As of the penning of this article, the new “Generator Rule” (The Rule) for skilled nursing facilities (SNFs) has been ratified by the Legislature and signed by the Governor, requiring compliance from all skilled nursing facility providers by June 1 of this year. We’ve heard from several providers asking about the impact of Public Law 115-97 (the Tax Reform) and depreciation guidelines for asset investments. Certainly, one way to recoup the investment in tangible property faster is by taking advantage of the benefits of the tax depreciation. In general, tax depreciation results in additional deductions against a taxpayer’s taxable income, which results in less income tax to be paid at the end of the day.
The amount of the tax depreciation depends on several factors, such as the property’s acquisition value, useful life and recovery period, the allowable depreciation method and other deductions which allow for an accelerated write-off of the cost of investment, such as the Bonus Depreciation and Section 179 deductions. Some major acquisitions, such as power generators, have allowable recovery periods of 15 years or more. The application of the Bonus Depreciation and Section 179 deduction allows for higher deduction in the acquisition year and therefore recoups faster the cost of the investment. The benefits are even greater when we consider the time value of money.
With the enactment of Tax Reform, the Bonus Depreciation is yet more attractive as it allows for 100% write-off (previously 50%) of the cost of qualified property placed in service after September 27, 2017. Generally speaking, property qualifying for Bonus Depreciation includes tangible property with useful life of 20 years or less and certain qualified improvement property, whereas property qualifying for a Section 179 deduction includes personal property and certain qualified real property placed in service after December 31, 2017.
For instance, generators installed and attached to a structure are considered real property with a useful life of more than 20 years except power generators with a rated total capacity of more than 500 kilowatts which are usually considered personal property with a recovery period of less than 20 years, hence the latter qualifying for bonus depreciation. Generators not meeting the description above have other alternatives ranging from classification of some or all of the cost of the generator as personal property on the basis that it directly or indirectly supports other personal property, hence qualifying for bonus depreciation.
On the other hand, any portion of a generator which is classified as real property will not qualify for Section 179 deduction since it is not considered qualified property as it is typically installed outside the building structure and the facility is a residential property.
If you placed in service or plan to acquire a power generator, we suggest consulting your tax advisor to confirm the proper classification and determine if it qualifies for Bonus Depreciation.
PPS treatment under new FRV
Recovery of the cost of compliance with The Rule will be more challenging for not-for-profit entities or others that do not qualify or cannot take advantage of the above Tax Reform rules. Under the new Medicaid Prospective Payment System (PPS) effective October 1 of this year, the new Fair Rental Value (FRV) rate component will be calculated based on standardized parameters to determine the economic age and rental value of a facility’s assets, not the actual cost of the assets themselves. New renovations or additions, such as generators and other large projects, will be included as part of the weighted economic age of a facility. The economic age of the facility will determine the amount of depreciation that is removed from the calculated rental value of the facility. Renovation and improvement projects costing more than $500 per bed will lower the economic age of a facility and therefore reduce the amount of depreciation applied to the rental value.
Fortunately, the new FRV rate method will in most instances accelerate the recoupment of the investment compared to the current FRV method depending on the size, occupancy and Medicaid utilization. It is important to note that your facility age upon PPS implementation will be based on information you have provided to AHCA by April 30 via the FRV portal on their website. If you have recently purchased additional equipment or upgraded your facility, it is extremely important that you report those assets in the portal by April 30 to get credit for those additional outlays on your initial PPS rate. Even if you have no additional information to report, now is the time for all providers to visit the FRV portal and review all previous submissions for accuracy and completeness. Otherwise, you will have to wait until your next cost report is submitted and AHCA rebases the FRV based on new assets reported on the cost report the following year. For a better understanding of how the cost of compliance with The Rule will impact your individual rate, contact your friendly reimbursement guru to assess your situation.