IRS Issues FAQs Addressing Taxation of CARES Act Provider Relief Fund Payments

Morgan Lewis
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Morgan Lewis

The Internal Revenue Service on July 6 published answers to frequently asked questions regarding the taxability of payments received by eligible healthcare providers from the Public Health and Social Services Emergency Fund (Relief Payments).

As described in our May 7 LawFlash, in enacting the CARES Act, Congress did not address the taxation of the Relief Payments. Although the IRS’s position is that its FAQ guidance is not citable as legal authority, it seems clear that the IRS expects taxpayers to rely on these FAQs and other recently issued FAQs to meet their federal income tax obligations during the coronavirus (COVID-19) pandemic. As described below, the short FAQs confirm that Relief Payments to for-profit healthcare providers are taxable on receipt. The US Department of Health and Human Services (HHS) has frequently updated its Relief Payments FAQs since April, but had not addressed the taxability question in those HHS FAQs.

QUESTIONS ANSWERED

The IRS FAQs provide the following:

  • Relief Payments issued to for-profit healthcare providers are includible in gross income under 26 U.S.C. § 61. The FAQs further clarify that the Relief Payments are not excludible from gross income under the qualified disaster relief provisions of 26 U.S.C. § 139 because a payment to a business, including a sole proprietorship, “does not qualify as a qualified disaster relief payment under section 139.”
  • Tax-exempt healthcare providers are not subject to tax on Relief Payments. However, if the Relief Payment reimburses the tax-exempt provider for expenses or lost revenue attributable to an unrelated trade or business, then the payment may be subject to tax under 26 U.S.C. § 511.

OBSERVATIONS

  • With the upcoming July 15 deadline for both first and second quarter 2020 estimated tax payments, it is important for recipients, particularly for-profit providers, of Relief Payments to immediately understand the impact of these funds on those estimates and prepare to make remittances accordingly.
  • There is a high likelihood some, if not many, Relief Payment recipients will return unused Relief Payment funds to HHS. The timing of the return of such amounts, whether it be within the taxable year of receipt or in a subsequent year, will have an impact on whether and how these portions of the Relief Payments are reported for tax purposes.
  • The FAQs provide helpful clarity. However, if Congress intended to treat the Relief Payments as not taxable for all recipients, it is clear that a legislative fix is needed. Morgan Lewis is currently working with clients in an effort to address these issues. If you are interested in learning more or joining these efforts, please contact Tim Lynch at +1.202.731.2021 or via email.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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