Tax considerations in healthcare M&A are crucial for ensuring a thorough understanding of the potential tax implications of a transaction. As healthcare facilities are subject to both federal and state taxes, the current tax climate can make taxation uncertain. This potentially can have both positive and negative effects on M&A transactions in the healthcare space. To best prepare for the upcoming tax season, it is essential to conduct thorough and comprehensive tax due diligence.
The individual mandate of the Affordable Care Act[1], which required all citizens to have health insurance or pay a fine, is projected to be repealed, resulting in a substantial increase in the number of uninsured individuals. This increase may negatively impact the finances of healthcare facilities by increasing bad debt and charity care and potentially leading to a loss of revenue from previously insured individuals, necessitating cost-cutting measures such as layoffs or service reductions.
Tax Considerations In Healthcare: What To Expect
The increase in uninsured individuals may lead to an increase in bad debt and charity care for healthcare facilities. Additionally, the loss of revenue from those previously insured individuals may cause financial strain for healthcare facilities, potentially leading to the need for cost-cutting measures such as layoffs or service reductions.
The Tax Cuts and Jobs Act (TCJA) will likely result in fewer charitable donations, according to the Tax Policy Center. This is because the TCJA doubles the standard deductions and limits state and local deductions to $10,000, making it less beneficial for individuals to offset their taxable income through charitable donations. This could negatively impact healthcare facilities that rely on such donations. [2] [3]
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 donations as charitable donations.
State governments are allowed to impose a “provider tax” on healthcare 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 to 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
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