Key Considerations: Management Services Organization Tax and Fee Structures

A version of this article was published in the March 2023 edition of Healthcare News.

The COVID-19 pandemic led to significant growth for telehealth providers, which spurred investment and increased M&A activity from private equity in physician practices. When a company operates in more than one state through contracting, employing providers, and physical presence, compliance can become complex.

Many states have laws governing the corporate practice of medicine that affect the organizational structure of multistate health care companies. A management services organization (MSO) and professional corporation (PC) structure can be used to allow legal ownership for nonphysicians in the MSO.

What Is a Management Services Organization Structure?

This is an increasingly common structure used by private equity or venture capital that can invest in the MSO but are legally unable to have direct ownership in the PC, which is wholly owned by one or more licensed clinicians. Companies with a multistate presence may have multiple PC entities in their organizational structure.

Typically, the professional fees are billed and collected by the PC that employs the providers and pays management fees to the MSO in exchange for administrative, management, and technology services. The economics of the intercompany agreement will often result in the corporation having no net income, or an overall net loss for a growing company.

If the management services agreement is silent on pricing, that could create issues under a state taxing authority exam. How the MSO fee structure is determined can vary greatly, but there should be support and consideration of fair market value and a regular cadence for payment.

IRS Rule on Consolidation for Income Tax Filings

The IRS clarified this rule in 2020, but tax advisors are finding that many companies with an MSO structure haven’t yet considered whether they would benefit from a consolidation of their income tax return filings.

Generally, two or more corporations can consolidate income tax returns only if they meet the 80% common ownership test or have a parent subsidiary ownership structure. There are two private letter rulings (PLR) issued by the IRS, PLR 201451009 and PLR 202049002, that highlight the IRS’s position on arrangements between MSOs and PCs for consolidated tax filings.

Consolidation could be done if the MSO and PC contractual arrangements provide for beneficial ownership by effectively transferring sufficient attributes of control and economics to the MSO entity, so that the IRS would conclude that the MSO entity is the beneficial owner of the PC for purposes of the consolidated tax filings.

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Consolidation of Corporate State Income Tax Filings

If beneficial ownership is determined between the MSO and PC, the company may file consolidated for federal income tax purposes. If the MSO and PC are a unitary business for state income tax purposes, then certain states could allow or require combined reporting.

A unitary business would typically have a similar ownership structure—such as, common control of more than 50% of the ownership interest—and business activities that result in a flow of value between businesses, like centralized management or functional integration. 

Consolidating a Management Services Organization and Professional Corporation Structure

Organizations should be aware of the following considerations when determining whether to file on a consolidated or combined basis:

  • Not all states allow it. Not all states allow combined or consolidated filing for income tax purposes, and for states that have adopted unitary combined reporting, a unitary business analysis must be conducted to determine whether combined reporting is allowed.
  • Consolidated reporting for federal income tax purposes is only available for C corporation (C corp) taxpayers. Consolidated income tax reporting is only available for an MSO-PC structure with entities that are C corp taxpayers, and this wouldn’t be an opportunity if the MSO is taxed as a partnership.
  • There should be separate accounting records. Consolidation for income tax reporting wouldn’t alleviate the company from the need to keeping accounting records for each separate legal entity. Accounting for the revenues and expenses attributable to each separate entity would continue to be a requirement.

Benefits of a Management Services Organization and Professional Corporation Structure

The benefits of combined or consolidated reporting for income taxes, if available, include:

  • Less federal and separate state income tax returns to be filed, which helps reduce errors
  • Ability to consolidate net operating losses
  • Less separate payments for minimum income tax and franchise taxes
  • Less state income tax accounts to manage
  • Possible elimination of some equity or receipts subject to net-worth or gross-receipts taxes in certain states

We’re Here to Help

For guidance on whether an MSO-PC structure is right for your organization, or if you have further questions on accounting for this type of structure, contact your Moss Adams professional.

You can also visit our Health Care Practice page for additional resources.

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