In early Spring 2020, a domino effect of business closures swept across the globe as countries spanning across Asia, Europe, and the Americas locked themselves away in response to concerns about the novel coronavirus that was then circumnavigating the globe. Many physicians, seeking to balance both the need to continue to treat patients and the need to protect patients from potential infection, turned to telemedicine options, vastly accelerating a trend that has been on the rise–at least in the form we know it–since the turn of the 21st century.
And it is not going away. In an April 2020 Gallup poll, 34% of Americans reported having used telemedicine (up from 14% in the prior year). In September, 50% of respondents said they were likely to use it in the future.
While the medical world continues to grapple with the pros and cons of telemedicine from diagnostic, liability, and ethical standpoints, the tax effects of these shifts must also be taken into consideration.
The Government Stamp of Approval
With the passing of the CARES (Coronavirus Aid, Relief, and Economic Security) Act in March 2020, the government legitimized telemedicine through expanded Medicare coverage for all telehealth services. Telehealth visits increased by 50% in March 2020 alone. Last Thursday, December 3, the HHS took the further step of lifting significant regulatory requirements under the HIPAA Rules for healthcare providers using telemedicine during the COVID-19 health emergency, liberalizing how and where services can be performed by healthcare providers acting in good faith. The CARES Act notwithstanding, much of the tax code is silent to telemedicine–or even teleservices as a whole. Therefore, tax implications must be extrapolated from the existing code and resources as states, Congress, and the tax courts wade through how to interpret, apply, and enforce tax code written in the hundred years before the magic of the internet.
The Costs of Setting up Telemedicine
In general, businesses may deduct “ordinary and necessary business expenses” (IRC Section 162). In a perfect world, this incorporates all the direct and indirect costs of setting up and facilitating telemedicine–a legitimate business line needing extensive resources. However, the lines become more blurred in light of the realities of how remote working functions. For instance, if employees are responsible for providing some of their own equipment (computers, phones, webcams), those expenses may not be deductible to them or to the business. Conversely, if the system set-up was done in direct response to COVID-19, which was declared a national emergency, it may fall under a different code section (IRC Section 139), which allows for such expenses to be deducted in some circumstances.
Sourcing Taxable Income
One of the biggest advantages of telemedicine by far is that it facilitates being able to serve patients across the globe, helping to mitigate the effects of the rural hospital crisis and bringing services to those who might otherwise struggle to access them. Roger Severino, the OCR Director at the HHS is actively encouraging physicians to “serve patients wherever they are during this national public health emergency.” But when those long-distance services cross state borders, they can become mired in the complexity of competing state tax codes.
What states consider to be “their” income for tax purposes varies across 43 different state tax codes that nuance income sources and deductions in distinct and many times conflicting ways. For many physicians, the idea of performing telesurgery feels less daunting than trying to sort through the tax effects of the patient and surgeon being on different sides of a state line.
State tax liability is driven by the principle of “nexus”–the relationship between a business and a tax authority. Nexus is established by having an “economic presence” in a jurisdiction. This presence may be established through sales (or the solicitation of sales) or through employee presence. Historically, that presence had to be physical; however, in a 2018 case, the Supreme Court opined that “the dramatic technological and social changes of our increasingly interconnected economy” made physical presence rules “removed from economic reality” (South Dakota v Wayfair, Inc). While this case pertained to sales tax, the future implications to income taxes are clear: tax laws across jurisdictions will shift to incorporate the impact of virtual cross-state transactions, and many practices may be impacted by these shifts.
Once nexus is established, states fall broadly into two camps: “Market-based” or “Cost-of-performance” revenue-sourcing.
- Market-based revenue sourcing relies on the presence of the patient–where the services are being received.
- Cost-of-performance revenue sourcing relies on the healthcare professional – where the services are being performed.
Where income is sourced impacts the tax liability inside of the various states in which the practice has established nexus. As the growth of telemedicine continues, it is essential to recognize–and be prepared for–how an expanded coverage area can impact your practice and tax liabilities.
A Note About Special COVID-19 Rules
As the country rushed to buoy the economy and help vulnerable businesses and individuals impacted by the COVID-19 pandemic, various stimulus measures and special rules were passed by the federal government and state and local taxing agencies; these measures are generally favorable to the taxpayers. Therefore, there may be some short-term benefits available to those who initiated or expanded their telemedicine practices in response to COVID-19.
This summer–while so much felt overwhelming and negative–an otorhinolaryngologist in Italy calmly completed surgery on a cadaver over a 5G wireless network. Humanity is resilient. Humanity is creative. Despite the tragic catalyst, the potential of telehealth to benefit the American and global public is enormous and will continue to grow. Our physicians and healthcare workers will change the world. Don’t let taxes hold you back.
The impact of COVID-19 on the economy continues to evolve. Physicians must remain vigilant for any changing tax regulations and accounting issues.
At Windham Brannon, our healthcare tax team is committed to providing reliable expertise to physicians and healthcare providers with complex tax matters.
For more information on tax planning for your healthcare practice, email Rebekah Judge or Kristi Johnson to discuss your business needs.