Posts Tagged exempt

The Tax Cuts and Jobs Act: How Will It Affect YOU?

The Tax Cuts and Jobs Act: How Will It Affect YOU?

The new tax reform law — commonly referred to as the “Tax Cuts and Jobs Act” (TCJA) — is the most significant tax legislation in decades. Although the law was passed only a few weeks ago, the impact on the economy and business outlook seems undeniable as the stock market rally continues and both individuals and businesses appear the most optimistic in quite some time.

Tax reform was originally sold to us as simplification. In fact, you would be able to file your taxes on a postcard, right? Although some aspects of tax law have been simplified, other new provisions such as the 20 percent Qualified Business Income Deduction are very complex, despite appearing straightforward at first glance.

The law significantly impacts both individuals and businesses. Let’s start with a basic overview of what’s covered in the new law. (Except where noted, these changes are effective for tax years beginning after Dec. 31, 2017.)


The new law makes small reductions to income tax rates for most individual tax brackets, and it significantly increases individual AMT and estate tax exemptions. But there’s also some bad news for individuals: the TCJA eliminates or limits many tax breaks. In addition, much of the tax relief for individual taxpayers will be available only temporarily.

Here are some of the key changes. Except where noted, these changes will sunset after 2025:

Individual Tax Rates

The majority of physicians will notice tax savings due to an overall reduction in tax rates. Please see the summary comparing tax rates and income brackets pre- and post-TCJA later in this section.

Physicians will notice not only have the tax rates been reduced, but the upper thresholds of most income brackets have also increased, resulting in more of your income being taxed at lesser rates.

For instance, under the new brackets, the 24 percent bracket extends all the way up to taxable income of $315,000, whereas under the old law, the 25 percent bracket only went up to taxable income of $156,150. For a married filing joint taxpayer with taxable income of $315,000, this results in tax savings of almost $15,000.

Standard vs. Itemized Deductions / Personal Exemptions / Limitations

Every taxpayer has the choice whether to itemize deductions on Schedule A of their 1040 (mortgage interest, charitable contributions, property taxes, state and local taxes, etc.) or take the allowable standard deduction.

Under the new law, the standard deduction nearly doubles as follows:

  • $24,000 for married individuals filing a joint return
  • $18,000 for head-of-household
  • $12,000 for all other individuals

Even with the increased standard deduction, I anticipate it will still be advantageous for most physicians to continue itemizing their deductions as most will exceed the increased thresholds above.

Prior limitations on itemized deductions, known as the Pease limitation (named after Rep. Donald Pease), have now been repealed. Under the Pease limitation, many physicians found their itemized deductions limited because their taxable income exceeded the amount allowed for full deductions. As a result of tax reform, these limitations no longer apply.

Although the benefits noted above are positive, there are some “take-aways” that should be noted, such as:

  • Personal exemptions of $4,050 have been eliminated;
  • Elimination of the deduction for interest on home equity debt;
  • Mortgage interest deduction limited to interest on debt up to $750,000 for new loans (previously $1,000,000). Taxpayers can continue to deduct interest on primary and secondary/vacation home;
  • New $10,000 limit ($5,000 if single) on the deduction for state and local income/property taxes; and
  • Elimination of moving expense deduction.

Since passage of the law, I have had several phone calls and emails from individuals worried that they are losing the ability to deduct charitable contributions. Please note that charitable deductions remain fully deductible under the new law. In fact, taxpayers are able to contribute more under the new law – up to 60 percent of their adjusted gross income as opposed to 50 percent previously. There is one exception, an admittedly BIG exception. Donors are no longer able to deduct 80 percent of the amount paid for the right to purchase tickets for athletic events (i.e. Tide Pride, Tigers Unlimited).

Estate Tax

Although the Estate Tax was not repealed under the TCJA, its impact was significantly reduced through increased gift and estate exemption amounts. Previously, the estate and gift tax exclusion was $5,490,000 in 2017, but under the new law will double to $11,200,000 in 2018 (including inflation). The increased exemption amounts are set to expire Jan. 1, 2026. This creates significant planning opportunities for physicians to transfer wealth using the increased exemption.

Alternative Minimum Tax (AMT)

AMT is a “supplemental” tax that hits many physicians. It essentially taxes those whom the IRS believes are taking too many deductions under the standard income tax system. For instance, under AMT, no deductions are allowed for state and local taxes, real estate and personal taxes, etc.

Many were hopeful AMT would be repealed in its entirety, but that did not happen. Instead, the exemption amount was raised significantly, thereby subjecting fewer individuals to AMT. It’s very likely that if you were subject to AMT tax in the past, you may not be going forward in 2018.

Affordable Care Act

During the final days of the bill’s negotiation process between the House and the Senate, a provision was added for the repeal of the individual mandate called for under the healthcare reform bill. Many took this to mean that the Patient Protection and Affordable Care Act was gone; however, that is not the case. The tax reform bill merely removed the penalty associated with the mandate for individuals to obtain health insurance. PPACA is still very much in play.

There was no change to the 3.8 percent net investment income nor the additional .9 percent payroll tax on high-wage earners. In addition, large employers (generally those with 50 or more FTE’s) are still required to provide affordable minimum essential health care coverage to full-time employees. Those employers are also still required to complete Form’s 1094 and 1095 annually to report the details of healthcare coverage provided to employees.


Under the TCJA, individuals will no longer be allowed to deduct payments for alimony or separate maintenance payments. Likewise, the recipient of those payments will no longer include payments in their income. This is generally effective for divorce or separation agreements executed after Dec. 31, 2018. Current rules (i.e. alimony deduction) continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.


In addition to the individual provisions noted above, the TCJA also has many provisions which will impact businesses both large and small. In general, the law significantly reduces the income tax rate for corporations and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and makes major changes related to the taxation of foreign income. But it also reduces or eliminates many business tax breaks.

Following are some of the key business-related changes:

Corporate Tax Rate Reduction

Under the old law, corporations were subject to graduated tax rates that topped out at 35 percent. Personal service corporations, which include physician practices, were taxed at a flat 35 percent. The TCJA reduced the corporate tax rate to a flat 21 percent rate. Although the tax rate reduction is a positive, most physician practices organized as C Corporations bonus out income at year-end to avoid paying corporate tax at all, making this somewhat irrelevant.

20 Percent Qualified Business Income Pass-Through Deduction

But what if your practice isn’t organized as a C Corporation? It doesn’t seem fair that one entity type receives a reduction in tax rates while others do not. To compensate for this, Congress created an entirely new 20 percent qualified business income (QBI) deduction for owners of flow-through entities (such as partnerships, LLCs and S corporations) and sole proprietorships through 2025. This new deduction is commonly referred to as the “pass-through deduction,” as income from these entities passes through to owners and is included on the individual 1040 income tax return.

Qualified business income is essentially the net income of the practice after physician salaries. It excludes any investment-related items, such as interest, dividends, or capital gains or losses from the sale of property. The deduction is 20 percent of the QBI and is a reduction in taxable income on Form 1040.

What appears rather straightforward at first, quickly becomes complex and illogical with a strict or literal reading of the law. In some cases, the amount calculated for the 20 percent deduction varies among entity types with all else being equal, which doesn’t appear the outcome Congress intended. These ambiguities will most likely be addressed in later regulations and technical corrections that will provide further details on interpretation and application of the law. This will be a key area to monitor for the remainder of 2018.

In addition, the 20 percent deduction is subject to a tangled web of limitations and phase-outs. Service-related entities (i.e. physician practices) are also subject to even more limitations that, depending on income level, quickly eliminate the 20 percent deduction.

Let’s first examine the limits applicable to both service and non-service businesses alike. The 20 percent qualified business income deduction is limited by the greater of:

  • 50 percent of W2 wages paid by the qualifying business, or
  • 25 percent of W2 wages paid plus 2.5 percent of unadjusted basis of all qualified property.

The 20 percent deduction is reduced if an individual’s taxable income as shown on their 1040 exceeds $157,500 if filing single or $315,000 if filing jointly. For service-related businesses such as a physician practice, the 20 percent deduction is completely lost once the physician’s individual taxable income exceeds $207,500 if filing single or $415,000 if filing jointly. Phase out begins at $157,500 filing single and $315,000 filing jointly.

To illustrate, assume Dr. A is a solo practitioner who files a joint return. Her practice is organized as a single-member LLC. The qualified business income as reported on Schedule C of Dr. A’s 1040 is $240,000 after $195,000 in wages paid to her staff. Dr. A and her husband’s taxable income for the year is $295,000.

In this example, Dr. A’s tentative 20 percent deduction is $48,000 ($240,000 QBI * 20 percent). Since this amount is less than 50 percent of wages ($195,000 * 50 percent = $97,500), the deduction is not reduced. Also, since Dr. A’s overall taxable income is less than $315,000, she is able to take the full deduction of $48,000.

This is perhaps the most complex area of the tax reform law. This is an area which will merit monitoring in the coming months as the IRS provides additional guidance on the implementation of this provision of the law.

Depreciation Deductions

For physician practices, several favorable changes were made to the existing rules regarding depreciation. Most notably, equipment purchased after Sept. 27, 2017, and before Jan. 1, 2023 (in most cases) can by fully expensed or deducted in the year of purchase rather than depreciating over the equipment’s useful life. Previously, this “bonus” depreciation was limited to 50 percent of the asset’s cost, but has now been increased to 100 percent. In addition, the equipment no longer has to be original use or new property — used property also qualifies for the deduction.

In addition to bonus depreciation, the provisions of Code Section 179 were also modified to allow for more property types to qualify for immediate write-off, including subsequent improvements to commercial property such as roofs, heating and A/C systems, fire protection, alarm and security systems.

Other Business Impacts

In addition to the major overhauls noted above, there were several other impacts to businesses, including but not limited to:

  • Repeal of the 20 percent corporate Alternative Minimum Tax
  • New limits on net operating loss deductions
  • Elimination of the Section 199 deduction
  • Like-kind exchanges now limited to real estate only
  • New tax credit for employer-paid family and medical leave — only through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation


The TCJA will have a significant impact on business and individuals. These items highlight the major provisions of the law that are most impactful to physicians. The new tax law is certainly broad-reaching and complicated.

Article contributed by Mark Baker, Principal, Jackson Thornton CPAs and Consultants. Jackson Thornton is a Preferred Partner of the Medical Association.

Posted in: Management

Leave a Comment (0) →

Physicians Can Now Apply for Hardship Exception for QPP

Physicians Can Now Apply for Hardship Exception for QPP

Physicians who have insufficient internet connectivity, “extreme and uncontrollable” circumstances or lack of control over the availability of certified electronic health record technology can begin applying for a hardship exception from the Quality Payment Program (QPP) requirement. The exception is for physicians eligible to participate in the Merit-based Incentive Payment System (MIPS). Hospital-based physicians are considered

Hospital-based physicians are considered special status and do not need to apply for a 2017 hardship exception.


Return to Pick-Your-Pace home page

Posted in: MACRA

Leave a Comment (0) →

Managing Your Practice New Overtime Law Could Be a Land Mine

Managing Your Practice New Overtime Law Could Be a Land Mine

Editor’s note: This article was originally published in the 2016 Summer Issue of Alabama Medicine magazine.

This is the time of year when many physician groups are evaluating their employees’ performances for the purpose of giving raises or bonuses. For most groups, the majority of their employees are not exempt from the overtime law. The Department of Labor’s (DOL) Fair Labor Standard’s Act (FLSA or Overtime Law) requires a business to pay its employees at an hourly rate of time-and-a-half if that employee worked more than 40 hours per week. The new law does not affect this group of employees. It’s those employees who are “exempt” from the overtime requirement that could trip a practice up and subject the owners to penalties by DOL and the IRS.

On May 18, 2016, the DOL released new regulations related to employees who are “exempt” from the Overtime Law. The new law is effective Dec. 1, 2016. A practice still has time to determine if the new law applies to any of its employees and what changes should be made to avoid penalties.

The new law changed the wage threshold amount from $23,660 ($455 per week) to $47,476 ($913 per week). This threshold has been frozen since 1975 but will now be adjusted every three years beginning Jan. 1, 2020. Any employee earning less than these thresholds are considered non-exempt; thus, entitled to overtime pay.

Generally, an employee is exempt from the “time-and-a-half” pay if both of these tests are met:

First: Their pay exceeds the new wage threshold amount of $47,476 ($913 per week).

Second: Their duties are primarily executive, administrative, or professional. The regulations have specific criteria that should be reviewed with your CPA or tax advisor to be sure this test is met. The duties test did not change with the new regulations.

Many office managers and nurses are paid by salary rather than an hourly rate. Oftentimes, these individuals work more than 40 hours per week. Until now, it was not important to track their time to know when their hours exceeded 40 in a workweek. Beginning Dec. 1, 2016, if any salaried employee is paid less than $47,476 per year, including the office manager and nurse, their time must be tracked and receive overtime pay. Their overtime pay must be calculated based on their salary converted to an hourly basis for a 40-hour workweek. You can still pay them on a salary basis, but you will need to be sure their hours do not exceed 40 hours in a workweek.

For example, suppose your practice manager is expected to be paid $50,000 this year, which includes a base salary of $46,000 plus a Christmas bonus of $500 and expecting a year-end performance bonus of $3,500 (if the practice has a good collection year; this was the bonus last year). Because the total salary of $50,000 exceeds $47,476, no overtime is required to be paid if the manager worked more than 40 hours per workweek.

However, suppose the practice’s collections are not so good and the performance bonus is not paid. This practice manager’s total salary of $46,500 is less than the threshold of $47,476. If this manager routinely worked more than 40 hours, he/she would be entitled to overtime pay. The problem is that the physician owner would not know until year-end how much the performance bonus will be. It is likely that the practice manager has already worked 250 hours over the 40-hour workweek. Just one extra hour per day for 50 weeks would result in 250 overtime hours. At a salary of $46,500 translated to $894 per week, divided by a 40-hour workweek results in the hourly rate of $22.35. The practice manager would be entitled to overtime pay of $5,587. Because of the changes in the law, this manager would be paid more in a bad year than in a good year simply by working an extra hour per day. (The law requires nondiscretionary bonuses to be included in the calculation of the rate per hour. Consult your tax advisor to determine if this provision affects your situation.)

There are some immediate actions needed by all practices to be sure there are no landmines after Dec. 1. Remember, the new regulation only impacts the exempt employees in your practice.

  • Using last year’s W-2 wages, assess whether any of your exempt employees were paid less than the threshold of $47,476; be sure to evaluate the employee classification as exempt or non-exempt.
  • Do your exempt employees generally work more than 40 hours per week? If you are not sure, this is a conversation you should have right away with your exempt employees: they should begin tracking their time, and all overtime must be pre-approved by you.
  • Compute the amount of overtime pay to which they could be entitled if they continue to work more than 40 hours per week.
  • Determine if the exempt employees earning less than the threshold should be given a raise to avoid having to track their hours and avoid potential penalties.
  • Another consideration is the exempt employee whose overtime hours cannot be avoided. A potential solution might include reducing their salary for the amount expected to be paid by the overtime hours. This is a more difficult conversation to have with your employee and would require careful calculations by your tax advisor.
  • How will hours be tracked for your salaries employees? Discuss with your tax advisor for the best method for an accurate and complete method that will meet the DOL regulation.
  • Determine if you need to meet with your exempt employees to discuss any potential changes. Exempt employees who work from home will have to assist in tracking their own hours. Flexible work schedules must be reviewed as well.
  • It’s important to communicate the reason for this salary change if you do not typically adjust it every year. By doing so, employees’ expectations for a raise next year and disappointment for not getting it will be avoided.

The new law also included an adjustment to the class of highly compensated employees. The threshold for this group also increased from $100,000 to $134,004. Employees whose salary or pay is above those amounts will be deemed as exempt and not entitled to overtime pay. The duties test does not apply to the highly compensated class of employees.

Avoid any landmines for your practice. Start looking at these law changes before Dec. 1.

The information in this article is not intended as tax or legal advice. Please consult your tax advisor for specific information regarding your individual situation.

bronzemvpContributed by Patti G. Perdue, CPA.CITP, Jackson Thornton. Jackson Thornton is a Certified Public Accounting and Consulting Firm and an official partner with the Medical Association.

Posted in: Management

Leave a Comment (0) →