Home-based care providers who received loans under the Paycheck Protection Program (PPP) could face unexpected expenses when it comes time to file their 2020 taxes.
That is, unless the government intervenes.
“Congress clearly intended that PPP funds would be nontaxable,” Leon LaBrecque — a lawyer, accountant and chief growth officer at Sequoia Financial Group — told Home Health Care News. “[But] the IRS has ruled that expenses associated with the generation of tax-free income is not deductible.”
In other words, Congress and the IRS are looking at PPP money through two different lenses of tax law. And the tax theory the IRS is applying circumvents Congress’s intention of making PPP loans nontaxable.
Even though the money isn’t considered taxable income, per the CARES Act, expenses associated with the loans can’t be deducted from a recipient’s income, according to Bill Sanders, a shareholder and tax group chair at the law firm Polsinelli.
Deductible expenses lower one’s tax liability, which, in turn, typically lowers the amount of taxes that person or entity must pay.
“Either one of those creates a taxable event: Either you have to recognize [money] as income or you can’t deduct it on the expense side,” Sanders told HHCN. “One [way] or the other, you’ve got to pay taxes on that amount.”
Unless something changes, the opposing rules will mean higher taxes for thousands of home-based care PPP recipients come April.
According to an HHCN analysis, more than 15,000 home-based care providers across the country received PPP loans of less than $150,000, with the average loan amount being slightly less than $45,000. Combined, the home-based care PPP loans add up to more than $666 million.
HHCN has yet to analyze the number of providers that received PPP loans above $150,000.
The IRS’s current interpretation of program funding poses a threat to these providers and other loan recipients, according to Sanders and LaBrecque. Even if providers’ loans are forgiven, they could be hit with a huge financial burden in the form of taxes on PPP money at a rate as high as 30% to 40% — which they’ll have to pay out of their own pockets.
“The only way that you’re going to be eligible for [PPP loan] forgiveness is if you use the money … for payments to employees, for rent, for mortgage interest and all those kinds of things,” Sanders said. “But if you’ve used the money and you’ve spent it to stay open, you’re not going to have any of that leftover to pay taxes on it.”
In many cases, PPP recipients applied for the loans out of dire necessity amid coronavirus-related economic struggles. After all, that’s what the program was designed for: to help small and mid-sized businesses stay afloat and keep paying their employees amid the COVID-19 emergency.
While businesses in nearly every industry have struggled during the coronavirus outbreak, home-based care providers have faced a unique set of challenges.
For one, home health and home care agencies operate on paper-thin margins, even in the best of economies. The coronavirus has stretched those margins even thinner, all while home-based care has become more important than ever as a means to keep seniors safe.
When the virus hit, nonmedical home care providers saw volumes — and revenues — dip as patients turned away caregivers out of fear. Plus, agencies saw unexpected workforce expensenses pop up.
For example, many chose to dole out additional hazard pay as a way to show caregivers appreciation and keep them in the workforce. One such agency is Excel Home Care, which received more than $6 million in relief funds — and opted to give all of it directly to its caregivers.
Meanwhile, Medicare-certified home health agencies dealt with all those struggles and more. For example, many have been forced to provide telehealth visits rather than in-person visits when appropriate to keep patients safe — though such visits are not eligible for reimbursement from the Centers for Medicare & Medicaid Services (CMS) and do not count toward Low Utilization Payment Adjustment (LUPA) thresholds.
The PPP tax burden could be the final nail in the coffin for loan recipients, Sanders said.
“They’re already going to be in a position where they’re … teetering on shutting down or bankruptcy,” he said. “I think it’s going to be a very difficult situation.”
Sanders isn’t the only one who thinks so. A coalition of 18 health care organizations — including the American Association for Homecare — have written to Congress urging them to ensure COVID-19 funding and provider relief are not taxable.
“It is critical that the actions taken to support front-line caregivers and hospitals are not diluted by technical issues around the taxability of support funds,” a letter said.
Lucky for PPP recipients, lawmakers seem to be on it. Bipartisan legislation was introduced back in May, but there’s no telling how long it will be before it makes its way to President Trump’s desk.
The sooner that happens, though, the better, according to LaBrecque.
“Congress should remedy the situation if it intends PPP to be fully tax free,” LaBrecque said. “[This] is a story with a short fuse.”
Provider Relief Fund tax problem
The PPP isn’t the only coronavirus-related relief that has unforeseen tax implications.
The CARES Act Provider Relief Fund does, too. It paid out $175 billion to hospitals and health care providers amid COVID-19, including Medicare-reimbursed home health providers.
Come tax time, such relief payments must be included in a provider’s gross income if that provider is for-profit, according to the IRS.
However, tax-exempt health care providers are exceptions. Their Provider Relief Fund payments are not generally subject to tax except under special circumstances.