In-house finance and accounting teams at healthcare organizations are overburdened and struggling to manage the nuance and complexity that the vast tax landscape brings. Stretched thin, these teams find themselves unable to focus on their core duties amidst the overwhelming demands of tax compliance and planning. Often, the lack of appropriate tax resources and tax expertise results in income tax, sales and use tax, personal property tax, payroll tax, and local business tax assessments or tax deficiency and delinquency notices for healthcare organizations.
Healthcare organizations must keep on top of changes to tax laws, fulfill their compliance obligations, and protect the growth goals of their organization. The growing influence of private equity in healthcare, multi-state implications of telehealth services, and the realities of nonprofit health organizations all compound the tax expertise and resources required; expertise and resources which could otherwise be devoted to overall organizational goals surrounding patient care and organizational growth.
Private equity brings opportunity, but tax headaches
One of the biggest tax challenges for healthcare institutions in recent years comes from the world of investment. Since 2020, leveraged buyouts, growth investments, and acquisitions from private equity players impact thousands of institutions and practices. Despite the macro headwinds like higher interest rates, many private equity firms continue to invest in the healthcare space. Data shows that in 2023 there were approximately 1135 unique PE investments into healthcare organizations.
The issue for the accounting team? Private equity in healthcare presents tax ramifications for both target companies and owners. Tricky tax reporting standards for these arrangements pose risk, specifically around compliance. The structure of a private equity transaction often includes a taxable sale and tax deferred contribution to an investor, resulting in complex reporting requirements and potentially mandatory conversions from the cash method to the accrual method for tax. Private equity investment typically adds more pressure for healthcare organizations to satisfy the expectations of new investors, including timely delivery of estimated K-1s, tax returns, and other financial reports.
While each circumstance is different and does not have a one-stop-shop solution, there are important steps healthcare organizations can consider. For instance, they may model the ramifications of a conversion to the accrual method (which typically spans a 4 year income recognition period on unrealized patient receivables) and the adoption of certain favorable methods of accounting for self-pay patient receivables. It behooves a healthcare organization to plan how such transactions may affect the organization financially and to model out the potential impact and cash consequences. Proactivity is key; examining the ramifications of a potential private equity investment in advance provides insight into the tax impact to the future financial landscape of a healthcare organization.
Telehealth and multi-state operational tax issues
Addressing the complexities of multi-state telehealth operations has created other prickly tax situations essential for compliance, but burdensome without the right resources. Operating at a multi-state level, something many healthcare institutions have evolved to do as telehealth booms, can trigger tax obligations. Gone are the days of assessing state tax obligations solely based on physical presence. Economic nexus and market-based sourcing are now essential concepts to determine state income tax and sales tax obligations.
Healthcare organizations contend with nexus on a national scale when their organization employs staff in different states, or when telehealth providers serve patients in a multi-state setting. A hodgepodge of state rules regarding the taxability of revenue streams require telehealth providers to assess income tax and sales tax obligations on an ongoing basis, especially when the structure of revenue contracts involve multiple streams such as technology use or licensing, medical services, and sale of prescription drugs. The nature of your telehealth service could also carry its own tax implications. Remote patient monitoring, questionnaire submissions, and video conferencing with specialists may each add a layer of complexity to the accounting process.
For healthcare organizations transitioning from single state to telehealth services, it’s critical to gather data on your various revenue streams and pinpoint where patients access and receive telehealth services for tax purposes among other compliance aspects. This may also involve tracking IP addresses or bill-to addresses for accuracy.
Having a physical presence in a state isn’t the sole determinant of tax obligations; it’s about recognizing your economic presence and identifying states with set thresholds for nexus. For states without thresholds, it’s a matter of weighing risks and tax impact, and drilling down into detailed state regulations.
Bespoke nonprofit tax challenges
Nonprofits are common in the healthcare industry but carry unique tax considerations critical to maintain status for these hospitals and healthcare systems. Nonprofit healthcare organizations may face scrutiny over tax breaks exceeding their community benefit and charity care provided, for example. Members of Congress push back on hospitals for a perceived lack of charity care. As recently as April 4, 2024, nine House Members wrote a letter to the Secretary of Treasury and IRS Commissioner seeking new regulations and guidance on nonprofit hospitals.
It’s important to confirm the hospital’s 501(r) support and documentation, relating to the following: Community Health Needs Assessment (CHNA) , Financial Assistance Policy and Emergency Medical Care Policy, Limitation on Charges, and Billing and Collections .
Compliance is a requirement for hospitals to maintain tax-exempt status from the Affordable Care Act. The Congressional interest in nonprofit hospitals may also give organizations an incentive to revisit the amount of charity care provided, including the amount Reported on Form 990, Schedule H.
Leveraging outsourcing as a strategic solution
In the face of these challenges, we see more healthcare organizations turn to outsourcing and technology platforms. When done right, these outsourcing partnerships mitigate many accounting pain points under one roof.
It’s difficult to build a superhero in-house tax team with expertise in income tax, payroll tax, sales and use tax, property tax, and healthcare tax.
Healthcare organizations’ financial planning strategies may also be affected by compliance shifts, evolving tax regulations, staffing shortages, internal resource constraints, and risks associated with insufficient tax expertise. Outsourcing allows financial leaders to redirect their focus towards strategic initiatives instead of day-to-day tax operations. A good outsourced partner will work alongside in-house accountants and stay on top of the moving target of healthcare accounting regulations, addressing tax risks and identifying cost-saving opportunities.
Healthcare organizations must adapt to these changes by staying informed and agile in their approach to tax compliance and planning, and ultimately prioritize proactive tax management. By establishing a solid foundation, they can effectively navigate the challenges of taxation, while optimizing resources and expertise, and upholding compliance standards.
Photo: freedigitalphotos user renjith krishnan
Naz Bhangal leads Armanino’s national healthcare tax practice. His team serves healthcare providers, healthcare technology companies, healthcare consulting organizations, medical device manufacturers and life science companies. Naz’s clients appreciate his responsiveness, thoroughness, in-depth knowledge of tax benefits, and understanding of the healthcare industry as it applies to the vast domestic, multistate and international tax landscape. Naz offers expertise in tax compliance, planning, advising, strategizing and forecasting.
Ron Present is a partner in Armanino’s Growth Office. He has more than 35 years of experience and is a health care industry expert. He has in-depth knowledge of the operational structure of pre-acute, acute and post-acute health care environments. Ron brings clients hands-on experience as both an industry executive and consultant.His health care expertise includes strategic, financial and operational advisory services; development of narrow and value-based networks; revenue enhancement and strategy implementation; reimbursement and process improvement strategies; HIPAA compliance; feasibility studies; merger and acquisition transactions and implementation; and market assessments. Prior to joining Armanino, Ron was a partner in Brown Smith Wallace’s Advisory practice and served as the Health Care Industry Group leader.
Matt Petroski is a nonprofit tax specialist with extensive industry experience. He works with exempt organizations in a variety of capacities, including consulting on formation, board governance and other tax consulting, and as an outside service provider of comprehensive tax compliance services. He joined Armanino after spending his career in PwC’s National Tax Services Exempt Organization Tax Services Practice. Matt received his B.S. from the University of Maryland, where he was enrolled in the University Honors Program. He also received his J.D./MBA and LL.M. in taxation from Villanova University. Matt is a licensed member of the Pennsylvania and New Jersey bars and is a member of the American Bar Association Section of Taxation.