The Internal Revenue Service is offering some relief to medical device companies on the excise tax that’s part of the Affordable Care Act.
The IRS issued Notice 2018-10 giving relief, for the first three calendar quarters of 2018, to medical device manufacturers, producers and importers from the failure to deposit penalties imposed by Section 6656 of the tax code, provided they meet certain requirements.
Section 4191 of the tax code imposes a 2.3 percent excise tax on the sale of certain medical devices by manufacturers. Section 174 of the PATH Act of 2015 provided a two-year moratorium on the tax for the beginning Jan. 1, 2016, and ending on Dec. 31, 2017, so sales of taxable medical devices during the moratorium period weren’t subject to the tax. Without further legislative action, the medical device excise tax is supposed to apply to sales of taxable medical devices on and after Jan. 1, 2018.
Republicans in Congress want to include a repeal of some of the taxes in the Affordable Care Act, including the medical device tax, as part of their continuing resolution to avoid a government shutdown. The resolution was passed by House Republicans on Thursday night, but its prospects in the Senate were in doubt Friday as Democrats also want protection for “Dreamers,” undocumented immigrants who were brought to the U.S. as children by their parents, included in the budget resolution.
The medical device excise tax is imposed on the sale or use of taxable articles by manufacturers, producers and importers. It’s reported on Form 720, Quarterly Federal Excise Tax Return. The Excise Tax Procedural Regulations require every taxpayer who is required to file Form 720 to make tax deposits for each semimonthly period in which the tax liability is incurred. The deposit for each period isn’t supposed to be less than 95 percent of the amount of net tax liability incurred during the semimonthly period unless a safe harbor applies. Under the safe harbor, any taxpayer that filed a Form 720 reporting the tax for the second preceding calendar quarter (also known as the look-back quarter) is considered to have met the semimonthly deposit requirement for the current quarter if: (1) the deposit for each semimonthly period in the current calendar quarter is not less than one-sixth of the net tax liability reported for the look -back quarter; (2) each deposit is made on time; (3) the amount of any underpayment is paid by the due date of the return; and (iv) the person’s liability doesn’t include any tax that was not imposed during the look-back quarter.
If a taxpayer fails to make the deposits as required, the IRS can withdraw their right to use the safe harbor rules. There’s a penalty in cases where a taxpayer fails to make timely deposits, but taxpayers can avoid the penalty if they’re able to make an affirmative showing that the failure is due to reasonable cause and not to willful neglect.
With the end of the moratorium on the medical device excise tax, taxpayers are required to resume making semimonthly tax deposits. The first deposit, covering the first 15 days of January, is due by Jan. 29, 2018. But in consideration of the short time frame between the end of the moratorium period and the due date of the first deposit and in the interest of sound tax administration, the IRS and the Treasury Department have decided to provide temporary relief from the penalty for the first three calendar quarters of 2018. The normal rules under Section 6656 and the corresponding regulations will apply with respect to deposits due during the fourth calendar quarter of 2018 and thereafter. Beginning in the third calendar quarter of 2018, medical device manufacturers can use the safe harbor rules for semimonthly deposits due during that quarter. For purposes of the safe harbor, the first calendar quarter of 2018 is the look-back quarter for deposits due during the third calendar quarter.
During the first three calendar quarters of 2018, the IRS won’t impose penalties on taxpayers who are liable for the medical device excise tax that fail to make timely deposits of the medical device excise tax relating to special deposits required in September, provided the taxpayer demonstrates a good faith attempt to comply with the requirements and the failure wasn’t due to willful neglect.
After that, a taxpayer can avoid penalties by making an affirmative showing that the failure to deposit is due to reasonable cause and not to willful neglect. During the third and fourth calendar quarters of 2018, the IRS said won’t exercise its authority to withdraw the taxpayer’s right to use the deposit safe harbor rules due to a failure to make deposits as required, provided the taxpayer satisfies the requirements for the look-back quarter at issue.
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