PCORI: Deductible Relief

Jun 11

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6/11/2013  RssIcon

Clients often ask whether the taxes paid under the Affordable Care Act (ACA) are deductible. The answer is generally: “no.”
However, the Internal Revenue Service (IRS) quietly released General Counsel Memorandum (GCM) (dated May 31, 2013 but released June 7, 2013) (AM2013-002), in which they acknowledge that the Patient-Centered Outcomes Research Institute (PCORI) fee is an excise tax (and not a “fee”) and that as far as deductibility is concerned, this tax under the ACA is the exception to the general rule; according to the GCM, the PCORI fee is deductible by the entity that pays the fee.
Sections 4375-77 of the Internal Revenue Code (Code) were added by the Affordable Care Act (ACA). The ACA provides for the establishment of the Patient-Centered Outcomes Research Institute, with a stated goal of studying "relative health outcomes, clinical effectiveness, and appropriateness" of different medical treatments. Under Code Sections 4375-77 funding of the Institute comes, in part, from taxes paid by insurance carriers and sponsors of self-insured health plans. The tax is $1 per member per year in the first year of its application, and will be adjusted annually. The Tax is paid annually by July 31 of the year following the plan year end date (e.g., July 31, 2013 for calendar year 2012 plans, or July 31, 2014 for plan years ending in 2013) and under the ACA it is scheduled to “sunset” in 2019.
Section 164(a) of the Code identifies taxes that are specifically deductible under the Code. The PCORI tax is not specifically listed. However, the GCM notes, excise taxes not listed in Section 164(a) may be nonetheless deductible under § 162 of the Code if the taxes represent an ordinary and necessary business expense paid or incurred by the taxpayer.
While the Code may specifically prohibit or limit a deduction—the play or pay penalty and the Cadillac Tax are examples of this—the GCM tells us that absent a specific prohibition, an excise tax may be deductible based on a number of factors, including whether the “expense” creates a separate and distinct asset. If the expense does not create such an asset, the most critical factors to consider are the period of time over which the taxpayer will derive a benefit from the expense and the significance of the benefit to the taxpayer. The GCM notes that the PCORI tax is paid annually, with “benefits” extending beyond the end of the taxpayer’s taxable year. (It’s not clear which benefit the IRS believes exists for the carrier or employer paying this tax.) Since the benefit is limited, and the Code does not otherwise disallow the deduction, the GCM opines that this excise tax is deductible.
Because the PCORI tax is a normal and customary business expense incurred in business, it is deductible by the payer. This is a bit of welcome—if quietly released—news.
This blog prepared by Peter Marathas of Proskauer.

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