Would Trump Tax Plan Trigger Entity Restructuring for Medical Practices?

President Trump’s vision for tax reform has raised more questions than answers. Just one of these provocative questions is how a 15% corporate tax rate—which would apply to pass-through income as well as corporate earnings—would affect physicians and other business owners.

We are still in the early innings of the legislative process, with the Senate yet to announce its own tax plan, so the final details of the plan are subject to change.

As our lawmakers debate the many aspects of tax reform, the provision to apply the corporate tax rate to pass-through income is one we are watching closely, because it would cause a major shift in many healthcare providers’ thinking on the most beneficial entity structure.

Entity Conversion Challenges for Medical Practices

For any business, converting from one entity type to another requires careful consideration of many factors. For medical practices, the cost-benefit calculation of entity conversion is even more complicated.

First, most medical practices have significant accounts receivable balances on which they have not paid income tax. This is because they use the cash basis of accounting that recognizes income only once it is received. As a result, a conversion from a C-corp to an S-corp would trigger built-in gains tax on those AR balances. While there are ways to minimize this tax, it is an area that can trip up the unwary.

Second, and perhaps even more onerous, when a medical practice changes its tax ID number (which would happen when converting from a corporation to an LLC) it must also recredential its providers with each payer. Payments are likely to be delayed during this time-consuming process, which would temporarily restrict cash flow.

These complicating factors have deterred many practices from converting their C-corporations or personal service corporations to S-corporations or LLCs. However, if Congress really does deliver on a low corporate tax rate that applies to pass-through income, then the long-term benefits of conversion might outweigh these short-term costs.

Once the tax bill becomes final—which could happen in a few months or in a year—medical practices will want to move quickly to make sure that their entity structure remains tax-efficient. Our tax advisors are keeping a close eye on the tax reform proposals and can help you adjust your strategy as details are finalized.

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