[Acknowledgment: Much of what I write here is compiled from notes I took at a recent South Texas Chapter, Healthcare Financial Management Association (HFMA) meeting June 1, 2007. At that meeting Paige Gerich, CPA with the CPA firm of  BKD LLP in Houston, Texas made an excellent presentation entitled “Texas Margin Tax, a Prescription for Complexity.” Ms. Gerich can be reached by phone at 713-499-4636 or email pgerich@bkd.com]. 

House Bill 3 passed by the Texas Legislature in 2006 imposed a margin tax health care providers. This tax replaces the Franchise Tax from which healthcare providers were exempt. An important provision of the law is that most healthcare providers will file a return even if no tax is due. Doctor, do not miss the filing deadline or you could pay a “failure to file penalties” even if you owe no tax.  I am going to limit my discussion in this paper to physician organizations though this new tax affects all healthcare organizations. This includes but is not limited to not-for-profit healthcare organizations especially if they have a for-profit entity or partner. 

All legal entities that receive any degree of statutory liability protection from the state are subject to this tax. Everyone knows that one reason for creating a legal entity (i.e., a corporation, PA, Partnership, etc.) is to get some degree of legal protection. This is what “statutory liability protection” means. Such organizations include, but are not limited to, Corporations (both C & S), Limited Liability Companies [or corporations] (LLC), Professional Corporations (PC), Partnerships (both general and limited) and Professional Associations (PA) the form of organization most often used by physicians. 

Sole proprietors are exempt from the new tax. For example, a physician who has not formed a Professional Association and files his or her federal income tax on Schedule C, IRS Form 1040 is exempt from the margin tax regardless of the amount of income. 

It is important that everyone understands that this tax is on Gross Income and not net profits. For example, a PA can have a net loss for income tax purposes and still pay the margin tax since it is computed on gross income and not profit or loss. Also, it appears that all organizations that are “subject to the tax” will file a return if only to show the state Comptroller that they do not owe any tax. 

Taxable Receipts: Taxable receipts begin with your Gross Receipts. Then you can deduct the allowed deductions. This gives you your “taxable receipts” The allowed deductions are:            

1. Providers of healthcare can deduct all receipts from Medicare, Medicaid, TRICARE, CHIP and Indigent Health Care and Treatment Act. It was stated that “if the right to receive payment is “assigned” to another legal entity, [the] exclusion may be lost.” And that the “Revenue is only excludable by a health care provider.” This poses a real problem for some organizations. For example, an LLC (or LLP etc.) holds a contract to provide services and contracts with physicians (sole proprietor or PA) to perform the services. The physicians performing the services are not employees of the LLC. If the physicians do not assign the payment for services then the physician can take the deduction. If they do assign the payment, they cannot take the deduction. Either way, the LLC cannot take the deduction. If the payment is assigned, both organizations will be subject to the tax.           
    
2. Up to $300,000 of compensations & benefits paid to natural persons is deductible. Payments made to other legal entities such as a PA  (not a person) are not deductible. If the payment is to contract labor (reported by a form 1099) the payment is not deductible. It appears that payments must be paid to a natural persons and reported on a W-2 (employees). Payments made to other entities such as a corporation (including another PA) or to non-employees are not deducible.
   
        Benefits such as health care insurance premiums and retirement funds paid on behalf of employees that are deductible to the organization as expenses for income tax purposes are deductible from gross receipts to get to taxable receipts.            
   
   
3. Uncompensated care (indigent and charity care) may be deductible. I say may be deductible because most physicians and physician organizations use the cash method of accounting. With this method of accounting income is only recognized when cash is received. Since uncompensated care is care not paid for and, since uncompensated care is care not paid for,  then no deduction would be allowed as it was not in income to start with.  
   
        If your organization uses the accrual method of accounting then you reported the charges as income and you can deduct uncompensated care. Nevertheless, be aware that the legislature has not yet defined uncompensated care or how to compute the deduction. The best recommendation that can be made right now is to keep complete record, by patient name, on all such care. You will also have to add back any payments you receive for previously excluded cases.            
   
   
4. Contractual Adjustments for federal payments have not been identified as a deduction by the legislature. This is not a problem if you are using the cash basis of accounting as you did not have them in your income (cash received) anyway. On the accrual basis of accounting, if they are not excluded, you would pay on charges you will never collect on. I am sure the legislature will rectify this oversight when they work on “technical correction” issues.            
   
   
5. Bad Debts. Bad debts are the same as contractual adjustments with regards to your method of accounting. If you use cash basis accounting and never reported them as income, you will not have a bad debt. If you use accrual accounting you may be allowed to deduct them. Again, this is another oversight requiring legislative corrective action.            
   
   
6. Patient Refunds. Patient refunds are deductible from gross receipts to get to taxable receipts. 

So, taxable receipts are your gross receipts less the deductions.  

Tax computation: Computing the tax is easy: taxable receipts times 1%. If the tax due is $1,000 or less you do not have to pay the tax but you still have to file the report. 

Due Date. Everyone will file the Margin Tax Return not later than May 15, 2008.           
     If your fiscal year is the calendar year (January through December) then your tax year began on January 1, 2007 and ends December 31, 2007. Your return will be due May 15, 2008.           
     If you are a fiscal year taxpayer, your taxable year is the first fiscal year ending in 2007. For example, if your fiscal year is July 1 through June 30, this is the period you will report. Your return will be due May 15, 2008. 

Recommendations: Here are some recommendations that you should consider now:            

1. Be sure your reporting system (manual or automated) records all receipts so that you can determine how much of your receipts can be deducted. You will need to know how much you received from the exempt programs identified above (Medicare, Medicaid, etc.) You need to be able to determine how much of the payments you received from your patients (co-insurance and deductible) was received from exempt program beneficiaries – if these are allowed as exclusions you want to be able to take them.            
2. Talk with your accountant about the Margin Tax. Asked them for an estimate of how it is going to effect you. If it is going to be major you may want to begin reserving funds to pay it now.            
3. Talk with your accountant or attorney about your legal structure and how it effects your tax liability. Ms. Gerich gave the following issues to consider:    
    > Each entity (LLP and PA) may be taxed separately, possibly resulting in double taxation.     
    > Revenue exclusions only recognized by the recipient of the funds (LLP).     
    > Contract labor not deductible as compensation.     
    > Distributions to owners (to PA from LLP) who are not natural persons are not deductible compensation.            

You may want to discuss the implications of changing your organizational structure if the impact of this tax is substantial. 

Disclaimer. Of course there is a disclaimer, I am not an attorney and, therefore, this document is not intended to be legal advise. The Texas Margin Tax is an extremely complex law. It is yet to be tested and for sure will undergo many corrections. Therefore you will need to check with the appropriate professional prior to filing your return. The purpose of this article is only to make providers of healthcare aware that they are now subject to a state tax that heretofore they did not have to report or pay. The information contained herein was accumulated as of June 1, 2007.  

I will attempt to answer, or get the answer to any question you may have but for continuity of your operations it is suggested that you seek assistance from your accountant, attorney, or other professional advisor. If you wish, please send questions to Fsmith@MedaPhase.net. 

Forrest Smith, MBA, CHFP, FHFMA
Director of Finance and Accounting
MedaPhase, Inc.
8401 Datapoint, Suite 500
San Antonio, Texas 78229-5907
Phone 210-614-0180 ext 144
Fax 210-614-1722