Final IRS Pass-Through Rule

Esq. Stephen B. Hanse and Carl J. Pucci in Finance & Reimbursement

The IRS has published a final rule related to the ability of owners of “pass-through” entities to deduct 20% of their “qualified trade or business income.” Below is AHCA’s President and CEO, Mark Parkinson’s summary: 


The IRS published a final rule that likely limits the ability of SNF owners and some assisted living owners to take full advantage of a new deduction included in federal tax cuts enacted in late 2017.

Unfortunately, our primary request that the IRS confirm that all SNFs and AL qualify for the new deduction was not accepted. Fortunately, there is some good news based on our advocacy. In this memo, I’ll briefly recap the issue, explain the implications for SNFs and the good news for certain AL communities.

As we have shared with you in the past, the Tax Cuts and Jobs Act enacted in 2017 allows the owners of pass-through entities like limited liability companies, partnerships, S corporations, and sole proprietorships to deduct 20% of their "qualified business income."  Congress defined qualified business income as income from a "qualified trade or business," which, importantly, does NOT include a "specified service trade or business."  Knowing this, we do not want SNFs or AL communities to be considered a specified service trade or business. This is an uphill climb. The Internal Revenue Code defines specified service trade or business as:

"Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners."

For several decades, the IRS has interpreted this language to include providing nursing services and physical therapy. Under that interpretation, it would be very difficult for any skilled nursing facility to qualify for the tax deduction.

Over the past six months since the Department of Treasury issued a proposed rule following IRS’s historical interpretation, AHCA/NCAL staff and members have met with Treasury and IRS officials, as well as key congressional staff, to convey our position that we should not be considered a specified service trade or business. We made a strong argument, supported by legal research outlined in a detailed white paper. Despite our best efforts, it appears that Treasury stuck with the IRS’s 30-year-old definition of services in the field of health.

Our initial analysis of the final rule indicates there is no across-the-board carve out for SNFs or AL. The final definition of “providing services in the field of health” includes nursing and physical therapy, and therefore it will most likely be very challenging for SNFs to take the 20-percent deduction. In its summary of comments and explanation released with the rule, the government notes:

The Treasury Department and the IRS agree that skilled nursing, assisted living, and similar facilities provide multi-faceted services to their residents. Whether such a facility and its owners are in the trade or business of performing services in the field of health requires a facts and circumstances inquiry that is beyond the scope of these final regulations. The final regulations provide an additional example of one such facility offering services that the Treasury Department and the IRS do not believe rises to the level of the performance of services in the field of health. 


The good news in this rule is that it is possible that certain AL communities will qualify for the 20-percent deduction based on a new example added to the regulations as a result of AHCA/NCAL’s comment letter. 

The new example included in the explanation reads as follows: 

“X is the operator of a residential facility that provides a variety of services to senior citizens who reside on campus. For residents, X offers standard domestic services including housing management and maintenance, meals, laundry, entertainment, and other similar services. In addition, X contracts with local professional healthcare organizations to offer residents a range of medical and health services provided at the facility, including skilled nursing care, physical and occupational therapy, speech-language pathology services, medical social services, medications, medical supplies and equipment used in the facility, ambulance transportation to the nearest supplier of needed services, and dietary counseling. X receives all of its income from residents for the costs associated with residing at the facility. Any health and medical services are billed directly by the healthcare providers to the senior citizens for those professional healthcare services even though those services are provided at the facility. X does not perform services in the field of health within the meaning of section 199A(d)(2) and paragraphs (b)(1)(i) and (b)(2)(ii) of this section.” 

In other words, a community or facility that meets the above description would fall outside the definition of a specified trade or business and qualify for the 20-percent deduction. 

It is incredibly disappointing that Treasury chose not to make an across-the-board change to the definition of providing services in the field of health. There is some good news for our AL members but the rule is still somewhat unclear. Ultimately, it will likely be very challenging for any SNFs to take advantage of the tax deduction, while some AL communities may be eligible. Instead of making an across-the-board definition, the rule alludes to everyone operating in different circumstances.

I encourage you to consult with your own accountant or tax advisor because everyone’s situation is different and the final rule makes specific mention of that. Your tax advisor can help you take a deeper look at your own business structure and entities to determine how this specifically impacts your business.

Under these circumstances, our only recourse is a statutory fix. We will continue to convey our disappointment with this rule and the negative impact it has on our providers. Thanks for your help on this and so many other issues.


Mark Parkinson
President & CEO


Stephen B. Hanse, Esq.
President & CEO
518-462-4800 x11

Carl J. Pucci
Chief Financial Officer
518-462-4800 15