President Trump signed the Tax Cuts and Jobs Act into law on December 22nd. The enactment of this legislation provides the first major tax reform in over 30 years and will have a far-reaching effect, offering both opportunities and potential pitfalls. This article will highlight several of the key provisions that will have the most significant impact on long-term care organizations.
Many long-term care facilities are organized and taxed as pass-through entities (S-Corporations, Limited Liability Corporations, Partnerships and Sole Proprietorships). These types of pass-through entities are taxed on the owner’s personal income tax return. The 2018 tax reform created a new pass through taxation structure that now allows a 20% deduction for owners on their personal tax return for qualified business income from a pass-through entity in certain cases. There are some limitations and phaseouts on this deduction, and not all types of pass-through income qualify for it. As such, it is important to understand that this is not an automatic 20% deduction on all pass-through income, but can be an excellent tax savings opportunity when properly applied.
In addition, some long-term care facilities own their real estate in a separate entity (usually an LLC). As stated above, owners of pass-through entities are now allowed a 20% deduction on their own personal tax return for qualified business income. However, this qualified business income must be from a qualified trade or business. Depending on the activities of your realty company, it may not qualify as a qualified trade or business and may not qualify for the pass-through deduction mentioned above. As such, the income generated in the realty company may be taxed at much higher rates because the income could be taxed at the maximum individual rate, which is 37% starting in 2018 (down from 39.6% in 2017). Due to these changes, now is a good time to review the organizational structure and the lease arrangement between the realty entity and the long-term care entity to potentially take advantage of this beneficial tax treatment.
Some long-term care facilities are organized as C corporations. For those entities, the corporate tax rate has been reduced to a flat 21%. As a C corporation, earnings are subject to a double tax, once at the corporate level and a second time (a potential tax rate of 23.8%) upon distribution of earnings to the owners. However, depending on how your organization distributes earnings to owners, along with other factors, the lower 21% tax rate may be appealing. Along these lines, certain pass-through entities may even want to consider becoming C corporations, which would make them eligible for this 21% tax rate. S corporations have until March 15 to revoke its S-election to become a C corporation as of the first of the year. A careful complete analysis should be done before doing this. There are many factors to consider in making this analysis.
The new tax law contains a magic number of $25 million of gross receipts. If your group of entities has average annual gross receipts not exceeding $25 million for the three prior tax years, you will be eligible to elect the cash method of accounting for tax purposes. Under the cash method of accounting, the tax liability follows the flow of the cash coming in to a business and allows you to defer paying tax on your receivables until they are collected.
The bill also instituted a limitation on the deductibility of interest expense. This limitation is essentially set at 30% of taxable income, before interest, depreciation, amortization and the new pass-through entity deduction. As with the cash method of accounting, if you are under the magic number of $25 million of average annual gross receipts you are exempt from this limitation.
As part of the reform, a 100% bonus depreciation for qualifying property placed in service after 9/27/2017 was also created. In addition, this change will be allowed for all qualifying property as opposed to just new property. The Section 179 expensing limit was increased from $500,000 to $1 million. However, care must be taken when deciding between bonus depreciation and Section 179-bonus depreciation is considered depreciation for purposes of the above interest expense limitation and Section 179 is not.
In summary, there are several planning opportunities for businesses in the long-term care industry. With careful planning and correct execution, pitfalls can be avoided, and tax savings can be generated. Please contact Greg Cabral at firstname.lastname@example.org or 401-330-2734 for additional information on how your organization can optimize these changes.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.