The IRS has confirmed that Provider Relief Fund payments made available through the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) cannot be excluded from taxation under a disaster relief exemption. Therefore, the payments do constitute gross taxable income, unless otherwise carved out under an existing exclusion, such as if the provider is a 501(c) nonprofit.
The IRS clarified that for-profit healthcare providers including hospitals and independent physician practices will be subject to the 21% corporate tax rate on the grants they received from the COVID-19 Provider Relief Fund, even though the two laws that set aside $175 billion in grants to help providers cover lost revenue and Coronavirus-related expenses didn’t explicitly state that the funds would be taxable.
The IRS issued guidance stating that the grants are taxable income days before a tax filing deadline on July 15. Both hospitals and independent physician practices will be subject to the 21% corporate tax rate. The IRS guidance came in response to a question about whether a health care provider that receives a Provider Relief Fund payment may exclude it from gross income as a qualified disaster relief payment under section 139 of the Internal Revenue Code. The IRS responded “No,” and said a payment to a business does not fit the definition of a qualified disaster relief payment under section 139, even if the business is a sole proprietorship. The relief fund payment is therefore included in gross income under section 61 of the code.
Tax-exempt healthcare providers are not subject to tax on relief payments, the IRS said. However, the relief payment may be taxable under section 511 if the payment reimburses the tax-exempt provider for expenses or lost revenue attributable to an unrelated trade.
The American Medical Association is asking Congress to exempt physicians from being taxed on the payments received from the Provider Relief Fund. This provision may be included in the next COVID-19 relief package expected at the end of July.
Reach Out To Us: Given that many healthcare providers may ultimately return unused payments from the Provider Relief Fund, taxpayers should be conscious of the tax consequences of payments received in one tax-year and returned in another year. Additionally, the guidance only applies for federal tax purposes so taxpayers should also consider the state and local tax treatment of the payments.
Our tax experts can help physicians take advantage of tax credits available, and assist with budget and cash flow planning, as well as expense analysis and new financial projections. Contact us with questions at CPA@Fuoco.com.