Key Tax Reform Issues That Impact Pharmacies
Below are a few of the key changes that potentially impact you and your pharmacy following the Tax Cuts and Jobs Act of 2017.
A flat tax rate of 21% for C Corporations could be a positive change for the C Corporation pharmacy, as the top rate is 39%. A change of this magnitude may cause some pharmacy owners to consider changing from S Corporation tax status to C Corporation status. A strategy like this is sure to require in-depth tax planning and analysis outside the scope of this article.
The domestic production activities deduction (DPAD) has been eliminated for tax years after 2017. If your pharmacy is heavy into compounding (greater than 10% +/- of all revenues) this tax deduction was or should have been a positive tax strategy for you and your pharmacy. This deduction is eliminated completely for tax years after 2017 unless you are a C Corporation. For C Corporation taxpayers, this is eliminated effective for tax years after 2018.
The deductions for certain business entertainment expenses have been repealed for amounts paid or incurred after 2017. Starting in 2018, no deductions are allowed for expenses related to any type of entertainment, amusement or recreation activities. This provision would also repeal expense deduction for activities that require membership dues such as business clubs or gyms. The law does keep the 50% deduction for meals as long as there is a business purpose that is directly attributable to your pharmacy business. There are also deductions still allowed for some types of employee-provided meals.
For the larger pharmacy entities, the UNICAP Section 263A gross receipt test is increased from $10 million to $26 million. For those pharmacies that have gross receipts or total revenues in excess of $10 million you probably are aware of the complex UNICAP 263A provisions. This provision is essentially a tax increase whereby the IRS requires the eligible pharmacy to capitalize expenses into inventory which ultimately increases your net taxable income. An increase in the gross receipt limitation is certainly a positive benefit for the pharmacy owner (and CPA)!
Pass-through pharmacy entities such as S Corporations, LLCs, sole proprietors and partnerships will be eligible for the Qualified Business Income Deduction (QBID) starting after 2017. The deduction is up to 20% of your qualified business income (QBI), but unfortunately it’s not as simple as it seems. The limitations and phase-outs are complex and will require in-depth analysis and calculations in order to determine the impact to you and your pharmacy. Regardless, the average pharmacy owner will likely be able to take advantage of this valuable deduction starting after 2017.
Passenger automobiles see an increase in depreciation starting after 2017. The limitation on automobiles are a headache for pharmacy owners looking to purchase delivery vehicles. But with the new tax law, the average pharmacy delivery vehicle will have a first-year depreciation expense of $10,000 up from the current $3,160.
Bonus depreciation or Sec. 168 (k) expensing has been expanded and modified,allowing pharmacies to write off 100% of new and used eligible property in the year placed in service, through 2022. Section 179 depreciation – which also allows 100% write off of eligible property placed in service – has been modified to include qualified real property as eligible for immediate expensing.
With these tax changes, keeping your accounting up to date is more important than ever in order to fully implement eligible deductions or depreciation for your pharmacy business. Certain provisions mentioned in this article are subject to limitations and exceptions. Be proactive and talk to Sykes & Company, P.A., or subscribe to new tax updates by filling out the form on the bottom of our tax reform page.
Scotty Sykes, CPA, CGMA
A previous version of this article appeared in the March 2018 issue of America’s Pharmacist magazine, published by NCPA.