While still awaiting final passage through Congress, the Tax Cuts and Jobs Act, once it is enacted into law, alters a number of tax provisions that will affect people of different income levels and business structures in varying ways. According to analysis by the Tax Policy Center, the new tax bill is expected to reduce taxes for all income groups through 2025, with the largest reductions going to the highest income earners (i.e., those in the 95th to 99th percentile). A percentage of taxpayers are expected to see an increase in their taxes and this percentage will grow over time from 5% in 2018, 9% in 2025, and 53% in 2027.
The effects of the tax law changes on physicians, and otolaryngologists in particular, are still not completely clear, but given the higher income levels of many otolaryngologists, most should see a slight income tax rate reduction. “The part of the bill that will impact all otolaryngologists, whether they are employed or own their own practice, is that most will see their tax rate decrease slightly,” said Jed Grisel, MD, an otolaryngologist at Head & Neck Surgical Associates in Wichita Falls, Texas.
Whether or not an otolaryngologist is employed or owns a practice will, however, determine other tax changes under the new tax bill. A breakdown of some of these expected changes, along with the anticipated effects of the new tax bill on rural practices, is discussed subsequently. Nothing is yet set in stone, and a good deal of uncertainty still remains about details of the tax bill. Otolaryngologists are advised to work closely with their accountants to ensure they are fully compliant and will reap the full benefits of the new bill.
Pass Through Entities (S-Corp, PLLC, Partnership)
Privately owned practices, including S Corporations, professional limited liability companies (PLLC), and partnerships, are considered “pass through entities” under the new tax bill and are entitled to deduct 20% of their income to lower their overall taxable income.
Reducing the taxable income for pass through entities is designed to help these entities use the saved monies to reinvest in their businesses. Many otolaryngologists and other specialists may not be eligible for this deduction, however, given the restrictions on eligibility based on income. Under the new law, high-earning physicians (and others, such as lawyers) will not be able to claim the deduction. “Unfortunately, most professional workers such as doctors and lawyers have been excluded from this deduction,” said Dr. Grisel, adding that the rationale to exclude professional workers from this deduction is based on what he says is flawed logic—logis that assumes, for example, that physicians don’t have the same type of significant overhead as do other types of pass-through entities.
“This exclusion, in my opinion, shows the lack of understanding by lawmakers about the realities of running an otolaryngology clinic in 2018,” he added, citing the many overhead expenses that medical practice owners have, including expensive equipment, rising staff health insurance, and digital health costs. “This deduction would have provided much-needed resources to cover some of these rising costs.
The increasing complexities in medical practice administration are very much larger obstacles for small practices. The new tax bill will help some of these practices, but to suggest that it will create a paradigm shift for these physicians is an overstatement. —Eugene Brown, MD
In addition, some of the deductions that privately owned businesses could previously deduct have been restricted or the amounts of allowed deductions reduced under the new law, said Nadim Bikhazi, MD, an otolaryngologist at the Ogden Clinic in Utah. “From my understanding, the new tax law did not favor professionals but rather favored other types of services such as architects,” he said. Otolaryngologists in an S-Corp [or other pass through entity] have been hurt to some extent by some of the restrictions because of the changes in these deductions, he added.
One area of ambiguity is how ancillary sources of revenue that generate passive income for otolaryngology practices will be considered under the law. According to Dr. Bikhazi, practitioners who rely on passive income sources, such as those arising from CT scans or surgical centers, are looking for other ways to maximize tax deductions from these sources of revenue because they will be more restricted under the new law.
Calling this a gray area, Dr. Gisel said it is uncertain whether these types of revenue streams will be eligible for the 20% deduction under the new law. “For example, if an otolaryngologist also owns the real estate in which the practice lives, these real estate assets are often held in a separate company. It is currently unclear if income from these ancillary companies [is] eligible for the 20% deduction,” he said.
“It is important to consult with your tax accountant in such cases, because guidance on such companies should be forthcoming over the next few months regarding how to address such circumstances,” he said.
The largest tax advantage for otolaryngology practices will be for those in a C-corporation (large practice or multispecialty group), given the proposed corporate tax cut from 35% to 20% on these entities. Some speculate that this substantial reduction for C-corporations may incentivize the creation of personal service corporations (PSCs), which were popular years ago. “If C-corporations for professionals are allowed to qualify for this lower rate, and/or the committee reduces or eliminates double taxation of corporate earnings, we’ll see PSCs come back into vogue,” said Johanna Fox Turner, CPA, CFP, RLP, of Fox Wealth Management, in a Medscape interview.
Eugene Brown, MD, RPh, an otolaryngologist at Charleston ENT & Allergy in South Carolina, said the tax benefits under the new bill may have some benefit for small, rural otolaryngology practices, but he emphasized that the benefits are not robust enough to help these practices handle the challenges they face.
“The increasing complexities in medical practice administration are very much larger obstacles for small practices. Recruiting to small markets is very, very difficult,” he said. “The new tax bill will help some of these practices, but to suggest that it will create a paradigm shift for these physicians is an overstatement.”
Dr. Brown emphasized the continuing uncertainty about how the final law will look and encouraged otolaryngologists to work closely with their accountants. “I think [otolaryngologists] need to work closely with their consultants and advisors to understand exactly how the bill may affect individual circumstances,” said Dr. Brown, echoing the sentiments of Drs. Bikhazi and Grisel.
Mary Beth Nierengarten is a freelance medical writer based in Minnesota.