While many provisions of the new Tax Cuts and Jobs Act overhaul the United States’ tax code, one in particular has potential direct implications for a physician’s bottom line.
Specifically, the Section 199A deduction, also known as the Qualified Business Income deduction, of the Act provides a new deduction of up to 20% for pass-through entities’ qualified net income.
Pass-through entities include partnerships, sole proprietorships, limited liability companies, and S-corporations. Additionally, pass-through entities do not pay income taxes at the corporate or partnership level. Instead, pass-through income is allocated among the owners, and income taxes are only levied at the individual owner’s level. While this still holds true for 2018 and beyond, the Act creates a new deduction for qualified pass-through income. Subject to certain limitations, the new deduction can be as much as 20% of the pass-through income reported on an individual tax return, thereby lowering a physician’s overall tax burden and freeing up available cash for distribution or reinvestment.
As the majority of physician practices are pass-through entities for tax reporting purposes, this provision of the Act has direct implications for a physician’s bottom line as well as his or her overall practice distributions. Specifically, this new deduction could help physicians practicing in more rural service areas remain independent, rather than selling their medical practices to a hospital or health system. For areas where only one provider is administering healthcare services to the community, physician retention will directly impact care provision for that community’s population. Further, physicians new to the workforce could be incentivized to seek self-employment, as opposed to entering into an employment relationship with an organization.
Of note, high-income physicians will likely not benefit from the 20% deduction. Only single filers with taxable income below $207,500, and joint filers with taxable income below $415,000, qualify for any portion of the deduction. Said another way, and specific to Specified Service Trades or Businesses (such as physicians), if taxable income is less than $157,500 (single tax filers) or $315,000 (married tax filers) then the 20% Section 199A deduction is available without limitation. If taxable income is greater than $157,500 or $315,000 (as applicable), but less than $207,500 or $415,000 (as applicable), then a partial Section 199A deduction is available. If taxable income is greater than $207,500 or $415,000 (as applicable), then no Section 199A deduction is available.
As this deduction expires December 31, 2025, physicians should work to ensure they are capitalizing on this new provision of the Act as it could have a positive impact to their after-tax net income and, therefore, their cash flow.
Kathryn Culver is a consulting manager within the valuation service line at Pershing Yoakley & Associates, P.C. She performs fair market valuations for physician practice groups, hospitals, and health systems, and evaluates compensation agreements between health facilities and physicians. In addition, Kathryn is a Certified Public Accountant and has a strong foundation in accounting and finance. She has presented for several organizations on topics such as healthcare valuation, practice valuation, and physician compensation planning and has co-authored articles in various healthcare industry publications.
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