Independent doctors get sweet deal under GOP tax cut bill
While many healthcare industry groups are unhappy about the Republican tax cut bill, primary-care physicians and dentists in independent practices may be smiling.
That's because the bill, which passed Congress Wednesday, sharply reduces the personal income tax rate for owners of pass-through entities such as partnerships and sole proprietorships, and gives a smaller tax break to owners of Subchapter S corporations. That's how most physician and dental practices are organized.
Under the Tax Cuts and Jobs Act, owners of pass-through entities will receive a 20% deduction on their taxable income, dropping their maximum effective tax rate from the current 39.6% (or 37% under the bill) to about 29.6%.
Healthcare professionals and other skilled service providers will only qualify for the new break if they earn no more than $415,000 a year for a married couple filing jointly, or $207,500 for a single filer.
"That will help our primary-care physicians, but it won't be that great a help to the two-physician family or to specialists, whose incomes will be above that," said Tina Hogeman, chief financial officer at the Medical Group Management Association.
There is no income limit on the tax break for other types of owners of pass-through entities who fall outside the bill's definition of specified service trades or businesses, which includes medical providers. For instance, very high-income real estate developers in pass-through entities will receive the 20% deduction while very high-income physicians and other healthcare professionals will not.
On the flip side, lower-paid employees of medical practices, such as nurses, medical assistants and billing clerks, will not benefit from the tax break, while their physician-bosses may qualify.
That drew scathing criticism from one expert. "If you're going to reduce tax rates, don't set haphazard lines," said David Kamin, a law professor at New York University who opposes the overall tax bill. "High-income doctors and lower-income employees don't get the lower tax rate but super-rich real estate developers do. It's a crazy provision. There's no principle behind it."
Kamin said, however, that high-income physicians and other service providers still may find ways to qualify for the lower pass-through rate by restructuring their business. For instance, they could convert their office building into a real estate investment trust and charge themselves a sky-high rent, artificially reducing their income.
He even foresees hospital systems restructuring their arrangements with employed physicians and other healthcare professionals to enable those professionals to take advantage of the lower pass-through tax rate.
David Moseley, managing director of the healthcare practice at Navigant Consulting, had a far more positive take on the new pass-through provision. He argued that the lower tax rate will help independent physicians in small towns, who may be their community's only healthcare provider, stay in business.
"What you hope is this provides a break for small-town doctors who are struggling so they can invest more into the business, grow it and pay their lower-level folks more," he said.
In addition, the lower tax rate could help those small-town and rural physicians remain independent rather than selling their practices to a hospital system or other large organization, he said.
But Hogeman said the lower tax rate would have no effect on the trend of physicians joining larger groups.
"This won't reduce that incentive," she said. "There are too many other factors in what's going on in the healthcare industry that would play a bigger role in their decision."
Correction: The original article inaccurately stated that owners of Subchapter S corporations would receive the same pass-through tax break as owners of partnerships and sole proprietorships. This error has been corrected.
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