Below are a few of the significant (or interesting) revenue provisions of the recently enacted Patient Protection and Affordable Care Act (the "PPACA") and the Health Care and Education Affordability Reconciliation Act of 2010 (the "Reconciliation Act"). Some of these revenue provisions are specifically targeted at the health care industry. Other revenue provisions are directed toward individual taxpayers that earn more than $200,000. A few revenue provisions will directly impact individual taxpayers that earn less than $200,000. The codification of the "economic substance" doctrine and the elimination of the unintended application of cellulosic biofuel producer credit had previously been designated to pay for a one-year extension of more than 40 individual and business tax breaks that expired at the end of 2009. Thus, new revenue provisions will have to be found to pay for the one-year extension of those individual and business tax breaks.
Additional Hospital Insurance Tax on High Income Taxpayers
The PPACA increases the tax imposed on the employee portion of hospital insurance tax by an additional 0.9% on wages received in excess of threshold amount. Thus, the employee portion is increasing from 1.45% to 2.35%. This additional tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return. Employers are required to withhold, but only to extent wages exceed $200,000 (disregarding spouse's wages). The threshold amount is $250,000 with respect to joint returns or surviving spouse; $125,000 with respect to married individual filing a separate return and $200,000 with respect to any other case.
This tax increase also applies to self-employed individuals. The deduction for half of the social security and medicare taxes paid by self-employed individuals does not include the new 0.9% tax. This provision is effective for taxable years beginning after December 31, 2012.
Unearned Income Medicare Contribution Tax
The PPACA imposes a tax of 3.8% on the lesser of net investment income or the excess of modified adjusted gross income (which includes otherwise excluded foreign earned income) over the threshold amount described in the preceding section. For the purpose of this new tax on unearned income, investment income includes: interest, dividends, annuities, royalties, rents, net gain from disposition of property and passive income from a trade or business or if trade or business consists of trading financial instruments or commodities. Amounts that are excluded from income, such as tax-exempt interest, gain from sale of a principal residence, gain from like kind exchanges, veteran's benefits and distributions from qualified plans also are not subject to this tax.
Trusts and estates are subject to the new tax generally based on the lower of undistributed net investment income or the amount of adjusted gross income over the dollar amount at which the highest income tax bracket begins. This provision is effective for taxable years beginning after December 31, 2012.
Modify the Itemized Deduction for Medical Expenses
The PPACA increases the threshold from 7.5% of adjusted gross income to 10% of adjusted gross income for purposes of calculating itemized deductions. The increase of threshold is not applicable in 2013 through 2016 if either taxpayer or taxpayer's spouse turns 65. The increase in the deductibility threshold is effective for taxable years after December 31, 2012.
Codification of Economic Substance Doctrine
The economic substance doctrine has been one of Treasury's most important weapons in their war against tax shelters. Courts were not uniform in applying the economic substance doctrine. Some courts required both the economic substance and business purpose. Other courts only required taxpayer to show one or the other. The codification makes standard the conjunctive test: the transaction changes in a meaningful way (apart from federal income tax effects) the taxpayer's economic position and the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transactions.
The Reconciliation Act of 2010 adds failure to satisfy the economic substance doctrine to the list of transactions subject to the imposition of the 20% accuracy related penalties on underpayments. The penalty increased from 20% to 40% in the case any portion of the underpayment is attributable to one or more nondisclosed noneconomic transactions. The penalties are also made applicable to similar doctrines such as "business purpose," "sham transaction," "substance over form" and "step transaction doctrine". These changes are effective for transactions entered into after the date of enactment of the Reconciliation Act.
Limitation of Deduction for Remuneration Paid by Health Insurance Providers
An insurance provider is a covered health insurance provider if at least 25% of the insurance provider's gross premium income is from health insurance plans that meet the minimum credible coverage requirements. No deduction is allowed for remuneration paid to any officer, director or other workers or service providers that exceeds $500,000. Exceptions for performance based remuneration, commissions, or remuneration under existing binding contracts do not apply. The limitation on deductions imposed by the PPACA is effective for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009.
Imposition of Annual Fee on Health Insurance Providers with Respect to United States Health Risks
The annual fee imposed on health insurance providers by the PPACA will be apportioned among providers based on market share of net premiums written during the preceding calendar year. Net written premiums is intended to mean premiums written, including reinsurance premiums written, reduced by reinsurance ceded, and reduced by ceding commissions. The first $25 million of net premiums are excluded, net premiums between $25 million and $50 million are only 50% included and 100% of net premiums written in excess of $50 million are taken into account. Covered entities do not include governmental entities or non-profit entities. Also excluded are employers that self insure. The aggregate annual fee is $8 billion in 2014, $11.3 billion for 2015 and 2016, $13.9 billion in 2017 and $14.3 billion in 2018. After 2018, the annual fee is indexed to the rate of premium growth. The annual fee is not deductible for US income tax purposes.
Imposition of Annual Fee on Branded Prescription Pharmaceutical Manufacturers and Importers for Sale to Specified Government Programs or Pursuant to Coverage Under Any Such Program
The annual fee imposed on branded prescription pharmaceutical manufacturers and importers by the PPACA will be apportioned among manufacturers and importers based on market share of branded prescription drug or biological products sales taken into account during the previous calendar year. Drugs and biological products eligible for Orphan Drug Tax Credit are excluded for purposes of this calculation. Amount of sales counted is phased in: 0% of sales less than $5 million; 10% of sales greater than $5 million but less than $125 million; 40% of sales greater than $125 million but less than $225 million; 75% of sales greater than $225 million but less than $400 million; and 100% of sales greater than $400 million. The aggregate annual fee is $2.5 billion in 2011, $2.8 billion for 2012 and 2013, $3 billion for 2014 through 2016, $4 billion in 2017, $4.1 billion in 2018 and $2.8 billion for 2019 and thereafter. The annual fee is not deductible for US income tax purposes.
2.3% Excise Tax on Medical Device Manufacturers
The PPACA imposes a 2.3% excise tax on sales by medical device manufacturers, producers or importers. Eyeglasses, contact lenses, hearing aids and other medical devices purchased by the general public at retail are excluded from this excise tax. There is also an exception for further manufacture and for export. This excise tax is effective for sales after December 31, 2012.
10% Excise Tax on Indoor Tanning Services
The PPACA imposes a tax on individuals receiving indoor tanning service. The 10% excise tax is collected by the person providing the service. If the provider fails to collect the tax then the provider must pay the tax. Phototherapy service performed by licensed medical professionals is excluded from this tax. This excise tax is effective for service provided on or after July 1, 2010.
Elimination of Unintended Application of Cellulosic Biofuel Producer Credit
The "cellulosic biofuel producer credit" is a nonrefundable income tax credit for each gallon of qualified cellulosic fuel production of the producer for the taxable year. The amount of the credit is generally $1.01 per gallon. A by-product of paper making, called black liquor, has been used for decades by paper manufacturers as a fuel in the papermaking process. In a Chief Counsel Advice, the IRS concluded that black liquor is a liquid fuel from biomass and may qualify for the cellulosic biofuel producer credit. The Reconciliation Act of 2010 modifies the cellulosic biofuel producer credit to exclude fuels with significant water, sediment, or ash content, such as black liquor. These revisions are effective for fuels sold or used on or after January 1, 2010.