By Catherine Lightfoot, CPA, CHBC, Director of Healthcare at EEPB
If we have learned anything about 2020, it should be that normal for can quickly change. How businesses review practices, alter operations, and shift strategies will require a different focus as we close 2020. Here are three areas that require a different or intensified approach.
Understand Reportable Income
This year brought Economic Disaster Loans (EIDL), the Paycheck Protection Program (PPP), and Provider Relief funds (PRF). As taxpayers received these funds, they were often placed in “other income” or on the balance sheet as practice debt. Many taxpayers reasoned that keeping the funds separate provides a true picture of how their practice is operating without being artificially altered due to the pandemic. Now that these programs are funded, and applications for forgiveness are being prepared, it is important for businesses to understand the income tax implications of the various programs.
EIDL funds are defined as grants. The maximum amount of funding under EIDL is $10,000. It only applied to businesses with fewer than 500 employees and has no repayment requirement. As a grant, EIDL is taxable income and should be reported as such for federal and state taxes.
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The taxation for PPP funds is not as easy. The first step is to determine how much of the PPP funding is forgivable. The PPP program originally had a covered period of 8 weeks. The interim final rule allowed an alternative 24-week covered period. This extension allowed many borrowers to successfully utilize the allotted funds for payroll funding, increasing their chances for full forgiveness. Borrowers must still calculate their eligible forgiveness based on a formula that considers specific reductions in FTE employees.
If the PPP loan is not forgiven in full, the borrower must repay any remaining balance due on the PPP loan. It is this amount that will continue to be a liability to be repaid by the borrower. The portion of the PPP loan that is forgiven will be characterized as a nontaxable income. The IRS determines that expenses associated with this nontaxable income are nondeductible. At the time of this writing, it remains unclear as to the timing of this recognition. If the recognition occurs when the loan is forgiven, that could be after the current taxable year. Until further guidance is received, borrowers should plan for these non-deductible expenses in the current tax year.
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PRF funds are much like grants and are being treated as taxable income unless they are repaid. Recipients who received one or more payments exceeding $10,000 are required to report as part of the post-payment reporting process. Recipients should report their use of PRF payments first to healthcare-related expenses attributable to coronavirus that another source has not reimbursed and then apply the funds to lost revenue. Taxpayers should track these PRF relevant costs separately on your financials to assist the required reporting and to understand the impact. Consider treating COVID-19 as a project to record at the lowest level possible (general ledger account, invoice) transactions impacted due to the pandemic. This will help facilitate reporting and will also bring clarity to the owners. For example, the company spent $xxxx during the quarter on PPE. You cannot do this if PPE Is buried in medical supplies with the other vendors.
Alter Operations
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One study has projected that the number of uninsured workers will increase by just under 3 million during the last three quarters of 2020. Additionally, it is projected that approximately half a million more Americans will be eligible for Medicaid after employment losses. This is obviously only a projection and one that will be fluid in the coming months. Nevertheless, the alert should be, now more than ever, to reinforce your front desk with a strict protocol. Eligibility verification should take place before or during each and every visit. For example, the insurance the patient had in February could be completely different or nonexistent in October. The $20 copayment is being replaced by the new “personal pay.” As the patient may not reach their annual deductible (many do not), it is crucial to be aware of this and inform the patient of their financial obligation. Your front desk should not be placed in the awkward position of explaining a large balance due in the lobby.
Check for outstanding balances when a patient is scheduling an appointment. If monies are due, immediately ask to take payment over the phone or inform them that they must pay the outstanding amount at their next appointment. Your practice should have the ability to accept all major credit, debit, and health savings account cards. The ability to collect self-pay payments upfront will keep your patient’s outstanding balance from spiraling out of control.
Shift Strategies
It is often said, “Cash is King,” and this is especially true during times of financial security. Another reminder is that you can maximize gains by minimizing losses. To help both of these ends, take decisive and timely actions to preserve cash and maximize liquidity. The economic slowdown has provided options for some in the money market. You should review all existing debt arrangements to see if they are eligible for refinancing at lower interest rates or better terms. Banks are offering new programs for refinancing that lower the interest rates without extending the terms. Investigate the options and see if one is right for you. Consider freezing or minimizing additional capital expenditures. This will free up available cash flow.
Change HR/compensation policies. Freeze new hires and see if the existing workforce might absorb the new hire workload. Consider temporarily stopping company match on retirement plans. Temporarily freeze pay increases. Reconsider how you pay bonuses.
The primary focus is to shift strategies to guide through the worst of COVID-19 and the financial impact of the new funding. None of these new strategies have to remain for the long term. However, on the other side of COVID-19, practices may find that some of these new strategies that were relevant during the crisis can be reworked for long term benefits.