Tax Reform Provision Effects for Health Care Providers
Author: Brian Todd
The political climate in Washington, D.C., along with recent remarks from congressional leaders and White House officials, seem to indicate the environment is ripe for tax change in 2017 and beyond. Even so, there are differing opinions about these major issues:
- When legislative language would be drafted and introduced
- How the legislation will read
- If there will be efforts to garner bipartisan support
- If the reform legislation would be retroactive to the beginning of 2017
Resolving the many differences within the current political agenda may make tax reform difficult to accomplish.
Though there have been many tax reform proposals, those put forth by House Republicans and President Trump are most likely to heavily influence tax change with Republicans in control of both Congress and the White House. If we see tax reform, the House Committee on Ways and Means Better Way for Tax Reform Blueprint (House Blueprint) is a likely starting point. Further, recent statements from House Speaker Paul Ryan and House Committee on Ways and Means Chairman Kevin Brady indicate these efforts may already be underway. Although the two proposals provide insight into how tax reform may look, they aren’t yet fully developed—and legislative language will be necessary to understand how the concepts would operate. Read “Election Results May Lead to Tax Changes in the New Year” to learn more about these proposals and how they compare to current tax law.
Despite the facilitative political environment, it’s difficult to predict the possibility or substance of tax reform without detailed proposals given plenty of differing opinions. Even so, possible tax reform can affect you, and understanding potential outcomes is important for your tax planning strategy.
To help you navigate uncertainty surrounding tax reform, here are some key areas and planning considerations in the health care industry that BKD’s tax professionals will be watching for in possible tax reform legislation:
- Patient Protection and Affordable Care Act (ACA) overhaul efforts are advancing through the budget reconciliation process. These rules are generally designed to facilitate provision passage without the 60 votes needed in the Senate to prevent legislation from stalling out due to filibuster. While the reconciliation process may facilitate the road to passage, 60 Senate votes still are required to pass a provision that loses revenue beyond the 10-year budget window.
- Key provisions of the bill affecting taxes imposed on the health care industry with the ACA include a repeal of the 2.3 percent tax on the sale price of taxable medical devices and a deferral of the 40 percent “Cadillac tax” on high-cost health insurance plans until 2025. A cap on the exclusion of employer-provided health benefits wasn’t included in the American Health Care Association (AHCA) when released; however, this proposal has appeared in recent Congress discussions to replace the ACA.
- The increasing prospect of an ACA repeal or change creates significant uncertainty for the health care industry. The concern is furthered, as the industry has undergone significant transition since the ACA enactment and the phasing in of ACA provisions.
- Trump’s budget calls for almost a $15 billion cut to the Department of Health and Human Services. While there isn’t enough detail to know what budget areas and providers could be affected, such cuts could create significant headwinds for health providers relying on federal grants and funding in the coming years.
Provisions Affecting Tax-Exempt Health Care Providers
- Republican leadership promises to repeal and replace the ACA have begun to take shape with the American Health Care Act March 6 release by House Republicans. Learn about this proposed legislation’s provisions in “Proposed Tax & Other Changes in the American Health Care Act.” Of interest to tax-exempt hospitals, the bill doesn’t affect the requirements under IRC Section 501(r) related to community health needs assessments, financial assistance policies, amounts generally billed or billing and collection practices.
- Tax-exempt health care organizations continue to become more complex with the prevalence of taxable subsidiaries and joint ventures, as well as the diversity of business lines and contractual arrangements. This organizational complexity contributes to the challenge of reform that fits for health systems, providers and insurers.
- Possible estate tax repeal and a reduced benefit of charitable contribution deductions to donors with the proposed lower overall income tax rates could put some health foundation donors in limbo. Foundations may face challenges enticing contributions if donors delay charitable and estate and gift planning until the outlook on tax reform comes into better focus.
- Not-for-profit taxpayers also will want to read our article “What Not-for-Profits Should Know About Potential Tax Changes” to learn more about the possible effect of tax reform.
Provisions Affecting Taxable Health Care Providers
- Trump and House Republican proposals generally call for lower tax rates on income from corporations and pass-through entities. See our tables comparing the proposals to current law on our Tax Reform Resource Center for a closer look at how the proposed reduced tax rates compare to current tax law.
- The proposals eliminate the net interest expense deduction, i.e., interest expense in excess of interest income, with any interest expense not deducted carried forward indefinitely for use against future interest income. This proposed elimination would reduce the incentive for debt financing of business activities and capital investment.
- The individual and employer mandates would lose their enforcement mechanisms under the AHCA, with the penalties imposed on individuals and applicable large employers being retroactively reduced to zero for tax years beginning on or after December 31, 2015. Despite the proposed elimination of these penalties, the reporting requirements established under the ACA would continue.
- White House and Republican congressional leadership statements indicate tax reform will follow work to repeal and replace the ACA. Stay up to date on how tax reform will affect the health care industry with our Tax Reform Resource Center, and contact your BKD advisor for more information.