Increasing your Taxable Income to retain Stimulus – A Rubik’s Cube
One of my clients (Mr. FF) called me in mid-December with the news that HHS released a FAQ regarding taxes and stimulus money. He was quite excited about it and rightfully so.
From the CARES Act Provider Relief Fund Frequently Asked Questions: “Can providers use Provider Relief Fund payment to pay taxes? (Added 12/11/2020) Yes. HHS considers taxes imposed on Provider Relief Fund payments to be “healthcare related expenses attributable to coronavirus” that are reimbursable with Provider Relief Fund money, except for Nursing Home Infection Control Distribution payments.”
There are three very important considerations for 2020. Obtaining and keeping PPP. Obtaining and keeping Stimulus funds. And, the tax cost of doing so. With the FAQ regarding taxes, balancing these three considerations just became easier.
For purposes of keeping the stimulus funds, care providers are allowed to keep stimulus funds to compensate for revenue reductions plus qualified expenses. When doing the math, qualified expenses are first offset by PPP funds and other state programs. Therefore, care providers who received significant PPP funds or funding from state programs may find themselves forced to return stimulus funds as the PPP and state programs reduce the amount of qualifying expenses.
The FAQ regarding taxes might be the saving grace. Since taxes on stimulus funds are a qualifying expenditure, facilities should consider the impact of increasing their taxable income for 2020 or the first half of 2021.
Many Care providers are flow through entities (LLC’s or S-corporations) and do not directly pay taxes. However, in other areas of the law which came into play in 2020 (qualifying under the alternative size standard for PPP), a flow through entity is allowed to impute the tax cost on its income. The issue will be whether the imputed tax would be computed based on the corporate rates (21%) or the individual rates (37%). Also, if there is taxable income, can we say that all of the tax relates to the stimulus funds (a “but for” approach) or would HHS prorate the tax across various types of income (regular v. stimulus) and only assign a portion of the tax to the stimulus payments? Hopefully these will get resolved (or left completely open) in way which is favorable to the industry.
There are legitimate questions as to whether unearned stimulus money is taxable in 2020. For an entity which has not earned the right to retain all the stimulus money, maybe they should consider showing it as taxable.
Also, most care providers are on the cash method of accounting. The cash method is a deferral in paying tax on the net accounts receivable in excess of accounts payable. Taxpayers can change from the cash to accrual method when they file their 2020 tax return as late as September 15, 2021. If a business is looking at repaying stimulus funds to the government due to a lack of qualifying expenditures after reducing for PPP and/or a lack of revenue reductions, the change to accrual would in essence pick up the deferral and have the government pay for it.
If a taxpayer made a change in their overall accounting method within the prior five years, then they cannot change from cash to accrual for 2020. There are however always ways to accelerate taxable income.
The beautiful part is that a taxpayer can increase their income for 2020 with a change in method, and then in five years change back to the cash method and write off the excess of the accounts receivable over accounts payable. The change back to the cash method should generate a significant loss at that time. Since the ongoing income of a cash method entity is generally the same as the accrual method once the facility census and mix is stable for a number of years, there should be no difference in the intervening years until the change back to cash method can be done.
If the tax is correctly imputed at the entity level, then the fact that an individual has losses from other places and has little or no actual tax should not be a consideration. As a result, taxpayers increasing their income in some companies in order to benefit from an imputed tax cost should proactively do what they can to generate offsetting losses in other companies.
Having been a tax advisor for 30 years, I have done everything to decrease taxes. It would be perfectly fitting with the craziness of 2020 if suddenly I find myself trying to increase taxes.
Kuno Bell, CPA, JD