The recently passed Tax Cuts and Jobs Act has affected how taxes are calculated for nearly everyone, but wading through the language to understand how it will affect you can be challenging. To help our insureds understand how this new tax plan may affect them, LAMMICO has turned to the experts at the CPA firm of Johnson Lambert LLP for insights.
Under the new tax act, owners of qualified business pass-through entities (sole practitioners, independent contractors and partners in partnerships) are generally allowed a deduction equal to 20 percent of domestic qualified business income. In the case of specified service businesses, which includes the field of healthcare, the pass-through entity deduction is limited to taxpayers who earn $315,000 or less for married filing jointly and $157,500 or less for single taxpayers. Thus, this provision potentially makes pass-through structures more beneficial for those physicians whose earnings fall under these thresholds. Hospital employed physicians with income under the thresholds may benefit from forming a partnership and having the hospital hire and pay the partnership instead of the individual doctors.
For physicians who earn amounts in excess of the above limitations, it would be worth considering potentially incorporating in a professional corporation, since the tax act specifically excludes those earners from receiving the benefits of a pass-through entity. Furthermore, any undistributed income of the corporation would be subject to the new corporate tax rate which is a flat 21 percent as compared to the highest individual tax rate (37 percent for single taxpayers with income greater than $500,000 or greater than $600,000 if married and filing jointly).
While there will be limitations on the ability to realize tax savings, and the practical and regulatory implications of changing to a different type of business entity should not be ignored, the Tax Cuts and Jobs Act gives physicians potential tax reduction opportunities to consider.
Please seek the advice of financial advisors when deciding what course of action would be the most beneficial.
This is not legal or financial advice, and is not intended to substitute for individualized business or financial judgment. It does not dictate exclusive methods, and is not applicable to all circumstances.