The biggest U.S. tax reform since 1986 consists of major tax law changes that will affect everyone. The most significant change for corporations is a move from the graduated corporate tax rate structure to a flat rate. Although President Trump was originally fighting for the corporate rate to be reduced to 15 percent, lawmakers settled by reducing the rate from 35 percent to 21 percent. Other aspects of the tax law are more complex, and many businesses are wondering how this new law will affect their particular industries.
Let’s dive a little deeper into how tax reform is affecting physician practices.
A significant amount of attention has been focused on the 20 percent pass-through income deduction (also known as the qualified business income “QBI” deduction). Unfortunately, physician practices are specifically excluded from QBI deduction eligibility. However, an exception is made for physicians with taxable income under $415,000 for joint filers and $207,500 for single filers. Physicians with taxable income below these thresholds may be eligible for the 20 percent QBI deduction. The QBI deduction calculation is complex and should be considered in conjunction with physician group compensation models and reasonable compensation guidelines.
Entertainment expenses need to be evaluated and minimized. Under the new law, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business will remain 50 percent deductible. The 50 percent disallowance will now also apply to meals provided at an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.
Physicians should also take into account the tax reform changes for individuals by evaluating their personal mortgage interest structure to maximize the interest deduction. This can be achieved by turning a home equity line of credit (HELOC) into a traditional mortgage, if applicable. The home mortgage interest deduction has been modified to reduce the limit on acquisition indebtedness to $750,000 for married filing jointly (MFJ), down from $1,000,000 under previous law. However, if the acquisition indebtedness occurred before Dec. 15, 2017, the limit remains $1,000,000.
Finally, tax reform limits the Federal tax deduction for state and local taxes to $10,000, beginning in 2018. Many physicians will far exceed the $10,000 state and local tax deduction cap. The limitation on state and local tax deduction encompasses both income taxes, sales tax and property taxes. Physicians can potentially minimize tax liabilities by strategically planning the payment of their individual state taxes and utilizing any state scholarship granting organizations, such as an Alabama Scholarship Granting Organization (SGO) or Georgia Student Scholarship Organization (SSO). These programs allow taxpayers to receive a state tax credit in return for an eligible contribution. This contribution qualifies as a charitable contribution on a federal return. This turns a state tax payment into a charitable deduction for federal purposes, increasing itemized deductions.