Long Arm of the Alternative Minimum Tax PDF Print E-mail
The alternative minimum tax system is a classic trap for the unwary. It is a system of taxation that is imposed under the Internal Revenue Code, and its general objective is to provide for equitable treatment among all taxpayers, regardless of wealth and income levels. The alternative minimum tax system imposes a tax that is in addition to the regular tax liability of a taxpayer, and is considered to be burdensome by virtue of the fact that many taxpayers are either unaware of it, or simply do not plan for it.

In many cases, taxpayers typically engage in tax planning and preparation that focuses strictly on the tax liability as computed under the regular tax system, without a view toward the unfortunate consequences under the alternative minimum tax system. The effect of this system is often felt by high net-worth individuals, such as physicians, through a mechanism that increases the annual federal income tax liability. The means by which the annual tax liability is increased is through a system of provisions that operate to reduce, defer or eliminate many preferential tax benefits and deductions to which individuals are otherwise legitimately entitled (often as a result of planning under the regular tax system).

Overview of the Calculation

Procedurally, the alternative minimum tax is computed by comparing the taxpayer’s "tentative minimum tax" with his or her regular tax. The alternative minimum tax is equal to the excess of the taxpayer’s tentative minimum tax for the taxable year over the regular tax for the taxable year. The term "tentative minimum tax" is a term of art, and is computed through the use of a mini-graduated rate tax scale under which two rates of tax (26 percent and 28 percent) are imposed. Specifically, the rates are applied to the taxpayer’s "taxable excess," which represents the taxpayer’s "alternative minimum taxable income" over his or her exemption amount. The exemption amount is defined by Section 55(d)(1). For example, for single individuals, the amount is $42,500 for 2006. For joint filers, the amount is $62,550 for 2006. These amounts are reduced at a rate of 25 percent of the excess of alternative minimum taxable income over certain thresholds ($112,500 for single filers and $150,000 for joint filers). The tentative minimum tax is equal to 26 percent of the taxpayer’s taxable excess up to $175,000, plus 28 percent of the taxable excess that exceeds $175,000. The $175,000 amount is reduced to $87,500 in the case of married individuals who file separate returns.

At the heart of the calculation is the concept of "alternative minimum taxable income," which is defined as the taxpayer’s regular taxable income, increased or decreased by certain "adjustments," and increased by "tax preference items." It is through this system of preferences and adjustments that certain tax deductions and other benefits are reduced, deferred or eliminated. As such, alternative minimum taxable income is broader in scope than regular taxable income.

Adjustments

Adjustments may operate to increase or decrease a taxpayer’s regular taxable income in arriving at alternative minimum taxable income. To the extent that adjustments relate to deductions for regular tax purposes, they may be curtailed or denied for alternative minimum tax purposes. As such, they are "added back" to regular taxable income in order to arrive at alternative minimum taxable income. Perhaps the most common (and possibly the most lethal) of the adjustments are those that pertain to a taxpayer’s itemized deductions. As revealed by the Tax Court in Katz, certain itemized deductions alone can trigger an unexpected application of the alternative minimum tax.

Among the itemized deductions that are the target of the alternative minimum tax system are so-called "miscellaneous" itemized deductions that are subject to the two percent of AGI limit. Certain miscellaneous deductions are deductible to the extent that they exceed two percent of adjusted gross income. These expenses, which are deductible in arriving at regular taxable income, are not permitted to be deducted in arriving at alternative minimum taxable income. Examples of such expenses include unreimbursed employee business expenses, professional dues, tax preparation fees, tax advisory fees, certain legal expenses, and certain investment-related fees and expenses.

In addition to miscellaneous deduction, state and local taxes are not deductible in arriving at alternative minimum taxable income. Such taxes include state and local income taxes, as well as real estate taxes.

Taxpayers who claim a deduction for qualified residence interest under the regular tax system may be required to make an adjustment for alternative minimum tax purposes. The Internal Revenue Code provides a subtle alteration to the deduction for interest under the alternative minimum tax system. Specifically, under the alternative minimum tax system, a deduction is permitted for "qualified housing interest."

Conversely, under the regular tax system, a deduction is permitted for "qualified residence interest." The latter is broader in scope than the former. For example, it is common knowledge that, under the regular tax system, a deduction is permitted for interest related to acquisition indebtedness, as well as home equity indebtedness. Acquisition indebtedness is defined as indebtedness which is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by that residence. On the other hand, home equity indebtedness means any indebtedness other than acquisition indebtedness, as long as it is secured by a qualified residence. A qualified residence is defined as the taxpayer’s principal residence and one other residence of the taxpayer.

Under the alternative minimum tax system, only qualified housing interest may be deducted. Qualified housing interest is defined as interest which is qualified residence interest and is paid or accrued during the taxable year on indebtedness which is incurred in acquiring, constructing, or substantially improving any property which is the principal residence of the taxpayer at the time the interest accrues, or is a qualified dwelling which is a qualified residence. Most noteworthy to this definition is its exclusion of interest related to loans that are not incurred to acquire, construct, or substantially improve property of the taxpayer. This effectively eliminates the deduction for interest on home equity indebtedness. Therefore, a taxpayer with home equity indebtedness may be required to make a positive adjustment to taxable income in arriving at alternative minimum taxable income.

Care must also be exercised in the case of refinancing activity. To the extent that the indebtedness resulting from the refinancing exceeds the outstanding debt immediately prior to the refinancing, the excess could give rise to a positive adjustment in arriving at alternative minimum taxable income.

In computing regular taxable income, taxpayers are permitted, within certain limits, to claim a deduction for personal exemptions and to claim a standard deduction in lieu of itemized deductions. These amounts are not permitted in computing alternative minimum taxable income, and thus must be added to taxable income in arriving at alternative minimum taxable income.

In addition to the foregoing, adjustments are potentially required for depreciation deductions. In general, if a taxpayer claims depreciation on certain personal property, such as business equipment, an adjustment may be required. For such property placed in service after 1998, depreciation for alternative minimum tax purposes is required to be computed using a less tax-advantaged method (i.e., the so-called "150-percent declining balance method") than that which is permitted under the regular tax system (i.e., the "200-percent declining balance method").

Actually, the 150-percent method produces smaller tax deductions only during the early years of the life of an asset. This generally reverses in the later years of the life of an asset. Section 56(a)(1)(A)(ii)(II) requires a switch from the 150-percent method to the straight-line method when the straight-line method produces larger deductions. Finally, no adjustment is required when the taxpayer elects to use the straight-line method or the 150-percent declining balance method for regular tax purposes.

To the extent that depreciation under the alternative minimum tax system exceeds the amount computed under the regular system, the difference is added to regular taxable income as a positive adjustment in arriving at alternative minimum taxable income. When the depreciation under the alternative minimum tax system exceeds the deduction under the regular tax system (e.g., in the later years of an asset’s life), then a negative adjustment occurs. Note also that, when an asset is sold, its regular tax basis (generally cost less accumulated depreciation) may differ from its alternative minimum tax basis, which will generate a gain under the regular tax system that is different from that which is recognized under the alternative minimum tax system. When this occurs, an separate adjustment is required.

Finally, taxpayers who own incentive stock options are entitled to benefits under the regular tax system. In general, a taxpayer does not recognize taxable income when he or she is granted an incentive stock option, nor does the taxpayer recognize taxable income upon the exercise of an incentive stock option. These rules apply as long as certain holding period requirements are satisfied. Thus, assuming satisfaction of the rules applicable to such options, taxation generally occurs only upon the disposition of the underlying stock. Any resulting gain on disposition is capital gain, since the stock is a capital asset. The rules related to incentive stock options are complex, and are beyond the scope of this article. They are, however, important to the realization of the desired tax consequences, and should be reviewed carefully prior to any transaction involving an option.

Under the alternative minimum tax system, the benefits related to incentive stock options are denied. As a general rule, the taxpayer is taxed at the time of exercise in an amount that is equal to the difference between the fair market value of the stock and the cost of the stock to the taxpayer. Consequently, this difference represents a positive adjustment to taxable income in arriving at alternative minimum taxable income. Note that, upon disposition of the underlying stock, the effect of the alternative minimum tax is theoretically reversed, since the basis of the stock for alternative minimum tax purposes will exceed that under the regular tax system. However, if the stock becomes worthless in a later year, the taxpayer may not be able to recognize this benefit, since the loss under the alternative minimum tax system will be a capital loss subject to the $3,000 limitation of Section 1211(b), and the taxpayer will not be permitted to carry back the loss to the year in which the income was recognized.

Preferences

Unlike adjustments, preferences generally increase taxable income in arriving at alternative minimum taxable income. Perhaps the most common of the preference items is tax-exempt interest income generated by private activity bonds. Many taxpayers may not be aware that the exempt interest income generated by their investments may give rise to alternative minimum taxable income, despite their exempt status under the regular tax system. Such interest is generally taxable under the alternative minimum tax system, and is often disclosed to taxpayers in year-end documentation generated by investment brokerage firms and similar organizations.

Other preferences include depletion and intangible drilling costs. The opportunity to deduct these items often arises as a result of an individual’s investment in a pass-through entity, such as a partnership. Note that, when an individual invests in a pass-through entity, the activity may be considered to be a passive activity, and separate and distinct calculations will be required for alternative minimum tax purposes.

In addition to the subtle element of additional taxation on those who least expect it, the alternative minimum tax regime is complex. Differences in taxation under the regular tax structure and the alternative minimum tax structure add to this element of complexity. As such, legitimate year-end (and year-round) tax planning may be compromised unless such planning considers the impact of the alternative minimum tax. Often overlooked, the tax is unfortunately a significant part of the taxation of individuals. Consequently, all taxpayers should review their tax postures with a view toward the impact and minimization of the alternative minimum tax.

Disclaimer

While the contents of this article are intended and believed to be accurate and authoritative, they should not be relied upon as tax, legal or accounting advice, or advice of any other nature. If any such advice or other professional assistance is required, the services of competent professional personnel should be sought.

IRS Circular 230 disclaimer: To ensure compliance with requirements imposed by the Internal Revenue Service, you are hereby informed that any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties that may be imposed, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. In addition, this article is intended to be a broad and general summary of the pertinent, but selected, rules.

By Joseph P. Nicola, Jr., CPA, JD
Source: Physician's News Digest
Joseph P. Nicola, Jr., CPA, JD, CVA is Director of Tax Services for the firm of Case Sabatini in Pittsburgh, Pennsylvania.
Alternative Revenue Streams PDF Print E-mail
With reimbursement levels declining, physicians and hospitals continue to look for ways to diversify their businesses. Historically, ancillary joint venture arrangements were a very attractive vehicle for increasing revenues. These joint venture arrangements typically included ambulatory surgical centers (ASCs), diagnostic imaging centers, equipment leasing arrangements and real estate investments. With continued financial pressure in the health care industry, we are beginning to see a concerted effort to align physician and hospital incentives through the emergence of specialty health care ventures. These ventures, including specialty hospitals, gainsharing arrangements and specialty purchasing groups and alliances, commonly known as "group purchasing organizations" (GPOs), provide a mechanism through which certain physician specialists and hospitals can control and reduce costs, increase efficiencies and enhance quality of care. The ventures, however, are not without risk.

Specialty Hospitals and Stark

Generally, Stark prohibits a physician (or immediate family member) who has a financial relationship with an entity from making referrals to that entity for the furnishing of designated health services for which payment may be made under the Federal health care programs, unless an exception or safe harbor is satisfied. Stark is often implicated in the specialty hospital context, because physicians make referrals for designated health services, including inpatient hospital services, to the entity and have an ownership or compensation relationship with the entity.

Prior to the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), specialty hospitals benefited from the "whole-hospital" exception of Stark, which protected a physician’s interest in a hospital, provided the referring physician was authorized to perform services at the hospital and the ownership or investment interest was in the hospital itself (not in a subdivision of the hospital). MMA, however, amended the "whole-hospital" exception of the Stark law and added an additional requirement to the exception, which specified that for an 18-month period (ending in June 2005), physician ownership and investment interests in specialty hospitals would not qualify for the exception. Although the U.S. Congress ignored efforts to extend the moratorium, allowing it to expire in June 2005, the Centers for Medicare and Medicaid Services (CMS) subsequently announced that it would review procedures over a 6-month period and continue the suspension until February 2006.

Last year, the Deficit Reduction Act of 2005 (DRA) was adopted by Congress. Under the DRA, the Department of Health and Human Services (HHS) was to develop

a strategic and implementing plan regarding physician investment in specialty hospitals and include recommendations for legislative and administrative

action. Recently, HHS submitted its report to Congress, which outlines plans to address physician ownership in specialty hospitals and end the administrative moratorium on specialty hospital enrollment in the Medicare program. Specifically, in an era of transparency and disclosure, specialty hospitals will, among other things, be required to disclose to CMS their compensation and investment relationships with physicians in the new Medicare enrollment forms. CMS will use this information to monitor physician and hospital compliance with the Stark law. Importantly, however, with the issuance of HHS’s report on specialty hospitals under DRA, came the end of the moratorium on the development of specialty hospitals and a new opportunity for physician specialists (including orthopedic and cardiac surgeons) and hospitals to co-invest. Physicians and hospitals should be aware that specialty hospitals will continue to present challenges under the federal Anti-Kickback Statute.

Gainsharing Arrangements and the Federal Civil Monetary Penalties Law

Gainsharing arrangements have been broadly defined as "arrangements pursuant to which a hospital provides physicians a percentage share of any reduction in the hospital’s costs for patient care attributable in part to the physicians’ efforts." Cost saving recommendations generally include product standardization, product substitution, open as needed and use as needed recommendations. Depending upon how they are structured, these cost-saving arrangements may implicate certain laws, most notably the federal Civil Monetary Penalties law.

The federal Civil Monetary Penalties Law prohibits a hospital from knowingly making a payment, directly or indirectly, to a physician as an inducement to reduce or limit services provided with respect to Medicare or Medicaid beneficiaries who are under the direct care of the physician. Physicians and hospitals which enter into such impermissible arrangements will be subject to penalties.

Although originally frowned upon by the OIG, such arrangements have recently gained the OIG’s approval, provided they are structured not to conflict with law and include certain safeguards. Recently, the OIG has refused to impose sanctions on several proposed gainsharing arrangements between hospitals and physician specialists, including cardiologists. Under the proposed arrangements, the OIG has generally identified the following safeguards as minimizing any risk of abuse:

· Transparency of the arrangement as evidenced by specific cost-saving actions and resulting savings.

· Credible medical support that the arrangement would not adversely impact patient care.

· Basing payments on all procedures, irrespective of patient insurance coverage, and subjecting Federal health care program payments to a cap.

· Protecting against inappropriate reductions in services by utilizing objective historical and clinical measures to establish baseline thresholds.

· The availability of the same selection of devices to the physicians.

· Providing written disclosure of the arrangements to patients and providing them with an opportunity to review cost-saving recommendations prior to

treatment.

· Reasonably limiting financial incentives in duration and amount.

Accordingly, gainsharing arrangements, if properly structured, can provide physician specialists and hospitals a viable alternative for reducing costs and increasing the bottom line.

Specialty GPOs and the Federal Anti-Kickback Statute

Other businesses focused on cost reduction are health care purchasers in the medical supply chain. GPOs are purchasing agents authorized to act for their members, thus allowing them to enter into agreements with manufacturers through which items and supplies can be purchased by members at competitive prices.

Since GPOs are funded by fees received from manufacturers, they are able to furnish these services at little cost to their members. Given their tremendous benefits, physician groups (such as orthopedic surgeons) and hospitals looking for purchasing power, alternative revenue streams and value adds have begun to invest in and develop their own specialty GPOs. These arrangements, however, are not without risk, since many of the payment arrangements often implicate the federal Anti-Kickback Statute.

Generally, the federal Anti-Kickback Statute prohibits an individual or entity from knowingly and willfully offering or paying, or from soliciting or receiving, remuneration in order to induce the referral or the arranging for the referral of business reimbursed by Federal health care programs. OIG has adopted safe harbors to protect certain payment arrangements under the GPO model.

Administrative Fees and Discounts

Since GPOs are in a position to arrange for the referral of business to suppliers (through their negotiation of contracts for the benefit of their members) and receive administrative fees in return for these services, a GPO’s arrangement with a supplier implicates the federal Anti-Kickback Statute. These fees represent the bulk of a GPO’s revenue and, therefore, protection of these arrangements is critical to a GPO’s financial survival. The group purchasing organizations safe harbor is designed to protect administrative fees from a supplier to a GPO.

Discounts give a manufacturer the ability to provide health care purchasers, in this case physicians and hospitals, with more competitive pricing.

Discounts, however, implicate the federal Anti-Kickback Statute because they are viewed as remuneration being transferred to a physician or hospital which is in a position to purchase items or services from the supplier providing the discount. There is safe harbor protection for certain discounts to physician and hospital members who enter into contracts with manufacturers, provided the parties comply with certain disclosure and reporting obligations.

Distribution and Dividend Payments

Although there are safe harbor provisions that protect administrative fees and discounts, the safe harbor regulations do not necessarily offer protection to any dividend and distribution payments made to the physician and hospital owners of the GPO. On the contrary, the only potential safe harbor is the investment interests safe harbor for small investments. To obtain protection under this safe harbor, however, a GPO has to satisfy a number of stringent requirements. These strict requirements may significantly impair the ability of a physician and hospital member-owned GPO to achieve safe harbor protection since the OIG may take the position that since the physician and hospital owners would also be purchasing members of the GPO, they would be in a position to refer and generate revenues for the GPO.

Because the Anti-Kickback Statute is a criminal statute, however, failure to fall within a safe harbor does not equate to violation of the law. Accordingly, if the dividend and distribution payments made to the physician and hospital owners are carefully structured in accordance with OIG’s position concerning health care joint ventures and other safe harbors requirements relevant to the proposed venture, the arrangement may pass muster under the statute.

In this new era of specialty health care ventures, an effort is being made to align physician and hospital incentives and increase revenues and reduce costs. To manage the uncertainty and potential risk of liability presented by these and other health care ventures, physicians and hospitals should structure such ventures in conformance with regulatory guidance in this area.

By John W. Jones, Jr., Esq.
Source: Physician's News Digest
John W. Jones, Jr., Esq., is a member of the Health Care Services Group at Pepper Hamilton in Philadelphia, Pa.
Presurgical Exercise Improves Recovery After Hip or Knee Replacement PDF Print E-mail
NEW YORK (Reuters Health) - Men and women with end-stage osteoarthritis can safely participate in and benefit from a program of cardiovascular fitness, strength training, and flexibility exercise prior to total hip or total knee arthroplasty, according to results of a prospective, randomized trial.

Little is known about the effects of exercise on patients with end-stage osteoarthritis or on the outcomes of joint replacement surgery, Dr. Daniel S. Rooks and his associates point out in their paper published in the October 15th issue of Arthritis and Rheumatism.

Dr. Rooks, from Beth Israel Deaconess Medical School in Boston, and other members of his team recruited patients scheduled to undergo unilateral, primary arthroplasty of the hip or knee. Patients who completed the study had been randomly assigned to exercise (25 with hip arthritis and 14 with knee arthritis) or to education alone (24 and 15, respectively).

The exercise protocol consisted of sessions 3 times a week for 6 weeks. For the first 3 weeks, the subjects performed light exercises in chest-deep water. During the next 3 weeks, strength training activities - such as the seated row, leg press, and biceps curls - were added to the water exercises, along with cardiovascular and flexibility exercises.

Prior to hip surgery, patients who completed the exercise program experienced stabilized or improved pain and function, while the control subjects had gotten worse. In contrast, those undergoing knee replacement did not seem to benefit from the program.

But no matter which joint was replaced, 65% of patients who were in the exercise group were discharged directly home after surgery, versus 44% of those in the control group. The odds ratio after adjustment for baseline function and age was 0.27.

At 8 and 26 weeks after surgery, participants in the exercise program had improved more in physical function and pain, particularly patients who had knee replacement surgery.

"Our findings suggest that men and women with severe arthritis can safely increase lower-extremity muscle strength through participation in a program of cardiovascular fitness, strength training, and flexibility exercise prior to total hip arthroplasty or total knee arthroplasty," the authors conclude.

Reuters Health Information 2006. © 2006 Reuters Ltd.
Most Wired 2006 The Good and the Wired PDF Print E-mail
A hospital can't promise top-notch healthcare simply because it has a lot of snazzy computers.

But the high-tech hospitals below are more likely to offer quality care because they've been awarded a double distinction. Earlier this month, they were listed among America's Best Hospitals, U.S.News & World Report's ranking of hospitals based on their ability to save lives, their expertise in tackling tough medical problems, their reputation among specialists, their nursing excellence, and other factors.
Telemedicine Study To Track Medication Reminders PDF Print E-mail
A new telemedicine drug study will use wireless technology to test if subtle visual reminders will help hypertension patients take their medication, InformationWeek reports.

Partners Telemedicine's study will evaluate patient adherence to drug regimes when the instructions are given through a "nonclinical-looking reminder." The six-month study will include 50 to 70 Boston-area patients. For three months patients will not receive a visual reminder and for the other three months they will have glowing reminders from an Ambient Devices orb to take their medication, according to InformationWeek.

Software vendor Claricode developed the Smart PillBox, which will send a wireless signal to a central application via Partners' remote paging system. The central application then will send a message to the orb, which turns from red to green when patients take their medication. The orb also turns red in the morning to remind patients to take their pills (McGee, InformationWeek, 10/3).
More...
<< Start < Previous 1 2 3 4 5 6 7 8 9 10 Next > End >>

Results 37 - 45 of 286
Robyne Wilkerson     SEO Administrator
Our other Physiatry Related Sites by PM&R Resources R. Wilkerson