As high-income business owners, healthcare providers are one of the groups of people most impacted by the new tax plan. Here's an overview of its key provisions and how they will raise or lower your tax bill.
Pass-Through Entity Deductions
One of the biggest overall changes in the tax code is a 20 percent deduction for pass-through entities. This deduction reduces taxes on your profit share (but not salary) from a sole proprietorship, partnership, LLC or S-Corporation.
Whether you qualify depends on your income. Service business income, including medical practice income, is only eligible for the full deduction if your individual income is no higher than $157,500 or your household income as joint filer is no higher than $315,000. If your income is up to $207,500 for single filers or $415,000 for joint filers, you receive a partial deduction; if your income is higher, you receive no deduction.
Loss of Itemized Deduction for Business Expenses
One common myth about the new tax law is that business owners will no longer be able to deduct their expenses. Only employees lose the unreimbursed business expense deduction.
If you receive a W-2 salary and have to pay travel expenses or professional fees on your own, you do lose your deduction. However, if you're an owner of your practice, the costs of operating your practice remain deductible.
Increased Availability of the Child Tax Credit
The Child Tax Credit will now be available to more practitioners thanks to an increase in the income limits to receive the credit. They are now $200,000 for single filers and $400,000 for joint filers. If your income is up to $40,000 above either limit, you receive a partial credit under the phase-out rules.
The credit is $2,000 per qualified child under age 17 and is designed to offset the impact of the elimination of the personal exemption.
Cap on State and Local Tax Deductions
You can now deduct a maximum of $10,000 in your combined property tax, state income tax, and local income tax payments. If you live and work in Texas year-round, you can apply the full deduction towards your property taxes. If that's not enough to cover your property taxes, don't forget the increase in the standard deduction to $12,000 for single filers and $24,000 for joint filers.
Student Loan Debt is Unchanged for Now
Although it was originally on the chopping block, the student loan interest deduction remains in place at least early in your career when your income still qualifies.
More troubling for doctors who are using an Income-Based Repayment or Pay As You Earn Plan is Congress codifying that a student loan discharged due to death or disability will not be taxed through 2025. Until this point, Congress had been silent on whether forgiven loans under student loan forgiveness programs would be taxable as discharged debt typically is. If you were using 401(k) contributions to reduce your student loan payments or took a low-salary position that doesn't qualify for Public Service Loan Forgiveness, it's likely that any forgiven balance on your loans will be taxed as part of your income.
Mortgage Interest Deduction Cap
The mortgage interest deduction is now only available on up to $750,000 in mortgage debt. The change only applies to new mortgages, and old mortgages continue to follow the old rules.
In addition, only mortgages or home equity loans taken to finance the purchase of a home or to refinance a loan that was originally for the purchase of a home receive a deduction. There is no longer a deduction for interest on loans taken out for home improvement or other purposes. This provision is effective immediately and does include loans made before the change in the law.
Increased Charitable Donation Deduction Limit
A deduction that was improved was the deduction for charitable donations. You can now deduct donations equal to up to 60 percent of your income up from the old limit of 50 percent.
Changes for For-Profit Hospitals
If you work on the administrative side or are a stakeholder in a for-profit hospital, there are some additional changes of which you should be aware.
- False Claims Act settlement payments are now deductible if specified as such in the settlement agreement. This is a departure from the general tax policy that settlements of fines and other regulatory issues are not deductible.
- For-profit healthcare corporations can only deduct interest expense equal to no more than 30 percent of their taxable income. Many for-profit hospitals have debt loads that create interest expense above this limit.
- Hospitals organized as corporations should also be aware of general changes in the corporate tax structure such as the new 21 percent corporate tax rate.
- Finally, the repeal of the individual mandate under the Affordable Care Act may decrease demand for medical services or cause hospitals to see an influx of uninsured patients.
These changes are only the tip of the iceberg in the most extensive overhaul of the tax code since 1986. Five-figure changes in your individual tax bill are not out of the question, and the business changes will also substantially impact the tax liability and valuation of your practice. Contact the healthcare CPAs at Goldin Peiser & Peiser as soon as possible to gain a better understanding of how the changes impact you and the tax planning moves you need to make.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.