT MY
ORGANIZATION?
Decline in Charitable Giving?
2017 2018 2018
Itemized Deductions:
Sales Tax 2,000.00$ -$ -$
Real Estate Taxes 15,000.00$ 10,000.00$ 10,000.00$
Home Mortgage Interest -$ -$ -$
Charity 7,000.00$ 7,000.00$ -$
Increased Standard Deduction -$ 7,000.00$ 14,000.00$
Total Itemized Deductions 24,000.00$ 24,000.00$ 24,000.00$
DONOR STRATEGIES?
• Bunching of itemized deductions
• Donor advised funds
• Qualified charitable distributions (QCDs)
BUNCHING ILLUSTRATION
BUNCHING 2018 2019 2020 2021
Itemized Deductions:
State income tax 10,000.00$ 10,000.00$ 10,000.00$ 10,000.00$
Real Estate Taxes -$ -$ -$ -$
Home Mortgage Interest 8,600.00$ 7,400.00$ 8,600.00$ 7,400.00$
Charity 20,000.00$ -$ 20,000.00$ -$
Increased Standard Deduction -$ 6,600.00$ -$ 6,600.00$
Total Itemized Deductions 38,600.00$ 24,000.00$ 38,600.00$ 24,000.00$ 125,200.00$
WITHOUT BUNCHING 2018 2019 2020 2021
Itemized Deductions:
State income tax 10,000.00$ 10,000.00$ 10,000.00$ 10,000.00$
Real Estate Taxes -$ -$ -$ -$
Home Mortgage Interest 8,000.00$ 8,000.00$ 8,000.00$ 8,000.00$
Charity 10,000.00$ 10,000.00$ 10,000.00$ 10,000.00$
Increased Standard Deduction -$ -$ -$ -$
Total Itemized Deductions 28,000.00$ 28,000.00$ 28,000.00$ 28,000.00$ 112,000.00$
DONOR ADVISED FUND ILLUSTRATION
Even Charitable Over 5 Years Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
State Tax Deduction 10,000 10,000 10,000 10,000 10,000
Interest Expense 0 0 0 0 0
Charitable 20,000 20,000 20,000 20,000 20,000
Total 30,000 30,000 30,000 30,000 30,000 150,000
Fund DAF in Year 1 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
State Tax Deduction 10,000 10,000 10,000 10,000 10,000
Interest Expense 0 0 0 0 0
Charitable 100,000 0 0 0 0
Additional standard deduction 14,000 14,000 14,000 14,000
Total 110,000 24,000 24,000 24,000 24,000 206,000
QCD ILLUSTRATION
W/O QCD W/ QCD
RMD Income 12,000 0
Itemized Deductions:
State income tax 10,000 10,000
Real Estate Taxes 0 0
Home Mortgage Interest 0 0
Charity 12,000 0
Increased Standard Deduction 2,000 14,000
Total Itemized Deductions 24,000 24,000
What Made the Cut
The Good News for Taxable Healthcare!
21% Flat Tax Rate
Bonus Depreciation
• 100 percent through 2022 for qualified
property placed in service after September
27, 2017
• 80, 60, 40 & 20 percent for property placed
in service in 2023–2026, respectively
• Definition of qualified property expanded
by removing requirement that original use
begin with taxpayer
• Specified property included & excluded
(Previously 40, 30 & 20 percent bonus
depreciation for qualified property in 2018–
2020, respectively; property must be new to
qualify)
DEPRECIATION
PROVISIONS
Cost recovery
Section 179 Expensing
• Up to $1 million
• Phaseout beginning at $2.5 million of
assets placed in service
• Definition of qualified property expanded to
include certain improvements to
nonresidential real property, including
roofs, HVAC systems, fire protection &
alarm systems & security systems
(Previously up to $520,000; phaseout
beginning at $2,070,000 of assets placed in
service)
DEPRECIATION
PROVISIONS
Cost recovery
• Deduction generally limited to sum of
▪ Business interest income
▪ Floor plan financing interest
▪ 30 percent of “adjusted taxable income”
Taxable income
+/- Items of income, gain, deduction or loss not properly
allocable to trade/business
+ Business interest expense
- Business interest income
+ Net operating loss
+ Pass-through business deduction
+ Depletion, depreciation & amortization
(taxable years beginning before January 1, 2022, only)
BUSINESS INTEREST EXPENSE
DEDUCTION
BUSINESS INTEREST EXPENSE
DEDUCTION
• Excess carried forward indefinitely
• Limit does not apply to
▪ Businesses with average annual gross receipts
≤ $25 million (affiliated group basis)
▪ Regulated public utility business (including
electric cooperatives)
▪ Following businesses may elect not to be
subject to limitation provided they use ADS
method for depreciation
• Real property businesses
• Farming businesses (including agricultural &
horticultural cooperatives)
Pass-Through Business Deduction
• Deduction = 20 percent of
• Domestic qualified business income from
partnership, S corporation or sole
proprietorship
• Qualified REIT dividends
• Qualified cooperative dividends
• Qualified PTP income
• Available to individuals, trusts & estates
• Aimed at maintaining tax rate benefit of flow-
through structure
• Sunsets December 31, 2025
• Limitations apply
QUALIFIED BUSINESS INCOME
DEDUCTION
Sunsets 12/31/2025
• Domestic: effectively connected with conduct
of trade/business within U.S. & Puerto Rico
• Qualified business income: net amount of
items of income, gain, deduction & loss with
respect to any qualified trade or business,
except
▪ Reasonable compensation
▪ Guaranteed payments
▪ Investment income
• Short-term & long-term capital gain/loss
• Dividend income
• Interest income
(Note overall loss treated as loss for purposes of
calculation in subsequent year)
QUALIFIED BUSINESS INCOME
DEDUCTION
Sunsets 12/31/2025
• Limitations: Apply when taxable income
exceeds $157,500 single ($315,000 MFJ)
& phase out over next $50,000
($100,000) of taxable income
1) Wage limitation: Greater of
▪ 50 percent of W-2 wages paid with respect
to business OR
▪ 25 percent of W-2 wages paid plus 2.5
percent of unadjusted basis (immediately
after acquisition) of all qualified property
2) Not allowed for “specified service trade or
businesses” once income exceeds threshold
amounts
QUALIFIED BUSINESS INCOME
DEDUCTION
Sunsets 12/31/2025
• Specified service business: Any trade or business
involving performance of services in fields of
QUALIFIED BUSINESS INCOME
DEDUCTION
Sunsets 12/31/2025
▪ Health
▪ Law
▪ Accounting
▪ Actuarial science
▪ Performance arts
▪ Investing & investment
management, trading
or dealing in securities,
partnership interests or
commodities
▪ Consulting
▪ Athletics
▪ Financial services
▪ Brokerage service
▪ Principal asset is
reputation or skill of one
or more of its employees
or owners
• Need further guidance in several areas
▪ Definition qualified trade or business
▪ Application of grouping elections
▪ Clarification on how definition of specified service
trade or business applies
▪ Whether wages paid by an affiliated management
company count for purposes of wage limitation
QUALIFIED BUSINESS INCOME
DEDUCTION
Sunsets 12/31/2025
OTHER
CONSIDERATIONS
FOR TAXABLE
ENTITIES
Entertainment Expense
• Entertainment expenses no longer
deductible
Meals Expenditures
• Business meals remain 50% deductible
• Convenience meals now subject to 50%
limit; previously fully deductible
OTHER
CONSIDERATIONS
FOR TAXABLE
ENTITIES
Carried Interest
• Partnership profits interest in connection with
performance of services
• Long-term capital gain rate after three-year
holding period with respect to any applicable
partnership interest
Like-Kind Exchange
• Deferral of gain limited to real property not held
primarily for sale
Cash Method of Accounting
• Allowed for C Corporations with <$25mil in
gross receipts (Previously <$5mil)
Pass-through vs C Corp
▪ Pass-through entity
▪ 37% top rate with no QBI deduction
▪ 29.6% top rate with full QBI deduction
▪ No deduction for state income tax
▪ C corporation
▪ 39.8% top rate if all profits are distributed
(blended rate: 21% corp rate; 23.8% max dividend rate)
▪ Full deduction for state income tax
ENTITY STRUCTURE
COMPARISON
Pass-through vs C Corp
▪ Long-term distribution plans
▪ Pass-through favors high distribution
rate
▪ C corp favors low distribution rate
▪ Long-term succession plans
▪ Buyers want assets, not C corp shares
▪ Customized modeling essential
ENTITY STRUCTURE
COMPARISON
PLANNING STRATEGIES FOR BUSINESSES
Consider strategies to accelerate deductions & defer income for permanent tax savings
Cost segregation
studies
Accounting method changes
R&D credit studies
Capital repair expensing & partial
dispositions
Keep Up with What’s Next
BKD Contacts
• BKD Tax Reform Resource Center
• bkd.com/taxreform
Simply Tax Podcast
• bkd.com/simplytax
BKD Year-End Advisor
• bkd.com/advisor
Questions?
Thank You!
