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 IRS Rule Offers No Relief for SNFs, but May Help Some AL Operators

Skilled nursing facilities (SNFs) will most likely not be able to qualify for a 20 percent tax reduction that was part of the 2017 federal tax cut package after a recent IRS rule offered details for implementing the deduction, according to long term and post-acute care advocates.

Advocates at the American Health Care Association/National Center for Assisted Living (AHCA/NCAL) had worked to make all SNFs and assisted living providers eligible for the cuts, but the IRS did not agree. However, these same industry sources said there was some positive news from the IRS rule in that certain assisted living communities may be able to benefit from the tax reduction.

At issue is that the Tax Cuts and Jobs Act enacted in 2017, which permitted owners of pass-through entities such as limited liability companies, partnerships, S corporations, and sole proprietorships to deduct 20 percent of their “qualified business income.”

In the law, Congress defined qualified business income as income from a “qualified trade or business,” which, importantly, does not include a “specified service trade or business.”  Advocates had worked to persuade the IRS that SNFs and assisted living communities not be considered specified service trades or businesses and thus qualify for the deduction.

This effort proved to be a tough sell, sources said, noting that the Internal Revenue Code defines specified service trade or business as:

“Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.”

In addition, the IRS has traditionally interpreted the Code language to include providing nursing services and physical therapy. In sticking to this often-used interpretation, once the new IRS rule came out, advocates said there is no across-the-board carve out for SNFs or assisted living, which makes it challenging for SNFs to take the 20 percent deduction.

The one silver lining from the new rule is the possibility certain assisted living communities may qualify for the deduction based on a new example added to the regulations as a result of AHCA/NCAL’s earlier comment letter to the IRS on the rule.   

The new example included in the explanation that follows:

“X is the operator of a residential facility that provides a variety of services to senior citizens who reside on campus. For residents, X offers standard domestic services including housing management and maintenance, meals, laundry, entertainment, and other similar services. In addition, X contracts with local professional health care organizations to offer residents a range of medical and health services provided at the facility, including skilled nursing care, physical and occupational therapy, speech-language pathology services, medical social services, medications, medical supplies and equipment used in the facility, ambulance transportation to the nearest supplier of needed services, and dietary counseling. X receives all of its income from residents for the costs associated with residing at the facility. Any health and medical services are billed directly by the health care providers to the senior citizens for those professional health care services even though those services are provided at the facility. X does not perform services in the field of health within the meaning of section 199A(d)(2) and paragraphs (b)(1)(i) and (b)(2)(ii) of this section.”

Sources said the boiled down version of the example above means a community or facility that meets the above description would fall outside the definition of a specified trade or business and qualify for the 20 percent deduction.

AHCA/NCAL said it would continue to work for a fix to the IRS interpretation of the qualifications of all SNFs and assisted living communities for the tax deduction.

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