How does Medicaid Waiver Payments (that qualifies for Notice 2014-7) affect the Schedule L of an S Corp?

[kaneki43]

Hello,

The owner of the business is engaged in Elderly/Homecare. In the tax year 2020 of 1120S returns, he entered certain Medicaid Waiver payments received that qualify for Notice 2014-7 in the Other deductions, Schedule 1, Line 19 of 1120-S. This resulted in a Net Loss and negative Retained Earnings. 

Fast forward to 2021, the same thing happens, there's a Net Loss and a negative Retained Earnings. Plus, it lowered the basis of the only Shareholder (Owner).

Not sure if these are the right process. Really need some help/ideas. He uses Proconnect.

How will this impact the Schedule L since it lowers the Retained Earnings (because of Net Loss since it is claimed as a deduction) while the Cash is still increased by the Waiver payments received? 

Thanks much!

[taxshack]

I may be wrong and I haven't researched this, but I think 2014-7 only applies to individual care providers, not entities.

[qbteachmt]

Read this:

https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income

For instance, A6: "The exclusion only applies to payments for care in the individual care provider’s home where the care recipient lives under the recipient’s plan of care."

An entity that is registered for the services and providing the plan of care, would have employees that need to qualify. If all of his employees live with the people they are caring for, then read Q11 and Q12, including: "Your status as an employee or independent contractor and the identification of your employer (if you are an employee) depend on whether the agency or the care recipient has the right to direct and control how you perform your services. Tax Topic 762, available at /taxtopics/tc762.html, provides information and additional resources on how to determine whether you are an employee and, if so, who your employer is."

And:

"Q16. I am an agency that employs individuals who provide care to disabled individuals under a state Medicaid Home and Community-Based Services waiver program. Some of the payments I make are excludable from the employee’s gross income under Notice 2014-7. Am I required to withhold federal income tax on the payments that are excludable under Notice 2014-7?"

[TaxGuyBill]

So combining the thoughts above:

It is taxable to the corporation.

It may not be taxable to individual employee that lives with the disabled person.

[qbteachmt · Accepted solution]

I agree with Bill. The employee being paid whatever they are being paid, any part of that wage that qualifies for this provision, that part of gross is not subject to income tax reporting. The Agency entity has this income from operations. The Agency cannot be paid for living in every client's home.

So, if they keep having losses, I guess it depends on payroll and overhead.

[kaneki43]

Thanks, y'all!!