Analysis: Impact of the Trump tax cut
Blake King, CPA, MAcc, MT, CVA
Partner, Director of Accounting
On Dec. 22, the Tax Cuts and Jobs Act of 2017 (TCJA) was passed in to law. The TCJA represents the biggest change to our tax system since 1986. At over 500 pages, it is without question complex, creating both opportunities and some potential pitfalls. Many of the new provisions have yet to be tested and agency-level regulations are still forthcoming. That being said, there are several items that affect medical practices and physicians. The two biggest are the new tax rates and the Qualified Business Income (QBI) Deduction.
New tax rates
Tax rates for both individuals and businesses have changed. For businesses operating as c-corporations, the new rate is a flat 21%. That is significantly lower than the old flat 35% rate for medical groups operating as c-corporations. A large practice with $1million of taxable income would see a savings of ~$140,000. For individuals (and pass-through entities), there are new (lower) tax rates. The top rate drops from 39.6% to 37% and does not kick in until a taxable income of $600,000 vs. $470,000 in 2017. These new rates will result in savings for most taxpayers. The brackets have been expanded with lower rates and higher starting amounts.
Tax brackets before law (2017)
Tax brackets after law (2018)
|10%||$0 – $18,650||10%||$0 – $19,050|
|15%||$18,651 – $75,900||12%||$19,051 – $77,400|
|25%||$75,901 – $153,100||22%||$77,401 – $165,000|
|28%||$153,101 – $233,350||24%||$165,001 – $315,000|
|33%||$233,351 – $416,700||32%||$315,001 – $400,000|
|35%||$416,701 – $470,700||35%||$400,001 – $600,000|
Qualified Business Income (QBI)
The TCJA creates a new 20% deduction for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. The deduction, which is available to both itemizers and non-itemizers, is claimed by individuals on their personal tax returns as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below $157,500 ($315,000 for joint filers) are simpler and more permissive than the ones that apply above those thresholds.
For those with taxable income above the threshold, the news is not as great. Specific rules apply to those owning a medical practice. If your taxable income exceeds $315,000 ($157,500 for individual filers), that new deduction begins to phase out. Once you reach $415,000 of taxable income, it goes away completely. This provision only applies to those working in fields where the principal asset is the skill or reputation of its employees (other examples include attorneys, accountants and athletes).
For example, if you are married filing jointly and your taxable income of $200,000 is from your medical practice (operating as a sole proprietorship), you could pay tax on only $160,000 of that amount. However, if you are in the same circumstance but earn $500,000, you would pay tax on the full $500,000.
There are ideas from many in the industry right now about moving income to other non- medical businesses that you may own (e.g. real estate or MSO’s) but without regulations governing those moves, that can be risky. How best to position your practice for these changes will depend on many factors including location, size of practice, and corporate structure.
While the revised brackets and new QBI deduction are the biggest changes, the law does contain some other provisions that may affect physicians and medical practices. These include:
- A new standard deduction of $24,000
- Elimination of the personal exemption
- Limit on deduction of $10,000 of state taxes
- This will have the biggest impact in high tax states
- Lower limit on mortgage interest
- Repeal of alimony deduction (for divorces finalized after 2018)
- Expansion of Section 179 and Bonus Depreciation
- An immediate tax deduction for most equipment
- 529 Expansion to include K-12
The last one, the 529 expansion, allows for some new planning opportunities for those in states that offer a tax deduction for 529 contributions. In the past, 529 funds could only be used for college, but starting in 2018, the funds can be used for K-12 private education also. For those living in a state that offers a state income tax deduction for contributions to a 529 they should consider putting funds in to the 529 for the deduction and withdrawing them shortly thereafter to pay private school tuition. A small step to create what could be a large deduction depending on the state.
One item to always keep in mind, “never let the tax tail wag the dog.” In other words, just because you can now write off the full cost of a piece of equipment, does not mean you should purchase it. Always consider whether the equipment is needed before buying it just for a tax deduction.
If you have any questions concerning these or any other aspects of the new tax law, please feel free to call or email our tax department to discuss. Thank you.
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