Tax issues on the horizon

January 10, 2011

Learn how healthcare reform taxation will impact your practice.

A: There are a few important tax issues hiding in the corners that I think need watching by physicians. The first has already passed as part of healthcare reform.

Beginning in 2012, physicians will need to send a 1099 form to every vendor with which they spend $600 or more, including your utility company, computer/technology provider, office supply store, office cleaners, and others.

The big tax issue to watch is the impact of value added taxes (VATs) that are being discussed. Many economists agree that a VAT is preferable to raising the income tax and may be politically more palatable.

A VAT is levied at each stage of production and distribution in the supply chain, unlike a sales tax, which is paid at final purchase. A VAT can occur when the raw material is sold, again at manufacture of the product, again at wholesale distribution, again at retail distribution. The end consumer of products and services cannot recover VAT on purchases, but businesses are able to recover VAT on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. This means that the cost of all goods and services, from accounting to supplies, rises for the physician practice. The concern for physicians is again that they may end up being the "consumer" and unable to pass on the increased cost to the insurance company through fee increases or a VAT on their own services or supplies that they purchased to serve the patients.

So a VAT of 10% would take away at least 15% of the net income of a primary care physician with a 60% overhead, not yet including the increased costs of administering the VAT, or the 10% increased costs of living experienced by the physician outside of his or her practice. Will some form of VAT exception be made in favor of physicians and against insurance companies? It's unlikely. And switching to a cash-based concierge practice doesn't help the physician as much as it might otherwise without a VAT, as the costs of doing business have still gone up. The physician could pass the VAT on to the patient, but that would increase the price to the patient and discourage visits.

It would be difficult to get away from the VAT by pursuing foreign work, since more than 100 countries worldwide use VATs, ranging from 5% to 25%.

The best solution I can think of (besides some serious strategic planning with your medical-practice-specialist accountant or management consultant) is to start learning to live on less income, before it is forced upon you. But that's a good life-strategy anyway.

Answers to readers' questions were provided by Medical Economics consultant Keith Borglum, CHBC, of Professional Management and Marketing. He has been a licensed practice broker, appraiser, author, and management consultant to physicians for more than 25 years; is based in Santa Rosa, California; and practices nationally. Send your practice management questions to medec@advanstar.com
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