The tax legislation signed in December 2017 enacted many changes that will affect the healthcare sector. Key provisions include a new 21% excise tax on executive compensation over $1 million at tax-exempt organizations, a reduced corporate tax rate of 21%, and limitations on deductions for net interest expenses and net operating losses. The legislation also increased taxable unrelated business income for certain fringe benefits and repealed tax-exempt advance refunding bonds. Further guidance is still needed on some provisions like the tracking of separate unrelated business activities.

1. KEY PROVISIONS FOR THE HEALTHCARE SECTOR
In December 2017, the president signed new
tax legislation, resulting in the most sweeping
reform to tax law since 1986. Many details are
still being worked through, and new regulations
are undoubtedly forthcoming, so this summary of
provisions affecting the healthcare sector is just an
overview until we have more guidance from the
Department of the Treasury. Below are the notable
changes for the healthcare industry. Some will affect
tax exempt organizations, some will affect taxable
entities and some will affect both, if the tax exempt
organization has unrelated business taxable income.
Most changes go into effect in 2018 and later years.
Changes to Tax Exempt Organizations
Cap on Executive Compensation: A new 21%
excise tax is imposed on tax exempt organizations
for paying executive compensation to an
individual in excess of $1 million. The “executive”
designation generally includes the organization’s
top five highest compensated individuals and
includes former employees. Compensation from
related organizations is aggregated to determine
the $1 million threshold and includes deferred
compensation amounts that are treated as paid
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2017 United States Tax Reform Bill
when there is no substantial risk of forfeiture (as
defined under Section 457(f)). There is an exception
for licensed doctors, nurses and veterinarians for
their performance of medical or veterinary services.
This excise tax is designed to bring tax exempt
organization salary rules in line with the cap on
compensation deductible by taxable entities.
Corporate Tax Rate Reduction: Unrelated
business taxable income (UBTI) is taxed under the
corporation income tax rate structure. Because the
maximum corporate income tax rate was reduced
from 35% to 21%, some organizations could benefit
from the lower rates.
Separate Activities: UBTI must be tracked
separately for unrelated business activities. Losses
from one activity may no longer offset income from
another. Additionally, net operating losses may
only carry forward to offset against income from
the same activity and are limited to 80% of taxable
income. Net operating loss carrybacks are no longer
allowed. Further details are not yet available on
how “separate activity” is defined and how this
may or may not affect alternative investments. The
Department of the Treasury is tasked with providing
regulations that clarify the details and definitions for
this tax reform provision.

2. Fringe Benefits: UBTI is increased by the value of
certain non-taxable employee benefits, including
transportation, parking, and on-site athletic facilities.
This mirrors the provision that eliminates the
deductibility of such benefits for taxable entities by
taxing the value as UBTI at the corporate rates.
Tax Exempt Bonds: The income exclusion for
interest from advanced refunding tax exempt bonds
issued after December 31, 2017 is repealed. The
final bill preserved use of tax exempt private activity
bonds, including qualified 501(c)(3) bonds, which
many organizations use to finance building and
renovation projects.
Qualified Opportunity Zones: A new provision
allows for the designation of “qualified opportunity
zones” within low-income communities to spur
economic growth by allowing deferral of capital
gains on sales of appreciated property if certain
requirements for reinvestment are met.
Changes for Taxable Entities and Tax Exempt
Organizations with UBTI
Corporate Tax Rate Reduction: The corporate tax
rate is reduced from a graduated rate structure with
a maximum 35% to a flat 21% tax rate.
Repeal of the Corporate AMT: The corporate
alternative minimum tax will be fully repealed under
the final bill.
Cash Method Limitation Increase: The final bill
increases the gross receipts test for use of the cash
method of accounting from $5 million to $25 million,
thus making the cash method more accessible to
small business taxpayers.
Accelerated Cost Recovery: The bill provides for
full expensing of qualified assets acquired and
placed in service after September 27, 2017 but
before January 1, 2023 with a phase out between
2024 and 2027.
Interest Expense Limitations: The bill limits
the deduction for net business interest to 30% of
the taxpayer’s adjusted taxable income, which is
generally measured as EBITDA. Unused deductions
can be carried forward indefinitely.
Changes to the NOL Deduction: Under current law,
net operating losses (NOL) generally have a two-
year carryback period and a 20-year carryforward
period. Under the final bill, the NOL carryback
period is generally eliminated, and the carryforward
period is indefinite. However, the amount of the
NOL carryforward allowed as a deduction would be
limited to 80% of taxable income (computed without
regard to the NOL deduction).
Modification to Like-Kind Exchange Rules: The bill
limits the availability of like-kind exchanges under
Section 1031 to real property only, whereas it was
previously available for certain personal property as
well.
Certain Tax Credits: The final bill retains the
orphan drug credit (with a reduced credit rate
of 25%), the new markets credit, and the work
opportunity credit, all of which would have been
repealed in the House bill. The research and
development credit also remains untouched.

3. Pass-Through Business Income: Whereas the
House version of the bill provided for a preferential
rate of 25% for the business income of taxpayers
operating as pass-through entities, the final version
achieves pass-through relief through a special
deduction. The current deduction is 20%, down
from the 23% provided for in the Senate bill. The
deduction is generally limited to 50% of allocable
W-2 wages of the business or the sum of 25%
of such wages plus 2.5% of the adjusted basis
of qualified tangible property. Specified service
businesses (e.g., accounting and law) qualify for the
deduction only if their taxable income is less than
$315,000 for joint filers and $157,500 for single filers.
If you have questions or concerns regarding the
above rule changes and how they may affect your
healthcare business, please contact Ryan Sells at
rsells@eksh.com, Kelly Kozeliski at
kkozeliski@eksh.com, or Dori Eggett at
deggett@eksh.com or by phone at 303-740-9400.