Understanding the tax implications of owning and operating a senior living facility can significantly impact your bottom line. Here are 15 essential tips to help you navigate the complex world of healthcare accounting:
1. Depreciation and Amortization
Depreciation is a tax deduction that allows you to recover the cost of tangible assets over their useful lives.
- Building and its components: Walls, floors, ceilings, and other structural elements.
- Furniture and fixtures: Beds, chairs, tables, and other furnishings.
- Medical equipment: Wheelchairs, walkers, oxygen tanks, and other medical devices.
- IT equipment: Computers, servers, and network equipment.
- Kitchen equipment: Stoves, ovens, refrigerators, and dishwashers.
- Laundry equipment: Washers, dryers, and other laundry machines.
Note: Things like handicap bars and IVs would typically be considered part of the building or furniture, and would be depreciated accordingly. Durable medical equipment (DME) might have a shorter useful life and could be depreciated more quickly.
Meanwhile, amortization is a similar process used for intangible assets, which are assets that lack physical substance. For senior living facilities, common intangible assets include:
- Goodwill: The value of the business’s reputation, customer relationships, and other intangible assets.
- Patents and trademarks: Intellectual property that gives the business exclusive rights to use or sell a product or service.
- Leasehold improvements: Improvements made to leased property that increase its value.
Note: The kindness of nursing staff, while valuable, is not considered an intangible asset for tax purposes. Goodwill, on the other hand, can be a significant asset for a senior living facility, representing the value of its reputation and the trust it has built with residents and their families.
2. Employee-Related Taxes (Fringe Benefits)
For instance, there’s the Fringe Benefits Tax, wherein certain benefits are taxable. While many employee benefits are tax-free, some, such as employer-provided health insurance premiums over a certain threshold, are subject to the fringe benefits tax. This becomes especially critical since most healthcare industries have generous health insurance plans so understanding the fringe benefits tax is crucial.
Additionally, under certain conditions, healthcare facilities can provide meals and lodging to employees without triggering income tax or FICA taxes. To qualify, the meals and lodging must be provided for the convenience of the employer and on the employer’s premises.
There’s also continuing education expenses (which is great for LPNs looking to become RNs), in addition to medical expense reimbursements. Employers can reimburse employees for out-of-pocket medical expenses, up to certain limits, without triggering income tax or FICA taxes.
3. Tax Credits and Incentives
If your facility conducts research or development activities, consider claiming research credits. Research credits are tax benefits provided to businesses that engage in R&D activities. While this does not directly impact good will (see point 1), this can indirectly impact goodwill. For example, if a company’s research and development efforts lead to significant breakthroughs or innovations, it may enhance its reputation and increase its customer base. This could, in turn, increase the value of its goodwill.
Additionally, there’s usually energy credits for any energy-efficient improvements, such as solar panels or LED lighting.
Meanwhile, though less common given the high level of care, specialized equipment and regulatory requirements, there are some skilled nursing facilities (SNFs) that can qualify for low-income housing credits.
Usually, these facilities cater to specific populations, such as veterans or individuals with disabilities, and may receive government subsidies to help keep costs down.
4. Medicare and Medicaid Reimbursement
Cost Reports: Understand the requirements for filing cost reports to determine Medicare and Medicaid reimbursement.
Of course, there was also the Provider Relief Fund (PRF). The PRF was a federal government program established to provide financial assistance to healthcare providers impacted by the COVID-19 pandemic. It was designed to help these providers prevent, prepare for, and respond to the virus, as well as to maintain their operations during the crisis.
While the PRF has since concluded its distribution of funds, healthcare providers who received PRF payments may still be subject to reporting requirements and potential repayment obligations.
5. Charitable Contributions
Senior living facilities can make a variety of charitable contributions to support their communities and improve the lives of those in need. Here are some examples:
- Donations to local organizations:
- Non-profit organizations: Support organizations focused on senior services, healthcare, education, or social welfare.
- Veterans’ groups: Contribute to organizations that support veterans and their families.
- Religious organizations: Donate to local churches, synagogues, or mosques.
- In-kind donations:
- Medical equipment: Donate unused or surplus medical equipment to local healthcare providers.
- Supplies: Donate supplies, such as food, clothing, or toiletries, to local charities.
- Services: Offer services such as transportation or meals to local organizations.
- Volunteer programs:
- Employee volunteerism: Encourage employees to volunteer their time to local organizations.
- Resident volunteerism: Facilitate opportunities for residents to volunteer in the community.
- Community outreach programs:
- Health screenings: Provide health screenings or educational programs to the community.
- Community events: Host or participate in community events, such as food drives or fundraisers.
- Partnerships with local businesses: Collaborate with local businesses to support community initiatives.
By making charitable contributions, senior living facilities can demonstrate their commitment to social responsibility and strengthen their relationships with the community.
6. Net Operating Loss (NOL) Carryover
Net Operating Losses (NOLs) occur when a business’s expenses exceed its income in a given year. In such cases, the excess loss can be carried back or carried forward to offset taxable income in other years. This can result in a tax refund or reduce future tax liabilities.
The specific rules for carrying back and carrying forward NOLs have changed over time, depending on the tax laws in effect. However, generally, NOLs can be:
- Carried back: This means applying the NOL to offset taxable income in previous years, potentially resulting in a tax refund.
- Carried forward: This means applying the NOL to offset taxable income in future years, reducing future tax liabilities.
The number of years for which NOLs can be carried back or forward varies depending on the tax law in effect. For example, there have been periods when NOLs could be carried back for a certain number of years and carried forward for an indefinite period.
Some of the specific benefits include:
- Tax refunds: Carrying back NOLs can result in immediate tax refunds, providing much-needed cash flow.
- Reduced future tax liabilities: Carrying forward NOLs can help mitigate future tax burdens, especially during periods of high profitability.
- Tax planning: Understanding the carryback and carryforward rules allows businesses to strategically plan their tax liabilities and optimize their financial performance.
As far as limitations and considerations, here are the following:
- Phased-in deduction: In some cases, the use of NOLs to offset taxable income may be subject to a phased-in deduction, which limits the amount of NOLs that can be used in a given year.
- Corporate tax rate changes: Changes in the corporate tax rate can impact the effectiveness of NOL carrybacks and carryforwards.
- Tax law changes: The rules governing NOLs can change over time, so it’s important to stay updated on the latest tax legislation.
7. Section 179 Deduction
Maximize your deductions by taking advantage of the Section 179 deduction for qualifying equipment purchases. Section 179 is a tax deduction that allows businesses to deduct the cost of qualifying equipment purchases in the year they are placed in service.
For senior living facilities: This can include medical equipment (e.g., wheelchairs, walkers, oxygen tanks), IT equipment (computers, servers), kitchen equipment, laundry equipment, and other business assets.
Ultimately, it encourages investment in new equipment, offers immediate tax savings, and improved cash flow.
Key points to remember:
- Deduction limits: The maximum deductible amount changes annually.
- Qualifying equipment: The equipment must be used for business purposes and not considered a luxury item.
- Phase-out: The deduction may be reduced if the total cost of qualifying equipment exceeds a certain threshold.
By understanding these key tax considerations, senior living facility owners can optimize their financial performance and ensure compliance with tax laws.
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