An article published Feb. 28 by the Journal of the American Veterinary Medical Association
provides insight on how veterinary practices will be treated under the Tax Cuts and Jobs Act signed by President Trump in December.
"New tax law: What it means for veterinary hospitals" provides some great information for veterinarians as they attempt to navigate the effects of federal tax reform. However, I'd like to correct the article's analysis regarding pass-through entities.
At issue are two paragraphs that explore pass-through income — profits that are passed to business owners who report it as personal income — and whether veterinary practice owners can take advantage of the provision for the 2018 tax year.
According to the article, it doesn’t look like it:
“As a general rule, income resulting from a ‘specified service trade or business’ does not qualify for this deduction for pass-through income. Examples of specified service trades and businesses are those engaged in the performance of services in the fields of health, consulting, law, accounting, and financial services.”
“Although the new law states that businesses engaged in health services do not qualify for the deduction for pass-through income, the Internal Revenue Service has yet to issue definitive guidance that makes it clear whether health services are limited to human health or extend to health services provided to animals as well. If veterinary practices are not considered qualified businesses for the purposes of this deduction, the individual owners of veterinary practices will not be entitled to the pass-through deduction.”
These statements are an inaccurate interpretation of the law. Veterinarians are not excluded from the deduction and could benefit from it, depending on their overall annual household income.
The law does not state that business engaged in health services do not qualify for the deduction. Rather, income generated from a "specified service trade or business" does qualify for the deduction; however, it is limited through a threshold system different from the limits on non-specified services.
The threshold is based on household income. While limited more than non-specified services, businesses in the health-service industry can still receive the full 20 percent deduction if under the threshold limits.
IRS previously addressed status of veterinarians
Although the IRS has not issued definitive ruling related to the new tax law, there is little doubt that the agency’s definition of health services includes veterinary medicine.
In Revenue Ruling 91-30, the IRS determined that veterinarians are in the "field of health" and should be included within the meaning of "similar healthcare providers" akin to doctors, nurses and dentists.
A revenue ruling is an official interpretation by the Service of the Internal Revenue Code. The IRS Office of Chief Counsel supported the agency’s stance on veterinary medicine in a memorandum dated Dec. 6, 2013.
The memorandum states that “a veterinarian’s services squarely fall within the scope of what are generally considered medical and healthcare services.” It also noted that “Congress and the IRS have historically included veterinarians in the field of medical and healthcare services.”
Finally, the Audit Technique Guide, an internal auditor guide used by IRS examiners, begins with the statement, “Doctors of veterinary medicine are medical professionals whose primary responsibility is protecting the health and welfare of animals and people.” It cites Revenue Ruling 91-30 for the continued proposition that veterinarians are in the field of health.
To explore how the new deduction works for veterinarians, consider this scenario:
You are married and a 50 percent owner of a veterinary hospital that is a designated pass-through entity. Your annual salary is $100,000. The hospital brings in $100,000 in annual net income. Your spouse brings in another $50,000 from a day job. You have another $5,000 in interest income.
Following the flow chart, here’s how you answer the questions.
- Are you a specified trade or business? Yes. You are in the field of health.
- What is your taxable income? It's $100,000 (your W-2 wages) + $50,000 (your 50 percent share from the hospital) + $50,000 (your spouse’s W-2 wages) + $5,000 (interest income) = $205,000.
- Is that $205,000 equal to or more than $315,000, the 2018 threshold for a married couple? No.
- That means you can deduct 20 percent of your share of the qualified business income: $50,000 x 0.2 = $10,000.
Because your taxable income is not more than the threshold, the deduction isn’t adjusted or phased out. (The credit phases out as you pass the threshold limit; it is completely eliminated once you exceed the threshold by $100,000 for joint filers or by $50,000 for all others.) You get the $10,000 deduction, which should be reflected on page 2 of your Form 1040. The $10,000 deduction may not be a windfall, but it is better than the zero-dollar benefit suggested in the JAVMA article, which states that “… individual owners of veterinary practices will not be entitled to the pass-through deduction.”
While uncertainties remain and regulations (once issued) may alter my analysis, the new tax plan is current law and veterinary professionals should consult with knowledgeable certified public accountants on how to maximize their benefits.
About the author: Raphael Moore, JD, LL.M, has been general counsel of the Veterinary Information Network since the 1990s. He enjoys figuring out esoteric legal issues and is a frequent contributor to VIN legal and practice management discussions. He is an avid hiker and has a knack for being attacked by bears in Yosemite. He lives with his wife and two daughters in their geodesic dome on the outskirts of Davis, California, where he's raising alpacas and chickens.