Congressional Tax Plan Affects Healthcare

Congressional focus on a tax cut package has moved forward quickly following the initial release last week by the House Ways and Means Committee. The committee has spent several days this week deliberating amendments to their proposal and has twice posted revisions to the plan.  The Senate Finance Committee plans to release its own tax cut package.  The House draft plan affects healthcare providers in numerous ways, including:

* Eliminating the ability to deduct qualified medical expenses. Current law allows for the deduction of medical expenses which exceed 10% of gross income for individuals who itemize deductions.

* Repealing the tax exemption for interest on private activity bonds, including qualified 501 (c)(3) hospital bonds.
Taxing tax-exempt entities on the value of providing employees with certain nontaxable fringe benefits, including qualified transportation and parking.  This would be accomplished by including these items as unrelated business income.  A comparable provision would apply to taxable entities; the employer would not be able to deduct the cost of such fringe benefits.

* Imposing a 20% excise tax on compensation in excess of $1 million paid to any of the five highest paid employees of a not-for-profit organization.  This would be effective for taxable years beginning after Dec. 31, 2017, with no transition rule for compensation paid under existing binding contracts. A similar provision already exists in the for-profit sector (denying a deduction for such compensation) and it would be tightened in the proposal.

* Raising the charitable contribution deduction limitation for cash contributions from 50% of adjusted gross income (AGI) to 60% of AGI, but the increase in the individual standard deduction and elimination of other itemized deductions could prevent middle-income taxpayers from having a tax benefit for their charitable donation, possibly affecting both the charitable organization and employee giving campaigns.

* Eliminating the 50% tax credit for rare disease research. The cost of such research should still qualify for the R&D credit (which provides a lower credit).

All of these provisions would be effective in taxable year 2018.