Franchise Tax Issues for Physicians

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. The top issues are summarized here:

Issues resolved in published rule:  

  • Revenues from Medicare, Medicaid, and TRICARE, the Children's Health Insurance Program (CHIP), and workers' compensation commercial insurers or managed care plans are excludable.
  • Uncompensated care can be valued at cost basis using the ratio of cost to charges, and includes compensation expenses.
  • Claiming a bad debt deduction on a tax return does not reduce the amount of excludable uncompensated care.

Issues resolved since rule publication:  

  • Co-pays and deductibles are excludable as part of the revenue from government programs.
  • Expenses attributable to excluded revenues can be deducted.
  • Partial payments do not render a service ineligible for the uncompensated care exclusion.

Unresolved problems  

  • The definition of a physician appears to exclude some physicians in practices who do not care for patients covered by one of the named programs. This definition also does not include physician risk-contracting entities, such as a 5.01a, thus a physician may lose his or her right to exclude Medicare, Medicaid, TRICARE, CHIP, and workers' compensation revenues.
  • Some complex physician organizations may face double taxation or lose the benefit of some allowable deductions.
  • Because implantable devices, other durable medical equipment, injectable drugs and vaccines are not deductible expenses, physicians who have large expenses for these items in their practices may face higher tax burdens.
  • According to current Comptroller rules, expenses attributable to uncompensated care cannot be deducted if the cost of uncompensated care was excluded.

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