The American Recovery & Reinvestment Act of 2009 (ARRA) authorized the Centers for Medicare & Medicaid Services (CMS) to make incentive payments to eligible providers and hospitals for the “meaningful use” of electronic health records (EHRs). Under ARRA “meaningful use” requires providers to demonstrate not only that they are using EHRs, but that the EHRs are being used in ways that positively impact patient care. For instance, providers are required to store patient records electronically and share these records either with the patient or other healthcare providers or use EHRs to transmit prescriptions electronically.

The Medicare EHR incentive program authorizes CMS to make payments directly to individual providers and not practices or groups of physicians. Typically, providers will assign their rights to receive these EHR incentive payments directly to their practices or physician groups. ARRA did not specifically address how these EHR incentive payments were to be treated or reported for U.S. federal income tax purposes. In a Chief Counsel Advice (CCA), the Internal Revenue Service stated its position on how it intends to treat recipients of EHR incentive payments for U.S. federal income tax purposes and the Form 1099 reporting requirements for payors of EHR incentive payments, including CMS and any providers who assign their rights to receive EHR incentive payments to their practice group or another party.

U.S. Federal Income Tax Treatment of EHR Incentive Payments. Generally, under the Internal Revenue Code taxpayers are required to include in gross income all funds received regardless of the source unless the amounts are specifically excluded from gross income under the Internal Revenue Code. In addition, a taxpayer is generally not required to include in gross income an amount that constitutes a return of capital. In its CCA, the IRS concluded that there is no statutory exception that applies to the receipt of EHR incentive payments and that the EHR incentive payments did not constitute a return of capital because ARRA provided that the incentive payments were for the use of EHRs and not for a return of the capital invested in EHR systems. Accordingly, the IRS concluded that recipients of EHR incentive payments must include these amounts in gross income unless the amounts were received as an agent or conduit for the provider’s practice group or another party. Under this principle, if an individual provider assigns his or her rights to receive EHR incentive payments to the provider’s practice group, the practice group (and not the individual provider) is required to include the EHR incentive payment in gross income for U.S. federal income tax purposes.

Form 1099 Reporting Requirements for Payors of EHR Incentive Payments. The Internal Revenue Code generally requires payors to file a Form 1099 if the aggregate payments made by the payor in the course of its trade or business to a payee exceed $600 per year. In its CCA, the IRS concluded that the EHR incentive payments were being made in the course of CMS’ trade or business and as such, CMS is required to provide a Form 1099 to each individual provider that receives annual EHR incentive payments in excess of $600 per year. Under the CCA, CMS is required to provide the individual provider a Form 1099 even if the provider assigned his or her right to receive the EHR incentive payments to the provider’s practice group. The CCA further provided that if a provider is acting as an agent or conduit for the provider’s practice group with respect to the EHR incentive payments (by reason of assigning the provider’s rights to the EHR incentive payments), then the individual provider would be required to provide a Form 1099 to the provider’s practice group if the amount of EHR incentive payments exceeds $600.