As the clock ran down on 2013, a number of deductions healthcare providers have come to depended upon to lessen their tax burden expired. Last year also saw an increase in federal tax rates, including higher taxes on investment income and capital gains. This combination has accountants nationwide bracing for a widespread outbreak of severe sticker shock come April 15.Tom McGuinness, CPA, CVA, of Reimer, McGuinness & Associates, PC in Houston said his firm has run tax scenarios for high net worth individuals for more than a year. “We’re doing this as a service to prepare you for the blow … but the blow is coming,” he stated. For one client whose income hit the $2 million mark, there was a six-figure difference in taxes owed. “Looking at 2012 actual income data, the tax differential was 22 percent,” McGuinness said of the $860,000 that would be owed for 2013 as compared to $706,000 for 2012. “It is real money.”He added that many of the changes in 2013 and 2014 will hit healthcare professionals and providers both as businesses and as individuals. McGuinness said at the beginning of 2013, Congress was upset about the fiscal cliff and proud of themselves for ‘fixing’ it. However, he continued, as 2013 tax bills come due, “It’s going to be the taxpayers turn to be mad because they are going to see how the fiscal cliff was avoided.”Key Business ChangesBeneficial depreciation options take a big hit in 2014. Changes to expensing qualified purchases, bonus depreciation, qualified leasehold improvements and a new IRS capitalization policy are all anticipated to impact many in the healthcare space. “Congress did not extend the favorable 179 deduction, which allows a taxpayer to expense immediately the cost of an otherwise capitalizable asset,” said Scott Tomichek, JD, CPA, senior tax manager for Carter Lankford CPAs PC, located in Tennessee. “The 2013 Section 179 deduction was $500,000 for purchases up to $2 million and is set to be reduced to $25,000 for purchases up to $200,000 in 2014.”Accelerated depreciation, which has been heavily used by healthcare providers and facilities to make equipment purchases more affordable on the front end was another incentive that expired at the end of 2013. Tomichek noted that on the purchase of capitalizable assets in 2013, a taxpayer was allowed to deduct 50 percent of that asset in the year of purchase and then depreciate the remainder. The accelerated 50 percent goes away in 2014 and reverts to the regular rules of a more even-based depreciation schedule without Congressional intervention. Another change is in the life of qualified leasehold improvements, which are defined as any improvement to an interior part of a building that is nonresidential property. “Qualified leasehold improvements were able to be depreciated using a 15-year life and included in the previous Section 179 and bonus depreciation calculation in 2013,” Tomichek explained. In 2014, those improvements return to a 39-year depreciable life, which means the expenditures are depreciated at a much smaller annual amount over nearly four decades and no longer qualify for the other depreciation benefits. Tomichek said the new IRS capitalization policy that went into effect on Jan. 1 is a bit of ying to the yang of losing the other deductions. “The most important part of the rule is the de minimis safe harbors that apply to not only improvements but to certain tangible property purchased,” he said. “The de minimis safe harbor allows a taxpayer to deduct purchases under a certain threshold. For taxpayers with audited financial statements, the threshold is $5,000 per invoice or per item as substantiated by invoice. For those without audited financial statements, the threshold is $500.” He noted that previously, these qualified items had to be depreciated but now can be expensed, which is a tax benefit. However, he added, “To qualify, the taxpayer must have a written accounting policy in place at the beginning of the tax year.”Doug Funke, CPA, a partner with Honkamp Krueger & Co. PC, a CPA firm headquartered in Dubuque Iowa, noted a number of other general 2014 tax changes could impact medical practices and hospitals. One example is the transit benefit allowance. “The amount of transit fringe benefits that employers can provide to employees on a pre-tax basis for using public transportation and van pooling will drop from $245 per month in 2013 to $130 per month for 2014.”He said dozens of other extenders, or tax incentives, including the work opportunity tax credit for hiring targeted individuals and the research tax credit, as well as various energy credits, expired at the end of 2013. A list of expired provisions is available through the Joint Commission on Taxation at www.jct.gov. For exempt organizations, which includes many hospitals, Funke said the IRS is focusing on compliance, using information reported on Form 990. “Indicators of potential noncompliance that they have identified include the following relationships:• Large fundraising revenues and small fundraising expenses,• Large fundraising revenues and small charitable program services expense,• Large unrelated business income but no income taxes due on the unrelated business income, • Large total compensation to officers, directors, trustees and key employees and small annual gross receipts.”Funke added, “An accurate Form 990 generally decreases the likelihood of being selected for examination.”Also pertaining to some employers, Funke said, “The June 2013 U.S. Supreme Court decision related to the Defense of Marriage Act recognizing same-sex marriages affects employers in states where same sex marriage is recognized. Employer-provided healthcare coverage for same-sex spouses get the same tax-favored treatment.” He added the IRS announced two special administrative procedures for employers to make claims of refunds or adjustments to employment taxes for certain benefits paid to same-sex spouses during 2013.This Time It’s PersonalMuch has been written about the higher tax brackets and rates, but McGuinness said a lot of people will still be surprised at the cumulative effect. “The top tax rate went from 35 to 39.6 percent and that happens starting at $450,000 married filing jointly or $400,000 for single filers,” he explained. However, McGuinness continued, that’s just one of six tax changes that will impact high income taxpayers. A 5 percent increase (from 15 percent to 20 percent) in capital gains and dividends tax has also been instituted for those at the same income levels as the highest tax bracket. For individuals starting at $200,000 and married filing jointly at $250,000, the Affordable Care Act added a 0.9 percent additional FICA tax on wages and a 3.8 percent Medicare tax on investment income. “The rules regarding the 3.8 percent investment income are more complicated than you might think,” he explained in a recent blog for physicians. “You do not include income from S Corporations or a trade or business in which you are actively involved … but do include interest, dividends, annuities, royalties, rents and net gain from the disposition of non-business property.”When looking at the combination of the increased investment income and capital gains taxes, McGuinness said, “What was being taxed at 15 percent is very possibly going to be taxed at 23.8 percent.”Additionally in 2014, the sales tax deduction goes away … and for single wage earners beginning at $250,000 and married filing jointly at $300,000, itemized deductions and personal exemptions are being phased out. “If you’re taking a deduction away from me, that’s a tax increase,” McGuinness said of the bottom line for taxpayers. He added the itemized deduction phase-out could be quite costly, particularly to those who give large amounts to charity and have significant home mortgage interest they were used to deducting. “The personal exemption is equal to $3,900 (in 2013) per exemption you claim, and all exemptions are lowered by 2 percent for each $2,500 of income above the numbers ($250,000 single, $300,000 married filing jointly),” he explained. “The larger your family, the larger the tax increase.”McGuinness noted there is a growing feeling of frustration. At the same time many of his physician clients are paying significantly more in taxes, reimbursements are shrinking. The net result is people are having to work much harder simply to make the same money. McGuinness said individuals should have already asked their tax advisors to provide estimates of what their 2013 tax burden will look like. If that hasn’t happened, he suggests doing it now to prepare for April 15, 2014. Quoting one of his colleagues, he said, “It’s not going to be pretty in a lot of cases … but better than finding out on April 10 that you need to either drain your savings or take out a loan to pay your tax bill.” End Notes & DisclaimerThe experts who contributed information to this article are members of the National CPA Health Care Advisors Association. Headquartered in Nashville, HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry and educating its members about the ever-changing financial and regulatory landscape impacting the industry. The financial professionals stressed the importance of consulting a tax specialist to ensure advice is specifically tailored to your unique business or personal situation to minimize the tax burden while fully complying with state and federal mandates.Additionally, the information in this article was provided prior to the end of 2013. It is possible that some of the expiring tax incentives could be extended through legislative action. However, the consensus opinion was that Congress is unlikely to reinstate all … or even very many … of the sunsetting extenders.
The Big PictureBrian Bourke, a healthcare consultant with Honkamp Krueger & Co. PC, works with both providers and purchasers of healthcare benefits. “We are in an unprecedented atmosphere of confusion and uncertainty,” he stated. “It’s more important than ever that healthcare organizations do three things — minimize their tax burden while simultaneously optimizing their efficiency and minimizing costs.”Although admittedly easier said than done, Bourke noted it is possible for organizations to improve in one or all areas to strengthen the bottom line. He added that it’s important for organizations to realize there is a cost inherent in complying with new laws and regulations. “The two biggest components of cost outside of medical equipment and supplies is human capital — the HR cost — and the cost of purchasing healthcare benefits if you sponsor a plan,” he said. Although some employer provisions associated with ACA have been delayed, others … like allowing adult children through age 25 to remain on a parent’s plan … are already in effect. Bourke said now is the time to really take a hard look at what it will cost to provide benefits and/or incur tax penalties. As for improving efficiency, he said enhancing the operational management function is critical and stressed the analytical process to ferret out inefficiencies isn’t a ‘one and done’ proposition but an ongoing process. “Over time, healthcare organizations … both big and small … have gotten very tolerant of inefficiency and revenue loss,” Bourke said, adding that often the management teams aren’t even aware of it. “What I would tell anyone who is trying to remain viable in this atmosphere is every cost needs to be looked at on a comprehensive basis.”He added that means scrutinizing every expenditure from reviewing vendor contracts to pricing out office supplies. Another major area for review is the number of people working for you. He said right-sizing isn’t always about laying off employees but might be achieved through strategic planning, realigning duties, early retirement incentives and natural attrition. “That’s not always a popular thing to say,” he admitted of reviewing human capital expenditures, “but it’s better than shutting down the practice.”Finally, too often money is left on the table due to poor revenue cycle management. “A lot of organizations and medical facilities have neglected their fee schedule payment from a lot of their third party payers,” he said. While federal rates and large payers don't typically offer much leeway, that doesn’t mean renegotiation is impossible with every payer. “If you can increase your fees even for a small percentage of your patients, it’s always a good thing to do,” he pointed out. Additionally, Bourke said changes in health benefits have shifted more responsibility to consumers, resulting in rapidly rising bad debt. “Healthcare organizations have done a poor job in making that transition and holding people accountable.” He added that it isn’t about banging on people’s doors to demand money … but neither is it effective to send an endless stream of statements. Bourke noted practices and facilities need to find ways to better address outstanding bills and engage patients such as offering discounts for prompt payment or setting up payment plans. “I think there are a lot of creative methods that can be used somewhere between a debt collector and writing it off.”