Wednesday, January 23, 2019

IRS Finalized Rule Affecting Deduction Eligibility for Pass-Through Entities

Lilly Hummel

The Tax Cuts and Jobs Act enacted in 2017 allows the owners of pass-through entities like limited liability companies, partnerships, S corporations, and sole proprietorships to deduct 20% of their "qualified business income." Congress defined qualified business income as income from a "qualified trade or business," which, importantly, does NOT include a "specified service trade or business." Knowing this, AHCA/NCAL advocated that nursing centers and assisted living (AL) communities to be considered a specified service trade or business. The Internal Revenue Code defines specified service trade or business as:

"Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners."

For several decades, the IRS has interpreted this language to include providing nursing services and physical therapy. Under that interpretation, it would be very difficult for any nursing centers and some AL communities to qualify for the tax deduction.

Since the Department of Treasury issued a proposed rule following IRS’s historical interpretation, AHCA/NCAL staff and members have met with Treasury and IRS officials, as well as key congressional staff. Despite these efforts, Treasury finalized a rule that stuck with the IRS’s 30-year-old definition of services in the field of health.

AHCA/NCAL’s initial analysis of the final rule indicates there is no across-the-board carve out for nursing centers or AL communities. The final definition of “providing services in the field of health” includes nursing and physical therapy, and therefore it will most likely be very challenging for nursing centers and some AL to take the 20-percent deduction. In its summary of comments and explanation released with the rule, the government notes:

The Treasury Department and the IRS agree that skilled nursing, assisted living, and similar facilities provide multi-faceted services to their residents. Whether such a facility and its owners are in the trade or business of performing services in the field of health requires a facts and circumstances inquiry that is beyond the scope of these final regulations. The final regulations provide an additional example of one such facility offering services that the Treasury Department and the IRS do not believe rises to the level of the performance of services in the field of health.

It is possible that certain AL communities will qualify for the 20-percent deduction based on a new example added to the regulations as a result of AHCA/NCAL’s comment letter. The new example included in the explanation reads as follows:

“X is the operator of a residential facility that provides a variety of services to senior citizens who reside on campus. For residents, X offers standard domestic services including housing management and maintenance, meals, laundry, entertainment, and other similar services. In addition, X contracts with local professional healthcare organizations to offer residents a range of medical and health services provided at the facility, including skilled nursing care, physical and occupational therapy, speech-language pathology services, medical social services, medications, medical supplies and equipment used in the facility, ambulance transportation to the nearest supplier of needed services, and dietary counseling. X receives all of its income from residents for the costs associated with residing at the facility. Any health and medical services are billed directly by the healthcare providers to the senior citizens for those professional healthcare services even though those services are provided at the facility. X does not perform services in the field of health within the meaning of section 199A(d)(2) and paragraphs (b)(1)(i) and (b)(2)(ii) of this section.”

In other words, a community or facility that meets the above description would fall outside the definition of a specified trade or business and qualify for the 20-percent deduction.

AL communities should consult their accountant or tax advisor to determine the applicability of the deduction to their taxes.

See relevant stories in Provider Magazine and McKnight's Senior Living

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