Top Takeaways for Healthcare Organizations From Biden’s Tax Proposal
The U.S. Treasury Department recently released the General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, detailing the Biden administration’s plan to alter tax policy in 2022. Healthcare organizations should prepare themselves for impactful changes.
We’ve summarized the top provisions from the proposal that could affect your healthcare organization and some steps you can take to prepare.
Increase the Corporate Tax Rate to 28%
Many professional corporations (PCs) and management services organizations (MSOs) are organized as C corporations. In 2017 the Tax Cuts and Jobs Act established a corporate tax rate of 21%, and the administration is proposing a tax rate increase to 28%. The increase would take effect for tax years beginning after December 31, 2021. Fiscal year organizations would be subject to a blended rate between 21% and 28% depending on the portion of the taxable year that occurs before and after the effective date.
Healthcare organizations should consider, to the extent possible, accelerating the recognition of income into 2021 and the deferral of expenses into 2022 to achieve a permanent tax savings. Accounting method changes may facilitate this.
Provide Funding to the IRS to Increase Return Compliance
To raise revenues, the administration plans to fund the IRS with nearly $80 billion over the next 10 years to assist in expanding and improving enforcement and compliance functions and facilitating technological/process improvements.
The expected consequences include more income tax audits and stricter enforcement on information reporting (1099s). Healthcare organizations should ensure they are IRS audit ready, have properly classified all personnel as employees or independent contractors using the IRS 20-factor test, and have proper practices in place to vet the classification of personnel upon hire.
15% Minimum Tax on Book Earnings of Large Corporations
The administration has proposed imposing a 15% minimum tax on corporations with book income in excess of $2 billion. Although your organization may not be large enough to be impacted by this provision, President Biden recently voiced that he may be willing to agree to a 15% minimum tax in lieu of a corporate tax rate increase. The administration has indicated that this provision would be effective for tax years beginning after December 31, 2021.
Keep your eye on this provision as it evolves because it may end up impacting all organizations.
Extension and Enhancement of Renewable and Alternative Energy Incentives
Current tax laws incentivize investments in solar, fuel cell and other clean energy sources via a tax credit. The credit is set to phase out for property placed in service through December 31, 2025. Currently, the energy credit amounts to a percentage of the property’s cost basis placed in service during the tax year:
- 30% of property that begins construction before January 1, 2020
- 26% for property that begins construction after December 31, 2019, and before January 1, 2023
- 22% for property that begins construction after December 31, 2022 and before January 1, 2024
- The energy source must be placed in service before January 1, 2026
Under the proposed rules, the credit would be expanded to include specific standalone energy storage and conversion technology. Additionally, the incentive would be restored to the maximum benefit!
According to the Treasury Department, the credit would be restored to the full 30% rate for eligible property that begins construction after December 31, 2021, and before January 1, 2027. After 2026, the credit rate will begin to phase down to zero over five years. Eligible property commencing construction after December 31, 2026, and before January 1, 2028, will receive 80% of the full credit; property commencing construction after December 31, 2027, and before January 1, 2029, will receive 60% of the full credit; and so on, until the credit rate reaches zero in 2031.
Any organization looking to invest in clean energy sources can benefit from these lucrative credits.
Childcare Tax Credits
Under current tax rules, healthcare organizations that provide childcare facilities, or contract with outside childcare facilities for the benefit of their employees, may claim a 25% credit for qualified care expenses for a maximum $150K credit per year. The administration is proposing to increase the credit to 50% of the first $1M of qualified care expenses, for a maximum $500K credit per year.
The proposed change would be effective for tax years beginning after December 31, 2021.
Increase in the Top Marginal Individual Income Tax Rate
President Biden and his administration have made it clear they plan to tax the wealthy. Physicians and executives in your organization are likely are be impacted due to intended tax rate increases.
Currently, the top marginal tax rate sits at 37% for individuals. The current tax rate applies to taxable income over $628,300 for married filing jointly and surviving spouse filers, $523,600 for unmarried individuals and head of household filers, and $314,150 for married individuals filing separately.
The administration’s proposal would raise the top marginal tax rate to 39.6% for individuals. This rate will be applied to taxable income over $509,300 for married filing jointly filers, $452,700 for unmarried individuals, $481,000 for head of household filers and $254,650 for married individuals filing separately.
The proposed changes would take effect for tax years beginning after December 31, 2021.
Changes to Self-Employment Tax and Net Investment Income Tax for Owners of Pass-Through Entities
Under the current tax law, shareholders of physician practices and healthcare organizations operating as S corporations are not required to pay self-employment taxes on their distributive share of income. Under proposed laws, shareholders of an S corporation who materially participate in the trade or business would be subject to self-employment tax to the extent that income exceeds certain thresholds.
Additionally, the administration intends to ensure that all pass-through trade or business income for taxpayers with $400K or more of adjusted gross income would be subject to the 3.8% net investment income tax. Specifically, the administration aims to amend the definition of the net investment income tax to include income and gain from any trade or business that is not otherwise subject to employment taxes.
The administration has proposed that this change would be effective for tax years beginning after December 31, 2021.
Reach out to Brown Smith Wallace's tax experts to learn more about how your organization may be impacted by any changes and what you can do to prepare.