Healthcare Industry Prepares for Major TCJA Changes
posted Nov 5, 2018 by Loree Dubois, CPA in the Global Tax Blog
The Tax Cuts and Jobs Act (TCJA) is the biggest change to federal tax law in over three decades. Many healthcare providers will benefit from a provision that reduces the income tax rate for C corporations, including personal service corporations, to a flat 21%. Learn more about what has changed under the new law.
TCJA changes for healthcare industry
Individual income tax rates are lower under the TCJA, with the highest tax rate at 37%. To help level the playing field, the TCJA allows certain pass-through entities to take a deduction of up to 20% on qualified business income (QBI). But this break is available only from 2018 through 2025, and it’s subject to various limitations and restrictions on what type of entities qualify.
In particular, specified service providers are subject to a limitation at higher income levels. It applies to “any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees [or owners].” So, physicians and other healthcare providers may be partially or completely denied the QBI deduction if their earnings exceed the income threshold limit.
Other TCJA provisions that are expected to benefit the healthcare industry include:
- Repeal of the 20% corporate alternative minimum tax (AMT), and
- Expanded first-year deductions for bonus depreciation and Section 179 for new and used assets.
However, several TCJA changes could adversely affect companies in the healthcare industry, including:
- The limitation on net operating losses (NOLs),
- The limitation on deductions for business interest payments to 30% of “adjusted taxable income,”
- Provisions on global intangible low-taxed income (GILTI) from intangible assets held in foreign jurisdictions and base erosion and anti-abuse tax (BEAT) on foreign income,
- Elimination of the domestic production activities deduction (DPAD) under Section 199,
- The reduction of the orphan drug credit for research on rare diseases, and
- A new requirement to capitalize and amortize research and experimentation (R&E) expenses for tax years starting in 2022.
Changes to the tax rules, in turn, may affect a company’s financial statements. Under U.S. GAAP, companies must report the effect of new laws in the quarter they’re enacted. Fortunately, the Securities and Exchange Commission (SEC) and the FASB issued guidance that allowed companies to use “reasonable estimates” and “provisional amounts” for some tax-related line items when preparing their fourth-quarter and year-end 2017 financial statements.
The IRS is expected to issue additional guidance to clarify complex provisions of the tax law in the coming months. Additional adjustments to deferred tax assets and liabilities may be required as companies learn more about the effects of the TCJA.
Questions? Our healthcare services group is on top of the latest developments and can help your organization implement the changes in a timely manner.
Wondering how your accounting will change? Check out our blog, “Healthcare Professionals: Prepare for Major Accounting Changes”.
For more tax reform updates, be sure to visit our Tax Reform Center- your “one stop shop” for all things Tax Cuts and Jobs Act (TCJA) related.