HHS Deems Provider Relief Fund Distributions Taxable
July 23, 2020
Announcement could affect healthcare practitioners’ tax liability
Many medical providers have taken advantage of the Provider Relief Fund, a part of the CARES Act intended to cover certain expenses and lost revenues that healthcare practitioners have incurred as a result of COVID-19 (read our eligibility guidance here). On July 10, 2020, the Internal Revenue Service (IRS) and the Department of Health and Human Services (HHS) updated the HHS FAQs to include a clarification that distributions allocated via the Providers Relief Fund do NOT qualify under IRS Code Section 139, a legislative provision that excludes disaster relief payments from taxable income. Healthcare practitioners should take swift action to determine tax liability.
This clarification impacts all for-profit providers who have received payment under either a General or Targeted distribution, which are grants and do not need to be repaid if the recipient attests to certain Terms and Conditions as outlined on the HHS website. These grants will be treated as income in the year received and the recipients will need to consider the impact on their 2020 income tax liability. For-profit healthcare providers will be the most significantly impacted, but nonprofit providers that received distributions should consider whether the payment is for an unrelated trade or business, which may result in the payment being subject to Unrelated Business Income Tax.
Some taxpayers question enforceability and whether they can rely on FAQs as authoritative guidance. In a recent blog post, the Taxpayer Advocate Service (TAS) asserts that under Treasury Regulation 1.6662-4(d)(3)(iii), IRS press releases and statements meet the standard of substantial authority, suggesting taxpayers may rely on the guidance included in FAQs provided at the time of filing or the end of the year.
More revisions to the FAQs are possible and could further impact tax liability. Any practitioner that received a distribution should consult with their tax advisor to determine the tax liability associated with receipt of this payment and whether estimated tax payments need to be made. Aprio has tax specialists standing by who can assist with your questions and tax filing preparations.