Tax Compliance Considerations for MSO/PC Structures in Healthcare & HealthTech
Josh Leider - Head of Growth
October 14, 2024
The MSO-PC structure is an increasingly popular model in the healthcare industry, especially among startups in the pfost-COVID-19 era as telehealth becomes more popular. Composed of a Managed Service Organization (MSO) that performs non-clinical functions for a Professional Corporation (PC), the structure separates clinical and non-clinical ownership, allowing healthcare professionals to focus on patient care while the MSO handles administrative tasks. Under such a structure, there’s more efficient management of a healthcare practice, while also ensuring compliance requirements are met.
There are also some unique tax implications under such a structure, which is what we’ll cover in this post. Read on for more information on the benefits of the MSO-PC model, its tax implications and how Graphite Financial can help you optimize your tax strategies under this structure.
Understanding the MSO-PC Model
Under an MSO-PC model, administrative services – such as billing for medical services provided, IT, procurement, marketing and more – are kept separate from the legal entity that doctors own. The MSO provides these services to healthcare organizations, usually for some private equity or ownership stake in the healthcare clinic. The PC is owned and controlled by medical professionals, who maintain ownership of the building, equipment and contracts, and are directly responsible for patient care.
CPOM, or Corporate Practice of Medicine, laws influence this model, which underscores the need for licensed healthcare professionals to own PCs, while non-physicians can invest via MSOs.
Legal and Regulatory Considerations
CPOM laws vary on a state-by-state basis and influence ownership and operational structures in healthcare. They restrict who can own and control healthcare companies and employ healthcare providers, and prohibit standard corporations from practicing medicine or employing practicing physicians.
It’s imperative to comply with CPOM laws to avoid legal and regulatory penalties. Violation of CPOM law may include fines, lawsuits, insurance issues and even criminal sentencing.
Tax Implications of MSO-PC Structures
There are several tax considerations to be aware of when it comes to an MSO-PC structure. For instance, the IRS has issued various taxpayer-friendly rulings, allowing for consolidated returns under this model, even despite the MSOs not owning legal title to any stock in the PCs.
There are also various state-specific implications, which can complicate tax compliance, especially for healthcare startups that operate across multiple states.
Consolidated Tax Returns
The IRS has ruled to allow for consolidated returns under the MSO-PC model, concluding that the MSP holds beneficial ownership of PC stock. The key benefit of filing a consolidated return is the ability to offset losses between entities.
However, careful analysis is a must before a decision is made to file a consolidated tax return. Determining tax ownership is complex, and it’s not always beneficial to file consolidated returns. In fact, several states even prohibit this.
So how do you know if you can file a consolidated income tax return? Generally speaking, two or more entities can do this if they meet the 80 percent ownership test or have a parent-subsidiary ownership structure in the states where it’s allowed.
Management Fee Structures
Various fee structures, and how they’re set and adjusted, also have tax implications. The most common management fee models in MSO-PC structures include fixed fees and percentage-based fees. Management fees are often determined by considering the fair value of the service provided and the estimated profit of the medical entity. They may be calculated via fixed fee, cost plus or as a percentage of revenue.
Fees can also be adjusted, but the frequency of this depends on the management fee structure. In some arrangements, the fee is set in advance and can’t be changed more than annually. In other arrangements, fees are tiered and ebb and flow as the practice grows.
It’s important to document the fee-setting process, both for clarity in the arrangement and for tax compliance purposes.
State-Specific Tax Considerations
Tax considerations vary on a state-by-state basis for MSO-PCs, especially regarding combined reporting and how various regulations impact overall tax strategy. New York, California and Texas, for instance, have stricter standards that are enforced, while many other states are more relaxed. It all underscores the need for tailored state-specific tax strategies based on the jurisdiction and any unique regulations.
Optimizing Tax Strategies for MSO-PC Structures
Further optimization of tax strategies involves properly structuring management agreements and intercompany transactions, while ensuring compliance. Some of the best ways to do this include:
- Using clear and straightforward language when structuring arrangements.
- Ensuring agreements meet arm’s length conditions.
- Complying with local and international tax law.
It’s also important to avoid potential pitfalls, such as improper documentation or misaligned fee structures that could lead to audits or penalties.
Record Keeping and Documentation
Record keeping and thorough documentation are important in finance, and tax strategies for MSO-PC structures are no exception. Everything from intercompany agreements to financial transactions is important to support tax filings and demonstrate compliance during audits.
Other best practices for maintaining accurate compliance records include:
- Regularly reconciling accounts
- Conducting regular financial reviews
- Detailed and highly organized records
Future Trends and Developments
It’s important to always have an ear to the ground and be aware of any potential changes in IRS guidance or legislation that could impact how MSOs and PCs operate from a tax perspective. You should also be aware of any trends impacting healthcare businesses that could potentially influence regulatory changes or create opportunities for optimization.
Final Thoughts
Federal and state tax implications associated with MSO-PC structures are complex and can be challenging for someone who lacks experience or knowledge. It’s a big part of the reason why it’s important to proactively plan to effectively navigate these complexities. It can also behoove your medical practice or healthcare startup to pursue a management services agreement and work with a professional to ensure that everything is correct and complies with both federal and state law.
Partner with Graphite to Enhance Your Tax Strategy
The MSO-PC structure is complex when it comes to tax compliance – and it’s always a good idea to seek professional help from a professional finance team focused on MSO/PC structures to ensure that you’re able to adequately navigate these complexities. That’s where Graphite can help. When you work with Graphite, you can ensure you’ll receive personalized tax strategies and access to our industry experts to ensure an effective strategy that works for you. Contact us today for more information and to schedule a free consultation.
FAQs
What is the main purpose of an MSO-PC structure?
The structure separates clinical and non-clinical ownership, allowing healthcare professionals to focus on patient care and medical services while the MSO handles administrative tasks. Under such a structure, there’s more efficient management of a healthcare practice, while also ensuring compliance requirements are met.
How does the IRS view MSO-PC structures for tax purposes?
The IRS permits consolidated tax returns, even though MCOs have no legal title to stock in PCs.
Can an MSO-PC structure file consolidated tax returns?
The IRS has ruled to allow for consolidated returns under the MSO-PC model, concluding that the MSO holds beneficial ownership of PC stock. However, careful analysis is a must before a decision is made to file a consolidated tax return. Determining tax ownership is complex, and it’s not always beneficial to file consolidated returns. Some states even prohibit this.
What are the key tax considerations when setting up an MSO-PC structure?
The IRS has issued various taxpayer-friendly rulings, allowing for consolidated returns under this model, even despite the MSOs not owning legal title to any stock in PCs. There are also various state-specific implications, which can complicate tax compliance, especially for healthcare startups that operate across multiple states.
How do state tax laws affect MSO-PC structures?
Tax considerations vary on a state-by-state basis for MSO-PCs, especially regarding combined reporting and how various regulations impact overall tax strategy.
What are the potential tax benefits of an MSO-PC structure?
Adding an MSO allows income received within the MSO to be taxed at a lower rate compared to conventional pass-through income.
How should management fees be structured to ensure tax compliance?
The most common management fee models in MSO-PC structures include fixed fees and percentage-based fees. Management fees are often determined by considering the fair value of the service provided and the estimated profit of the medical entity. They may be calculated via fixed fee, cost plus or as a percentage of revenue.
What documentation is crucial for tax purposes in an MSO-PC structure?
It’s important to keep a detailed paper trail with thorough documentation to ensure you’re prepared in the event of an audit and to take advantage of maximum deductions.
Are there any recent tax rulings that affect MSO-PC structures?
Recent rulings have allowed for the filing of consolidated tax returns, even with the MSO not owning the legal title to any stock in the PC.
How can Graphite help with MSO-PC tax compliance?
Graphite will ensure you receive personalized tax strategies and access to our industry experts to ensure an effective strategy that works for you, while staying in compliance with federal and state-specific regulations.