November 24, 2020
For many physicians, making it to the end of 2020 successfully is an achievement of perseverance, planning, pivots, and good business sense. An industry not traditionally associated with financial challenges was tested thanks to COVID-19 when in-office patient contact was restricted, elective procedures were all but halted, and ongoing medical care shifted to virtual. Many offices were forced to shut their doors or furlough staff, and the added cost of PPE and technology upgrades strained already-tight budgets.
With the end of 2020 quickly approaching, physicians will want to maximize cash flow, minimize tax impacts, and ensure that they are organized and up to date with all reporting and compliance requirements. In addition to typical year-end tax planning strategies, 2020 is throwing curveballs at physicians with additional planning and documentation for PPP, HHS, and election-year tax changes.
Paid sick leave (FFCRA)
It seems like a forgotten piece of legislation now, but FFCRA, which was passed just a couple of weeks before the CARES Act, contained valuable tax credits for employers with up to 500 employees who offered paid sick leave to their employers. Physicians, like other businesses, have been eligible to take this credit along with PPP and HHS funds. As the year closes out, just ensure that records are accurate and organized for filing taxes.
Employee retention tax credit
Physicians, like other small business employers, had the option to claim a tax credit worth up to $10,000 per employee. Though this tax credit was to be taken quarterly, physicians that used this strategy to increase short-term cash flow should ensure accurate record-keeping for their 2020 tax return. Those that took PPP funds must also make sure that they did not apply PPP funds to payroll during periods when claiming the credit as it is not permitted.
Deferred Medicare Part B Billing
Another optional tax deferral specific to physicians was to delay Medicare Part B billings to 210 days from the original payment to repay the balance. Make a note of those deadlines to avoid a potential penalty.
And, speaking of Medicare, since the required two percent sequestration fee is not being taken out in 2020, the policy has been extended to 2030 instead. This may impact cash flow planning in the future.
Net operating losses
The CARES Act permitted a five-year lookback period for net operating losses (NOLs) in 2018, 2019, or 2020, as well as a temporary 100 percent NOL limit. NOLs can also be used to offset non-business income above $250,000 (single) or $500,000 (married filing jointly) for 2018, 2019, and 2020. Considering some physician practices may take a loss in 2020, this is a valuable strategy to pursue.
As part of the CARES Act Provider Relief Fund, the Department of Health and Human Services (HHS) also released funding for physicians, hospitals, and other healthcare practices. $50 billion of HHS funding was initially tied to Medicare fee-for-service, and a second-round released in summer 2020, were tied to CHIP and Medicaid providers.
Because HHS funds were grants, not loans, healthcare entities that accepted them also agreed to specific documentation and reporting requirements. As year-end approaches, physician practices that accepted HHS funds in excess of $10,000 will need to report how funds were used, including expenses and intent. The first reporting deadline is February 15, 2021, for funds used by December 31, 2020. The second and final deadline of July 31, 2021, applies to any healthcare entity that still had unused HHS funds after December 31, 2020.
In January, the U.S. will usher in a new presidency under a political party with different visions for federal tax policy. President-Elect Biden has indicated repeatedly his desires to carve down tax benefits for high-income earners. This is the tax planning area with the most amount of uncertainty because the new Administration is not in office yet, but it will be important to proactively approach the topic to leverage savings before significant changes are implemented.
Higher tax for wealthy taxpayers
The top tax rate could be going up to pre-2018 levels again, putting top earners in the 39.6 percent tax bracket. This would apply to anyone making more than $400,000. Biden has also expressed support for imposing Social Security taxes on wages and self-employment income above $400,000 and limiting the value of itemized deductions. The Pease limitation for taxpayers making more than $400,000 would potentially be restored, too.
Capital gains
It is possible the capital gains tax, currently at either 0, 15, or 20 percent depending on income, could rise, too. Biden’s tax plan calls for taxing long-term capital gains at the ordinary income tax rate for anyone making $1 million or more as well as eliminating the step-up in gains. This could be a factor for physicians who intend to sell any type of asset in the years ahead.
Section 199A
Biden has also indicated support for phasing out the popular Section 199A deduction for pass-through entity owners earning above $400,000. Many physicians were able to take advantage of at least some level of the deduction, though perhaps not the full 20 percent – especially solo practitioners and partners in a group. Going forward, that may change.
Estate and gift taxes
Also, on the table are potentially higher estate and gift tax rates, at 2009 levels. If estate and gift taxes revert, that means a federal estate tax exemption of just $3.5 million with a 45 percent maximum rate on amounts above that threshold; compared to $11.58 million ($23.16 million for married filing jointly) per individual today. The gift tax exclusion in 2009 was $13,000 compared to $15,000 today.
With either of these potential changes, keep in mind that nothing will happen overnight, and another tax overhaul will require Congressional support. Nevertheless, it is advisable to plan for likely scenarios by accelerating or deferring deductions or income where it makes sense.
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2020 has been a challenging year offering an unexpected mix of a global pandemic, economic uncertainty, a changing business landscape, and a new President-Elect. The convergence of these factors means practices not only have to leverage tax-saving opportunities for this year but also be proactive to capture opportunities now for 2021. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.