On Dec. 22, 2017, President Trump signed sweeping tax reform,
formerly known as the Tax Cuts and Jobs Act, into law, marking the largest
change to U.S. tax policy in decades.
What changes are coming for healthcare companies?
To help organizations navigate the issues most impactful and
urgent to the healthcare industry, we’ve prepared a summary of the major
implications based on the signed legislation.
Provision
Implications for Nonprofits
Considerations for Healthcare
Organizations
Repeal of the ACA Individual
Mandate
The final legislation ends the requirement for individuals
to possess health insurance or face a monetary penalty. This will increase
the number of uninsured individuals by about 13 million in 2027, according to
the Congressional Budget Office. However, large portions of the ACA are still
in effect.
Effective date: Effective for years after
Dec. 31, 2018
Industry view: Negative
Comments: A sharp increase in
the number of people without insurance could hurt hospitals’ finances as they
treat more uninsured patients.
Increase the Standard
Deduction; Limit the State and Local Tax Deduction
The final legislation nearly doubles the standard
deduction for individuals and married couples filing jointly and limits the
deduction for state and local taxes to $10,000.
Effective date: Taxable years after Dec.
31, 2017
Industry view: Negative
Comments: The increase in the
standard deduction, combined with the limitation on the deduction for state
and local taxes, will cause fewer individuals to itemize, which many
nonprofits fear may lead to a reduction in overall giving. It has been
estimated by the Tax Policy Center that charitable giving will decline
between $12.3 and $19.7 billion.
Increase the Charitable
Contribution Deduction Limit and Repeal the “Pease” Limitation
The Act increases the charitable contribution deduction
limit for an individual to 60 percent of his or her adjusted gross income
(AGI), up from the current limit of 50 percent. The Act repeals the “Pease”
limitation, whose original intent was to raise tax revenue by increasing the
taxable income for high-income earners. It does this by reducing the value/
benefits of several itemized deductions (including charitable contributions)
once a taxpayer’s AGI reaches a certain amount ($261,500 for single filers
and $313,800 for married couples filing jointly). The suspension of this
limitation sunsets in 2025.
Industry view: Positive
Comments: The increase in
deduction limits may be an incentive for high-income donors to give more to
charity, as they can claim more of their donations as a charitable deduction.
Since the “Pease” limitation reduced the benefits of
itemized deductions (including charitable contributions), repealing it allows
high earning taxpayers to go back to enjoying the full benefits of these
deductions. It is anticipated that this measure could help prompt high
earners to donate more to charity.
Impose an Excise Tax on
Endowments of “Applicable Educational Institutions”
The law includes a new excise tax of 1.4 percent on the
net investment incomes of applicable educational institutions. The term
‘applicable educational institution’ refers to an educational institution
which a) had at least 500 students during the preceding taxable year; b) the
aggregate fair market value of the assets of which at the end of the
preceding taxable year (other than those assets which are used directly in
carrying out the institution’s exempt purpose) is at least $500,000 per
student of the institution; and c) more than 50 percent of the students are
located in the United States.
Effective date: Taxable years after Dec.
31, 2017
Industry view: Negative
Comments: Healthcare systems
that have post-secondary schools could be caught by this provision. Under the
new law, when making the determination of whether the asset threshold is met,
an institution will have to include the income and assets of certain
related organizations.
Repeal of Advance Refunding
Bonds
Effective date: Applies to advance
refunding bonds issued after Dec. 31, 2017
Industry view: Negative
Comments: Eliminates advance
refunding for municipal bonds by making interest on advance refunding
bonds taxable.
Imposes Excise Tax on
Executive Compensation
The Act imposes a 21 percent excise tax on the
compensation of any covered employee in excess of $1 million. The term
‘covered employee’ means any employee (including any former employee) of an
applicable tax-exempt organization if the employee a) is one of the five
highest compensated employees of the organization for the taxable year, or b)
was a covered employee of the organization (or any predecessor) for any
preceding taxable year beginning after Dec. 31, 2017. Certain medical
professionals are excluded from the definition of a covered employee.
Effective date: Effective for taxable
years beginning after Dec. 31, 2017
Industry view: Negative
Comments: Tax-exempt
organizations will need to factor this new excise tax into their overall tax
planning and be aware that this extra payment may require budget cuts
elsewhere.
Remuneration of a covered employee paid by an applicable
tax-exempt organization includes amounts paid by a related person or
government entity if the person or entity controls, or is controlled by, the
applicable tax-exempt organization; is controlled by a person, or persons,
that control the organization; or is a supported or supporting organization.
A related organization can be taxable or tax exempt.
Modifications to the
Unrelated Business Income Tax (UBIT)
The Act disallows tax-exempt organizations to take the
business losses from one economic activity and deduct them from the gains of
another economic activity. Organizations could, however, use one year’s
losses on the same unrelated business to reduce taxes on another year’s
operation of the same unrelated business.
The provision is effective for taxable years beginning
after Dec. 31, 2017. NOLs arising before Jan. 1, 2018, are not subject to the
rule.
Industry view: Negative
Comments: There are many
unanswered questions about this UBIT provision and there may be opportunities
for additional tax planning. On the other hand, the corporate income tax rate
is decreased from 35 to 21 percent, which means nonprofits will pay a lower
tax rate on the UBIT than they are currently.
Certain Fringe Benefits Taxed
as UBI
A tax-exempt organization includes as UBTI any amounts
paid or incurred by the organization for any qualified transportation fringe
or any parking facility used in connection with qualified parking.
UBTI does not include the amounts described above to the
extent connected with an unrelated trade or business.
Effective date: Tax years
beginning after Dec. 31, 2017
Industry view: Negative
Comments: These provisions
were enacted to equalize the treatment between taxable corporations that can
no longer deduct these amounts and nonprofits.
Guidance will be needed for the allocation of depreciation
and other costs with respect to facilities used for parking.
What should you do now?
Here are five steps healthcare organizations should take now
to tackle tax reform:
1.Assess impact. Tax professionals will likely need to
review the bill text manually and measure their organization’s specific
circumstances against it to assess the impact of the provisions and their
holistic effect on their organization’s bottom line.
2.Assemble a team. While the heaviest burden may fall
on accountants, companies and their finance teams will have an important role
to play in gathering all the necessary data.
3.Dig into the data. Assessing the impact of tax reform
requires a substantial amount of data. Organizations need to move from modeling
the impact of tax reform to focusing on data collection and computations as
soon as possible. If you have an international presence, bear in mind that some
of the information needed could date back to 1987.
4.Establish priorities. When considering what next
steps to take, focus on the areas that could have the greatest impact on your
organization.
5.Initiate tax reform conversations with your tax advisor. Tax
reform of this magnitude is the biggest change we’ve seen in a generation and
will require intense focus to understand not only how the changes apply at the
federal level, but also to navigate the ripple effect this is likely to have on
state taxation as well.
Speak to one of our professionals about your organizational needs
