The IRS clarified that for-profit healthcare providers will have to pay taxes on the grants they received from the COVID-19 Provider Relief Fund.
The two laws that set aside $175 billion in grants to help providers cover lost revenue and coronavirus-related expenses didn't explicitly state that the funds would be taxable. However, the IRS issued guidance stating that the grants are taxable income days before a tax filing deadline on July 15. The change means that grants to for-profit healthcare providers including hospitals and independent physician practices will be subject to the 21% corporate tax rate.
"Physicians or hospitals will be asked to give back on average 21 cents of a dollar of relief, while large tax-exempt hospitals will get 100 cents on the dollar when everybody is experiencing the same losses," said Federation of American Hospitals CEO Chip Kahn. "It's unfair and will lead to an unlevel playing field."
Some for-profit providers had hoped that the grants could be classified as a qualified disaster relief payment, but the IRS said the grants have to be included in gross income. Tax-exempt providers won't be taxed on the grants unless they reimburse the provider for lost revenue for an unrelated trade or business.
"In the beginning there was denial that this could be taxable because it did not seem like it was in line with the spirit of the legislation to create liquidity to help hospitals and medical providers," said Jennifer Breen, a partner at Morgan, Lewis & Bockius.
The Federation of American Hospitals, American Academy of Family Physicians, American College of Physicians, American Hospital Association, American Medical Association, and U.S. Chamber of Commerce asked congressional leaders on June 25 to change the policy so that for-profit providers don't have to pay taxes on the grants.
"The current grant structure creates an inefficient process that provides grants, and then takes back 21% or more of the same grants for many of the organizations that need the assistance the most," the stakeholders wrote.
Advocates for the policy argue that the Congressional Budget Office didn't interpret lawmakers as intending to tax for-profit providers on the grants because they estimated the entire $175 billion as outlays, without estimating there would be corresponding tax revenue. But now that the IRS has issued its interpretation, exempting for-profit providers from having to pay taxes on the grants would be considered as new spending.
A change that creates new spending could be a tough sell, as Senate Majority Leader Mitch McConnell (R-Ky.) has a target of $1 trillion total for Senate Republicans' forthcoming relief package.
The IRS guidance came with relatively short notice, as it was announced on July 6, just nine days before a key calendar-year tax filing deadline for the first and second quarters of 2020. HHS cross-posted the guidance to its website on July 10.
"HHS has unfortunately developed a pattern over the last several months of revising and expanding its Provider Relief Fund guidance without notice," said Jed Roebuck, an attorney at Chambliss, Bahner & Stophel.
If providers miss the guidance and underpay their estimated taxes for the second quarter, they could be subject to tax penalties, Breen said.
Lawmakers explicitly stated that forgiven small-business loans through the Paycheck Protection Program do not have to be counted as taxable income, and the borrowers maintain tax deductions related to the funds.
Mary Khodaparast, a senior manager in Aprio's professional services group, noted that the Provider Relief Fund grants will be taxed the same whether they were from the $50 billion initial general distribution or from subsequent targeted tranches. Some of those tranches were directed to facilities in COVID-19 hot spots.