Federal And State Tax Considerations In Healthcare M&A

Healthcare facilities are subject to both Federal and state taxes. The current tax climate makes taxation uncertain which may have some positive and negative effects on M&A transaction in the Healthcare space. Tax due diligence in a health care transaction must be extremely thorough and comprehensive to best be prepared for the upcoming tax season.

The repeal of the Affordable Care Act’s individual mandate[1] (the requirement that all citizens have health or pay a fine) is projected to increase the number of uninsured individuals substantially. The increase of insured individuals may negatively affect the finances of healthcare facilities treating more uninsured patients.

According to the Tax Policy Center, the implementation of the Tax Cuts and Jobs Act (TCJA) would result in fewer taxable donations which will be given.[2] Charitable donations are provided by individuals looking to offset their taxable income. The TCJA doubles the standard deductions and limits state and local deductions to $10,000.[3] As a result, less charitable donation will be given, negatively affecting the finances of healthcare facilities which rely on charitable donations.

However, the TCJA also increases the charitable contribution deduction to 60% of income at the federal level. This might induce high net worth individuals to donate more to charity as they claim more of their donation as charitable donations.

State governments are allowed to impose a “provider tax” on health care facilities with a limited assessment of up to a quarter of the state’s Medicaid Expenses. It is essential to review the tax laws of every state in which the target healthcare facility is subject.

[1] https://www.irs.gov/affordable-care-act/individuals-and-families/aca-individual-shared-responsibility-provision-exemptions

[2] https://www.taxpolicycenter.org/taxvox/21-million-taxpayers-will-stop-taking-charitable-deduction-under-tcja

[3] IRS Publication 5302, https://www.irs.gov/pub/irs-pdf/p5307.pdf