November 28, 2017 Senate Finance Committee tax reform plan would produce mixed results for taxable healthcare providers, but could negatively impact tax-exempt providers The Chairman's modification released by the Senate Finance Committee, as well as the Chairman's Mark itself (together, the Senate Finance Committee Plan), include a number of important changes that would affect healthcare providers, including hospitals and physician groups. While some of the changes mirror provisions included in the recently passed House bill, other provisions in the Senate Finance Committee Plan are new or modified from earlier proposals. This Alert examines the implications of select provisions for both taxable and tax-exempt healthcare providers. Eliminating ACA individual mandate The Chairman's modification adds a provision that would reduce the Affordable Care Act's individual shared responsibility payments (commonly referred to as the "individual mandate") to zero. (For details, see Tax Alert 2017-1938.) This could negatively affect hospitals and others in the healthcare industry if it prompts fewer individuals to maintain health insurance and they do not have the ability to pay for their care when they incur significant medical costs. In addition, health insurers may experience challenges based on shifting demographics of their insured populations. Other key provisions included in the Senate Finance Committee Plan have mixed results for companies in the healthcare sector depending on their taxable status. The current plan includes both positive and negative results for taxable healthcare providers and overall negative results for tax-exempt health-related companies. Implications for taxable healthcare providers A lowering of the corporate tax rate to 20%, the repeal of the AMT, immediate capital expensing and retention of key credits are key wins in the Senate Finance Committee Plan for taxable healthcare providers. (See Tax Alert 2017-1921.) Full capital expensing through 2022 would allow hospitals and other taxable healthcare entities to invest in and immediately expense equipment, machines, and other tangible property for five years. The Plan would also retain some key deductions and credits, such as those for "orphan drugs" and research and development. Taxable hospitals participating in drug trials and medical research are sometimes eligible to use these credits and would therefore benefit from their retention. Under the Senate Finance Committee Plan, the lower corporate rate of 20% would not apply until 2019. Accelerating deductions and credits into the first year of enactment when possible would allow for the most benefit at the current 35% statutory rate. A few provisions could negatively impact certain taxable corporations, including the limitation on interest expense deduction for leveraged companies and limitations on the net operating loss (NOL) deduction. Taxable hospitals and other healthcare providers use debt to grow through acquisition or to invest in high-cost equipment for long-term benefit and can, therefore, be highly leveraged. These entities could not deduct as much interest expense as they do under current law, which would increase their tax burden. Additionally, many healthcare companies operate within consolidated groups that use NOLs to offset taxable gains. An 80% limitation on this deduction would effectively increase taxes paid by those companies. Implications for tax-exempt healthcare providers Tax-exempt healthcare providers, in comparison, could face a higher tax burden in the form of excise and unrelated business income taxes, as well as restricted access to funds through the repeal of advance refunding of tax-exempt bonds and reduction in incentives for charitable giving, as explained in Tax Alerts 2017-1943 and 2017-1959. One provision in particular may prompt tax-exempt health systems to restructure their operations. The Senate Finance Committee Plan contains a new rule, taken from former Ways and Means Committee Chairman Camp's tax reform bill, that would require organizations operating multiple unrelated trades or businesses to compute unrelated business taxable income separately for each trade or business. Systems that are currently relying on losses from one unrelated trade or business to offset income from another (or against gains and losses from alternative investments or pass-through entities) would likely see an increase in their unrelated business income tax burden. For example, healthcare companies that routinely use losses from laboratory services and other unprofitable lines of business to offset gains from their consulting services or alternative investments would no longer be able to net the losses and gains, likely resulting in higher unrelated business taxable income. This could be mitigated through restructuring efforts, including possible transfer of business lines to related taxable entities, but such restructuring requires careful analysis of all the possible implications before being undertaken. ——————————————— — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg. ———————————————
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