How health care organizations can prepare for tax changes under Trump in 2025

Authored by RSM US LLP

Health care organizations have more clarity about the direction of tax policy in 2025 now that Donald Trump has been elected president and Republicans have flipped control of the Senate while retaining control of the House of Representatives.

The unified Republican Congress will be able to pursue broad legislation that remakes the U.S. tax landscape before dozens of provisions in the Tax Cuts and Jobs Act of 2017 (TCJA) are scheduled to expire at the end of 2025. With nonexpiring provisions also subject to change, new legislation could significantly alter health care organizations’ cash flows and tax obligations.

Ahead of any tax changes in 2025, for-profit health care organizations that are partnerships, as well as tax-exempt organizations entering joint venture arrangements, can equip themselves to make smart, timely decisions by understanding how different tax policy scenarios would affect their tax profile, cash flow projections, valuation and net income.

Below, we highlight for health care organizations several key business issues that tax changes could affect.

Debt-financed transactions

As health care deal activity and strategic partnerships continue to increase, the unfavorable limit for deducting interest expense makes consolidation more expensive, undercuts organizations’ ability to make necessary improvements, and may subject some investors to taxable income they do not expect.

The tax policy crossroads

The business interest deduction limitation under section 163(j) became less favorable in 2022, as part of the Tax Cuts and Jobs Act. The current limitation does not expire.

There is some Republican support for a more favorable deduction limit, but it was not a top priority for either party in negotiations that produced the ill-fated Tax Relief for American Families and Workers Act early in 2024. It remains to be seen whether Republican support is strong enough to result in a change. The cost of more favorable tax treatment will factor heavily in what Congress does.

Health care organizations should consider:

• How more favorable expensing of business interest would affect their debt and equity mix in approaching transactions.
• Tax distribution language in their partnership agreements, flexibility in paying those distributions and expectations of their partners where there is a lack of cash to do so.
• Cash flow management tactics where substantial ordinary income and limited interest deductions are both present.

Cost of capital

Health care organizations are upgrading facilities, equipment and technology to enhance the quality and consistency of patient care. When it comes to acquiring fixed assets and placing them into service, more favorable deductions can make these types of improvements more affordable.

The tax policy crossroads

Companies’ ability to deduct the entire cost of qualified assets the year they were acquired and placed in service—a provision known as bonus depreciation—began to phase out in 2023, under the TCJA. Trump and congressional Republicans support restoring this notion of bonus cost recovery as a tax incentive for capital expenditures that drive infrastructure and business growth.

However, the nonpartisan Congressional Budget Office estimated in May that reinstating full bonus depreciation retroactively to 2023 would cost the federal government $378 billion through 2034. That estimate would likely invoke a broader discussion around the need for revenue raisers.

Health care organizations should consider:

• Accelerating capital expenditures to take advantage of bonus depreciation before it phases out completely. Such scenario planning should factor in the possibility that 100% bonus depreciation could be reinstated, and the extent to which the organization would regret having accelerated capital expenditures in that scenario.
• Changing their internal capitalization policy to allow the expensing of more assets that would otherwise be capitalized. For example, an organization may expense laptops and other small single item assets that are below their book capitalization limit and that limit is respected for tax.

Income

Although many for-profit health care organizations are structured as pass-throughs, most physicians, nurses, dentists and other health care professionals who provide services are ineligible for the 20% deduction for qualified business income. For service providers who are also owners, eligibility would increase their after-tax income, which could encourage investments in patient care and support the recruitment and retention of skilled workers.

The tax policy crossroads

Health care is considered a specified service trade or business (SSTB) under section 199A, which makes most health care professionals ineligible for the 20% deduction. Neither Trump nor congressional Republicans have proposed making health care service providers eligible; however, keep an eye on any proposed changes to the list of SSTBs as policy negotiations evolve.

Health care organizations should consider:

• Engaging in the legislative process. This may include informing lawmakers directly of their preference for health care service providers to be eligible for the deduction. It may include getting involved with professional organizations that advocate on behalf of health care organizations.

The tax policy road ahead for health care

Expect the path to new tax legislation in 2025 to be unpredictable, difficult to follow at times and lined with conflicting claims by lawmakers, think tanks, news media and other analysts. However, health care organizations have a guide.

Those that work closely with their tax advisor to monitor proposals can model how proposed tax changes would affect their cash flows and tax obligations. This can equip organizations to stay confidently on course and make smart, timely decisions once policy outcomes become clear.

In recent years, many tax law changes have become effective on the date a bill was introduced rather than the date it was signed into law or later. Businesses that are prepared for law changes and their effects will likely experience the greatest benefits.

This article was written by Parr Thomson, Rebekuh Eley and originally appeared on 2024-11-13. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/services/business-tax/trump-2025-tax-proposals-health-care.html

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.