Tax strategies for senior living providers: New ways to maximize savings
With recent changes under the One Big Beautiful Bill Act (OBBB), senior living providers face new opportunities and challenges in optimizing their tax position.
From Qualified Business Income (QBI) deductions to entity structuring and bonus depreciation, understanding these rules can significantly impact profitability and compliance. Senior living providers who proactively plan can leverage tax benefits, reduce liabilities and reinvest savings into growth and facility improvements.
Here’s anoverview of key changes and tax strategies for senior living providers, including compliance considerations, real estate implications, and energy incentives that can benefit your bottom line.
Section 199A deduction and trade or business classification
Senior living operations may qualify as active trades or businesses under OBBB, enabling ordinary income reporting on certain providers. This classification is critical because it opens access to the 20% QBI deduction under IRC Section 199A. This is now a permanent and annual deduction worth exploring for your continued benefit.
Senior living businesses — such as skilled nursing facilities (SNFs), assisted living facilities (ALFs), independent living, home health and hospice — often qualify as active trades or businesses, enabling owners to claim up to a 20% QBI deduction under §199A. However, classification matters: if the operation is deemed a Specified Service Trade or Business (SSTB) (e.g., providing healthcare services), the deduction phases out for high-income taxpayers. Facilities that outsource clinical services rather than providing them directly may avoid SSTB classification, preserving eligibility for the full deduction.
For organizations looking to take advantage of this tax change, here are some important considerations:
- Healthcare tax compliance risk: The primary compliance risk lies in accurate income classification. Mixed activities, such as healthcare, real estate leasing and ancillary services, require careful structuring to prevent active income from being mischaracterized as passive. Improper structuring could lead to the disallowance of the deduction or IRS scrutiny. Documentation of trade/business status and adherence to wage and property basis limitations is critical.
- Outsourced services: Facilities outsourcing clinical or therapy services may still preserve QBI eligibility if contractual arrangements meet trade or business standards. However, improper structuring could inadvertently convert active income into passive income, jeopardizing deductions.
- Real estate holdings: For providers with significant real estate holdings, classification as a real estate professional under IRC Section 469 can enhance deductibility and mitigate passive loss limitations. This is especially relevant for operators managing multiple facilities or engaging in development projects who are looking to maximize tax-advantaged real estate investment in senior living.
Entity structure optimization
The OBBB’s tax framework encourages a review of entity structures:
- Partnerships and LLCs: Partnerships have a valued utility as it relates to holding appreciating assets, such as real estate, which allows leverage to be used for tax benefits and to help supply additional capital needs. While income on the operations side is generally subject to self-employment taxes, the availability of specially allocating income/losses and distributions, as well as less restriction on ownership than S-corporations, makes it a viable option circumstantially. Working with an experienced advisor can help determine the most balanced outcomes.
- C-corporations: The 21% corporate tax rate under current law may appeal to large-scale operators seeking predictable tax exposure. This can be advantageous for providers reinvesting profits into expansion or capital improvements. However, unlike pass-through entities, C-corporations do not qualify for the 20% QBI deduction. Providers must weigh the benefit of lower corporate rates against the forfeiture of this deduction, especially if ownership groups rely on pass-through income for tax planning.
- S-corporations: This entity type offers a blend of the partnership and corporate models. It requires the owner to pay themselves a salary via a W-2 and participate in employee benefits. Primarily, the income that flows through to the personal returns is not subject to self-employment taxes, unlike income from partnerships. For tax efficiency purposes, S-corporations are the ideal entity structure for operating companies but should be avoided in owning real estate. Therefore, an operating company (OpCo)/ property company (PropCo) model is ideal for operating senior living facilities where the real estate is owned by the operator.
Bonus depreciation and cost segregation
OBBB restores 100% bonus depreciation for qualifying property placed in service after January 19, 2025, making cost segregation studies more valuable than ever. These studies enable providers to accelerate depreciation on building components, thereby improving cash flow and reducing taxable income.
As providers face rising labor and compliance costs, accelerated depreciation can free up substantial capital for reinvestment in facility upgrades, staffing and technology.
To fully leverage your cost segregation benefits, consider the following:
- Strategic timing of capital projects: Operators planning expansions or renovations should align project timelines to ensure qualifying assets are placed in service after the effective date, capturing full bonus depreciation benefits.
- Complexity in asset classification: Cost segregation requires detailed engineering analysis to properly allocate building components (e.g., HVAC, lighting, flooring) into shorter-lived asset classes. Misclassification risks IRS challenges and potential penalties.
- Tax sheltering: Under a properly aggregated PropCo/OpCo model, income from operations can be offset from losses generated in PropCos from the cost segregation-related losses.
Energy incentives
Energy incentives under Sections 179D and 45L have been updated, with phase-outs (projects starting prior to June 30, 2026, and completed by December 31, 2027) and eligibility changes impacting new construction and renovations.
- Section 179D (Commercial Energy Efficiency Deduction) offers deductions for energy-efficient improvements to HVAC, lighting and building envelope systems. Senior living facilities with high utility loads stand to benefit significantly.
- Section 45L (Energy-Efficient Home Credit) applies to residential components of senior living communities, including ALFs and independent living units. Credits can offset construction costs for projects meeting updated energy standards.
Senior living providers investing in energy-efficient upgrades should take a proactive approach to incentives.
Engaging specialists during design or acquisition phases can help you identify components eligible for accelerated depreciation, ensure compliance and maximize deductions.
You can also look at bundling energy upgrades with renovations. For example, incorporating energy-efficient systems into planned renovations can help you qualify for 179D and 45L incentives while reducing payback periods.
Other healthcare tax opportunities
Recent changes under the OBBB present senior living and healthcare providers with new ways to optimize their tax position. In addition to major legislative updates, several tried-and-true strategies remain effective:
- State PTET elections: Healthcare organizations with substantial state tax liabilities can benefit from Pass-Through Entity Tax (PTET) elections. These allow state tax payments to be deducted on federal returns, which is especially valuable for those exceeding the $40,000 SALT deduction threshold.
- Accrual to cash basis conversions: Healthcare entities can generally remain on a cash basis for income tax reporting, enabling them to defer recognition of accounts receivable until collected. This flexibility can improve cash flow management and reduce taxable income in periods of high receivables. Note that the election to change accounting method is only available once every five years.
- De minimis safe harbor election: Providers with audited or reviewed financial statements may deduct purchases of $5,000 or less ($2,500 if unaudited) rather than capitalizing them. This simplifies compliance and can reduce taxable income.
To fully leverage these opportunities, collaborate with tax advisors early, maintain robust documentation and be proactive.
Why Wipfli
With deep experience in healthcare taxation and a national footprint of senior living clients, Wipfli is uniquely positioned to guide providers through the OBBB’s evolving tax landscape. Our approach blends technical precision with industry insight, helping you stay compliant and minimize tax liability while delivering exceptional care.
Talk to our healthcare services team to learn more about how can enhance your tax planning.
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