The IRS announced, through its FAQ page, that for-profit healthcare providers, including hospitals and physician practices, will have to pay federal income taxes on any distributions they receive from the Public Health and Social Services Emergency Relief Fund (Provider Relief Fund). In contrast, payments from the Provider Relief Fund to nonprofit healthcare providers are generally not taxable.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act appropriated $100 billion for the Provider Relief Fund and the Paycheck Protection Program and Health Care Enhancement Act appropriated an additional $75 billion to the Provider Relief Fund. However, neither law addressed the taxation of payments from the Provider Relief Fund. According to the IRS guidance, payments from the Provider Relief Fund should be included in the gross income of recipients and are not excludable as qualified disaster relief payments. As a result, for corporate taxpayers, these payments are subject to the 21% federal corporate tax rate absent some other exception.

With regard to nonprofit healthcare providers, the IRS added that, while the payments are generally not taxable, the payments may be subject to tax if the payments reimburse the provider for expenses or lost revenue attributable to an unrelated trade or business.

Given that many healthcare providers may ultimately return unused payments from the Provider Relief Fund, taxpayers should be conscious of the tax consequences of payments received in one tax-year and returned in another year. Additionally, the guidance only applies for federal tax purposes so taxpayers should also consider the state and local tax treatment of the payments. The FAQ does not have the binding authority of law, but it establishes the IRS’ position on the issue. With Congress leaving the question up in the air, it seems taxpayers’ best hope for future relief is clarification from Congress in future legislation.