UPDATE: Franchise Tax Issues for Physicians
June 10, 2008
Because the new method for calculating franchise tax is dramatically different from prior methods, there are few precedents for the State Comptroller to use in drafting rules. Thus, every issue is new and contentious, the impact of the rule is untested, and rulemaking is a difficult process for all parties. TMA anticipated some of the issues in advance, but others emerged from unexpected Comptroller interpretations. TMA responded to a pre-proposal rule draft and to the draft rule published in the Texas Register . The Comptroller's office officially published the rules in December 2007, and TMA convinced the Comptroller to revise some of the rules .
Are sole proprietors exempt from paying the new business tax?
Yes, sole proprietors are exempt.
What is the difference between a sole proprietor and solo practitioner?
A solo practitioner could be a sole proprietor and thus would be exempt from paying taxes. However, if you set up your business as a professional association (PA), then you will be taxed. PAs will be taxed even if they are owned by only one physician. Entities subject to the new business tax are ones that have set up a legal structure to protect the owners from business liability, such as practice operating losses. The state, in essence, is now charging businesses in Texas for this liability protection. Physician entities formed under this sort of legal structure include PAs, limited liability partnerships (LLPs), and limited liability companies (LLCs).
How should I track my uncompensated care?
The rulemaking process will define how you should track and deduct this cost. TMA will advocate that any system should include, at a minimum:
- Care that you deliver, knowing in advance that you will not be paid;
- Care that you deliver without any knowledge about whether you will be paid (for example, the care you provide in the hospital emergency room);
- Services for which you accept a token payment (like $5) because the patient cannot pay; and
- Unpaid deductibles and copays for Medicare and other payers.
How are "gross receipts" vs. net income recognized?
The gross receipts you use to calculate your tax are your cash collections, if you are a cash-basis taxpayer - like most physicians. Go to the TMA 2006 Tax Calculator, where you can find more information on how to calculate your taxes.
Steps to follow to estimate the effect of the new business tax:
- Start with gross receipts (cash collections).
- Subtract Medicare, Medicaid, Children's Health Insurance Program, workers' compensation, and TRICARE revenues. Also subtract any revenues paid under the Indigent Health Care and Treatment Act;
- Subtract staff and physician salaries, health care benefits, retirement contributions, and workers' compensation payments, (up to $300,000 per person).
- Multiply the remaining sum by 1 percent. If the answer is less than $1,000, you owe no tax.
- If you still owe tax, you can claim a deduction from revenue for your charity care costs. It might be worth the effort.
When I subtract Medicare, Medicaid, CHIP, Tricare and workers' comp revenues, does that include revenues received from the managed care plans for those programs?
We won't have a definite answer to this question until rules are published but early indications are that managed care plan payments under these programs will be considered to be program revenues and can therefore be excluded from your gross receipts before calculating your taxes. We think that payments received from any source to cover copays, coinsurance, and/or deductibles should also be excludable, including payments from Medigap plans. You may need to revise your record-keeping to assure that you can easily retrieve this information from your records for reporting on your tax return.
When do I have to pay this tax?
For most physician taxpayers, the first tax return will be due in May, 2008 and will be calculated based on business activities from Jan. 1 to Dec. 31, 2007. If your usual tax year is different from the calendar year, you can consult the Comptroller's Web site to determine your franchise tax due date.
Consult Your CPA and Attorney
Physicians who answer "yes" to any of the questions below may want to consult their certified public accountant and attorney to evaluate the impact of the new tax bill and possible options for changing some elements of practice operations.
- Is your practice composed of multiple legal entities, such as a limited liability partnership that is owned by physician professional associations (PAs)?
- Are some physicians or staff paid as contracted labor?
- Are you a solo practitioner who formed a PA?
- Does your practice purchase large amounts of prescription drugs or durable medical equipment?
- Do you have an arrangement with practice management companies or management service organizations?