With comprehensive tax reform working its way through Congress, the provisions are likely to affect individual veterinarians and veterinary business in different ways. Once a tax overhaul is signed into law, AVMA will share an analysis of the provisions of interest to our members. In the meantime, we want to note a few measures that may be of particular interest to veterinarians and business owners.
Provisions Impacting Individuals:
- The agreement reached last week between House and Senate conference committee members reduces the top individual income tax rate to 37 percent, down from 39.6 percent in current law. The agreement maintains seven tax brackets but modifies them as well as the rates that apply to each:
- 10 percent (income over $9,525 for individuals; up to $19,050 for joint returns;
- 12 percent (over $9,525 to $38,700 for individuals; over $19,050 to $77,400 for joint returns)
- 22 percent (over $38,700 to $82,500 for individuals; over $77,400 to $165,000 for joint returns)
- 24 percent (over $82,500 to $157,500 for individuals; over $165,000 to $315,000 for joint returns)
- 32 percent (over $157,500 to $200,000 for individuals; over $315,000 to $400,000 for joint returns)
- 35 percent (over $200,000 to $500,000 for individuals; over $400,000 to $600,000 for joint returns)
- 37 percent (over $500,000 for individuals; over $600,000 for joint returns)
- The agreement nearly doubles the standard deduction to $12,000 for single filers and $24,000 for joint returns, and expands the child tax credit to $2,000 per child under the age of 17.
- The agreement also maintains the Student Loan Interest Deduction, which permits taxpayers repaying student loans to deduct as much as $2,500 in interest paid on student loans if they have a modified adjusted gross income of less than $80,000 ($165,000 if married filing jointly). AVMA has long sought to increase the deduction and income caps to take the deduction.
- Additionally, the package permanently repeals the health insurance individual mandate tax starting in 2019, and caps the state and local property and income tax deduction at $10,000.
Provisions Impacting Veterinary Practices:
- Pass-throughs: The agreement allows pass-through businesses that meet certain conditions to deduct up to 20 percent of qualified business income. Because Congress was seeking to exclude high earners in the financial industry, professional sports and performing arts from the 20 percent deduction, lawmakers imposed some restrictions on pass-through entities. Specifically, “specialized service” businesses – which include veterinarians, doctors, lawyers and those in the financial industries – are excluded from this benefit unless their taxable income is less than the new thresholds established in the agreement: $157,500 for an individual or $315,000 if filling jointly. Within this limitation, there are formulas for specialized service businesses (e.g. veterinary practices) to calculate their applicable percentage of qualified income, such that the deduction is phased out over the next $50,000 or $100,000 of additional taxable income for individual or joint filers, respectively. These restrictions are intended to deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the deduction under the provision.
- Cash accounting: The agreement increases the threshold to allow cash method of accounting if the annual gross receipts for the three-year period prior to the tax year do not exceed $25 million.
- Expensing: Full expensing of new and used equipment would be permitted for five years. The agreement increases the maximum amount businesses can expense to $1 million and expands the benefit to include improvements to nonresidential property, such as roofs; heating, ventilation, and air-conditioning; fire protection and alarm systems; and security systems. After 2022, the 100 percent allowance would be phased down by 20 percent each year. Also, Section 179 expensing, which doubles the amount eligible for the special small business investment write-offs, would be made permanent.
AVMA’s work with Congress
Throughout Congress’ consideration of tax reform, AVMA has advocated to minimize the tax burden on veterinarians and veterinary practices, and to incentivize and support acquisition of education and skills. Early on, AVMA developed principles to guide our advocacy efforts. In addition to targeted meetings on Capitol Hill, the AVMA works actively with tax-focused coalitions to educate senators and representatives about the needs of veterinary medicine. Most recently, AVMA sent a letter to the bipartisan leadership of the Senate Finance Committee and the House Ways & Means Committee applauding their efforts to reform the tax code and outlining the policy changes that would be beneficial to the veterinary profession, including pass-through rates, expensing and cash accounting, among other items.
The AVMA will continue to explore all opportunities to improve provisions that impact the veterinary profession, including pass-throughs. It will take time to understand the full impact of the agreement on the veterinary community. Since it has been 30 years since the nation’s last overhaul of the tax code, the bill’s passage is sure to spark critical conversations about the structure of veterinary practices across the country.