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IRS Declares CARES Act Provider Relief Funds as Taxable Income

7/23/20 – Dave Macke

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The Department for Health and Human Services (HHS) has been publishing updates to the Frequently Asked Questions (FAQs) on an almost daily basis. The CARES Act allocated $175 Billion in grants to help healthcare providers to deal financially with the COVID-19 crisis. These funds are meant to help providers cover the cost of coronavirus related expenses and recover lost revenue. There have been numerous funding allocations starting with the $50 Billion General Distribution as well as subsequent more targeted allocations. Generally, these funding allocations are based on a percentage of revenue, most commonly 2%.

At the same time, The Small Business Administration (SBA) made available Paycheck Protection Program (PPP) funds designed to help businesses with payroll and other eligible expenses. The Internal Revenue Service (IRS) stated that these PPP funds would not be taxable income, however the expenses would not be deductible on tax returns, thus eliminating a double dip.

On July 13, 2020, the Department of HHS updated the FAQs for the CARES Act PRF to state payments that a provider receives from the CARES Act funds would be taxable income. They do not qualify as disaster relief payments under Section 139. Tax-exempt health care providers would not be subject to a tax on these funds.

May a health care provider that receives a payment from the Provider Relief Fund exclude this payment from gross income as a qualified disaster relief payment under section 139 of the Internal Revenue Code (Code)? (Added 7/10/2020)

No. A payment to a business, even if the business is a sole proprietorship, does not qualify as a qualified disaster relief payment under section 139. The payment from the Provider Relief Fund is includible in gross income under section 61 of the Code. For more information, visit the Internal Revenue Services’ website at https://www.irs.gov/newsroom/frequently-asked-questions-about-taxation-of-provider-relief-payments.

Is a tax-exempt health care provider subject to tax on a payment it receives from the Provider Relief Fund? (Added 7/10/2020)

Generally, no. A health care provider that is described in section 501(c) of the Code generally is exempt from federal income taxation under section 501(a). Nonetheless, a payment received by a tax-exempt health care provider from the Provider Relief Fund may be subject to tax under section 511 if the payment reimburses the provider for expenses or lost revenue attributable to an unrelated trade or business as defined in section 513. For more information, visit the Internal Revenue Services’ website at https://www.irs.gov/newsroom/frequently-asked-questions-about-taxation-of-provider-relief-payments.

The effective tax rate on these funds could be 21% or more. 

Providers have struggled with vague guidelines from HHS on determining amounts for eligible expenses and lost revenues.  See previous article https://vlcpa.com/articles/hhs-provides-guidance-on-cares-act-provider-relief-fund-financial-reporting-202063/541.   

Notice of Reporting Requirements

Initially, HHS indicated there would be a quarterly report for those providers that received more than $150,000. The first report was to be due July 10, 2020.  However, on June 13, 2020, that reporting requirement was suspended. On July 20, 2020, HHS announced that further reporting instructions would be released by August 17, 2020. All providers that received payments in excess of $10,000 in the aggregate will need to report.

These reporting instructions will provide directions on reporting obligations applicable to any provider that received a payment from the following CARES Act/PRF distributions:

General Distributions:

> Initial Medicare Distribution

> Additional Medicare Distribution

> Medicaid, Dental & CHIP Distribution

Targeted Distributions:

> High Impact Area Distribution

> Rural Distribution

> Skilled Nursing Facilities Distribution

> Indian Health Service Distribution

> Safety Net Hospital Distribution

> The reporting system will become available to recipients for reporting on October 1, 2020.

> All recipients must report within 45 days of the end of calendar year 2020 on their expenditures through the period ending December 31, 2020.

> Recipients who have expended funds in full prior to December 31, 2020 may submit a single final report at any time during the window that begins October 1, 2020, but no later than February 15, 2021.

> Recipients with funds unexpended after December 31, 2020, must submit a second and final report no later than July 31, 2021.

Detailed PRF reporting instructions and a data collection template with the necessary data elements will be available through the HRSA website by August 17, 2020.

https://www.hhs.gov/sites/default/files/provider-post-payment-notice-of-reporting-requirements.pdf?language=en

HHS has indicated that applicable recipients will be required to submit a report to substantiate that the funds were used for coronavirus related expenses or lost revenues and that the amounts were not reimbursed from another source such as PPP.

With regards to recouping excess funds, HHS has also made the following statement in the FAQs. 

“The Provider Relief Fund and the Terms and Conditions require that recipients be able to demonstrate that lost revenues and increased expenses attributable to COVID-19, excluding expenses and losses that have been reimbursed from other sources or that other sources are obligated to reimburse, exceed total payments from the Relief Fund. Generally, HHS does not intend to recoup funds as long as a provider’s lost revenue and increased expenses exceed the amount of Provider Relief funding a provider has received.”

“Instead, HHS expects that providers will only use Provider Relief Fund payments for permissible purposes and if, at the conclusion of the pandemic, providers have leftover Provider Relief Fund money that they cannot expend on permissible expenses or losses, then they will return this money to HHS. HHS will provide directions in the future about how to return unused funds.”

HHS has indicated there will be significant anti-fraud monitoring of the funds distributed, and that the Office of Inspector General (OIG) will provide oversight as required by the CARES Act.

There have been many questions about how and when to recognize the Provider Relief Funds (PRF) as revenue on the financial statements. There has not been much guidance on this topic. We believe that PRF revenue should initially be recorded on the Balance Sheet as a liability or deferred revenue amount. In a recent Technical Bulletin, The Governmental Accounting Standards Board (GASB) stated that revenue should be recognized as eligibility requirements are met.  We believe this occurs when you can document the allowable expenses and lost revenues. That portion of the funds could then be moved from the Balance Sheet to the Income Statement. This would also address the income tax issues. The funds would become taxable in the time period that the funds move from the Balance Sheet to the Income Statement. For Subchapter “S” Corporations this will be pass thru income to the shareholders. Thus taxable entities should engage in careful tax planning for 2020.

Healthcare providers should carefully document their COVID-19 expenses and lost revenues to make sure that you take full advantage of the funds that they have received. Don’t wait until it is too late.

HHS has been issuing Frequently Asked Questions and are updated every few days. We encourage you to monitor this website on a regular basis. 

For any questions related to the CARES Act Provider Relief Fund, or healthcare reimbursement in general, contact Dave Macke, VonLehman’s reimbursement specialist, at dmacke@vlcpa.com or 800.887.0437.