Are CMS incentive payments, which are available to physicians who invest in electronic health records, or EHRs, and use them in a meaningful way, taxable by the IRS? That question was asked during the recent AAFP Town Hall meeting in Denver.
The simple answer is "yes." According to Steven Waldren, M.D., director of the AAFP's Center for Health IT, all health IT incentive payments received as a part of the American Recovery and Reinvestment Act of 2009 and the accompanying Health Information Technology for Economic and Clinical Health, or HITECH, Act are viewed by the IRS as taxable income.
Physicians who meet the incentive payment criteria are eligible to earn as much as $44,000 from Medicare, or they can choose to earn Medicaid incentives of as much as $63,750.
Waldren, who consulted with the Office of the National Coordinator for Health IT, noted that family physicians should consult their tax accountants for recommendations on how to manage the tax burden.
Mark Estroff, C.P.A., a principal at Gates Moore and Co., an Atlanta-based health care consulting and accounting firm, explained how the government is viewing the incentive program.
"The way I look at it, this is just enhanced reimbursement from the federal program," he told AAFP News Now. "They're just going to give you a little more money because you're utilizing the proper technology in your practice, and it is taxable just like any other practice gross receipts that you're going to receive."
Estroff added that there are some tax advantages for medical practices. For example, when physicians buy equipment -- whether it's hardware or most software -- the IRS allows them to write off as much as 100 percent of the cost of that equipment. However, that write-off is subject to the limitations of the optional expensing rules of Internal Revenue Code Section 179, Estroff added.
"Depending on how you go about it -- the tax law limitations, the size of your practice and a lot of other factors -- you may be able to write it all off in the year that you acquire it," he said, although in other situations, it may take five years to recover the investment through tax benefits.
Estroff also advised physicians to comb their state tax laws to see if there are additional tax incentives -- as is the case in Georgia -- for upgrading their practice technology or for training staff to use a health IT system.
Putting himself in the role of a qualifying physician, "it's another cash infusion into my practice to help me pay for the cost of the EHR," said Estroff.
Estroff makes sure that his physician and health care professional clients are aware that the HITECH incentive offer is a once-in-a-lifetime chance to boost their income.
"If they do not implement (an EHR) and take advantage of this extra money that's being offered, eventually they're going to be penalized," said Estroff. The federal program offers several years of bonus payments, but in 2015, CMS will begin penalizing physicians who aren't using EHRs by reducing their Medicare payments.
"Right now, physicians are getting the carrot before the stick," said Estroff. "They're going to get the stick in a few years, so they might as well eat the carrot while they can."
Estroff concluded with this tip: "The tax question is a basic question. The real issue goes back to selecting the right (EHR) product," and that means physicians have to take a hard look at their practices' needs and capabilities. "There's a whole selection process that takes place, and you don't often let the tax implications drive your decision," said Estroff.