CARES Act Relief Payments to For-Profit Medical Care Providers May Be Taxable on Receipt

May 07, 2020

For-profit medical care providers that receive CARES Act grants to provide funds for healthcare-related expenses or lost revenues attributable to the coronavirus (COVID-19) may be taxed for those receipts. Because Congress did not otherwise exclude or address the tax treatment of these grant payments, taxability would be determined based upon applicable tax law and guidance, which require that such funds be reported as taxable income. For-profit healthcare providers that received these grants should consider this issue and its resulting tax implications.

Morgan Lewis is forming a coalition in an attempt to bring this unintended consequence to the attention of Congress and the relevant agencies. Please contact us if you wish to be included in information relating to this important matter.

The Public Health and Social Services Emergency Fund

The Public Health and Social Services Emergency Fund provisions of the CARES Act, found in Division B—Emergency Appropriations for Coronavirus Health Response and Agency Operations—create a $100 billion fund designed “to prevent, prepare for, and respond to coronavirus, domestically or internationally, for necessary expenses to reimburse, through grants or other mechanisms, eligible health care providers for health care related expenses or lost revenues that are attributable to coronavirus” (Relief Payments). (Emphasis added).

The CARES Act anticipated that the Secretary of Health and Human Services (HHS) would “review applications and make payments under this paragraph in this Act.” HHS began issuing Relief Payments, without applications from recipients, on April 10, 2020. HHS made the first tranche of Relief Payments based upon each healthcare provider’s share of total Medicare fee-for-service reimbursements in 2019. Within 30 days of receipt, recipients must sign an attestation confirming receipt and agreeing to the Relief Payment Terms and Conditions. Noncompliance with any of HHS’s Terms and Conditions for the Relief Payments is grounds for the Secretary to recoup some or all of the payment made.

The Taxability of the Relief Payments

In enacting the CARES Act, Congress did not address the taxation of the Relief Payments. In the absence of guidance otherwise, the taxability of the Relief Payments would be determined by applying the applicable provisions of the Internal Revenue Code, published guidance, and case law.

Income Inclusion Resulting from Receipt of Relief Payment

Under 26 USC § 61(a), gross income includes all income from whatever source derived unless specifically excluded by law. For corporations, prior to the passage of the Tax Cuts and Jobs Act (TCJA), some grants from governmental entities may have been excludible from gross income as a contribution to capital.[1] The TCJA repealed this exclusion, unless the grant is part of a plan approved before the passage of the TCJA. With respect to individuals, certain government grants are specifically excluded from gross income in certain circumstances, including educational grants when used for qualified tuition and related expenses under 26 USC § 117 and grants issued to low and moderate-income individuals to assist them in their individual needs are nontaxable under general welfare principles (see CCA 200431012).

As enacted, the CARES Act does not specifically exclude the Relief Payments from recipients’ gross income and the Internal Revenue Code does not contain a specific income exclusion for the Relief Payments. Additionally, grant payments reimbursing taxpayers for lost revenues or operating expenses are generally held to be includible in gross income.[2] Accordingly, without additional guidance, the Relief Payments would be includible in a recipient’s gross income for federal income tax purposes.

Timing of Income Inclusion Resulting from Receipt of Relief Payment

The Internal Revenue Code provides that the amount of any gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless such amount is to be properly accounted for as of a different period.[3]

In situations where a taxpayer has received funds and its right to retain such funds is unclear, courts have looked to the “claim of right” doctrine to determine when and in what amounts a taxpayer should recognize an income inclusion for tax purposes. Under the claim of right doctrine, if a taxpayer receives money under a claim of right and without restriction as to its disposition, then the taxpayer has received income that is required to be reported even though it may be determined at a later date that the taxpayer is not entitled to retain the money and may be ordered to restore its equivalent.[4] The claim of right doctrine is based on the concept of annual reporting of income. Under this concept, income is determined at the close of the taxable year regardless of possible subsequent events.

Based on the restrictions placed on the use of the Relief Payments, the recipients do not have perpetual control over the funds and are not without restriction as to their disposition. However, an entity that has received funds—either through an automatic disbursement from the government or based upon an application for funds—presently has access to and the ability to use such funds. Claim of right cases are inherently factual, and without guidance from Congress, the Internal Revenue Service (IRS), or the US Department of the Treasury, specifically addressing the timing of the taxability of the Relief Payments, recipients should assume that they are taxable in the year of receipt under 26 USC §§ 61 and 451.


  • A legislative fix may be needed if Congress intended to treat the Relief Payments as not taxable for all recipients. Further, if the Relief Payments are ultimately treated as tax exempt income and the intent is also to allow the deductibility or capitalization of the associated expenses, the legislation should address that issue as well.
  • The application of federal tax principles to other CARES Act programs has caused concern on Capitol Hill recently. For example, the IRS issued Notice 2020-32 addressing the deductibility of certain expenses incurred in a taxpayer’s trade or business when a taxpayer receives a loan pursuant to the Paycheck Protection Program (PPP) and concluded these expenses were not deductible. Legislators quickly responded that the position taken in Notice 2020-32 was inconsistent with the policy objectives of the PPP and the CARES Act and have announced plans to take corrective legislative measures, if necessary. Despite these concerns, Treasury Secretary Steven Mnuchin has remained insistent that the position taken by the IRS is correct and should be considered “Tax 101.” For a detailed discussion on Notice 2020-32 and the issues raised by this guidance, read our Taxpayers Receiving PPP Loans: IRS Provides Important Guidance on Expense Deduction LawFlash.
  • Review of compliance with the Relief Payment Terms and Conditions is critical. Providers will want to be vigilant in how they allocate Relief Payments to address COVID-19-related healthcare expenses and revenue losses. Some providers are creating separate bank accounts to assist with the tracking and administration of such funds. In the event that the Relief Payments are taxable, timing of the income inclusion can be problematic for taxpayers who have segregated the funds in this way and are only utilizing the funds when it is determined they qualify for the Relief Payments and can substantiate the amount of qualifying expenses or lost revenues.
  • In the absence of clarifying legislation, two questions must be answered: Are Relief Payments gross income? And, if so, when must providers include the gross income on their tax returns, impacting their estimated tax payments? In the absence of guidance to the contrary from the IRS, for planning purposes, recipients should assume that Relief Payments are gross income when received.
  • Even if the IRS believes that Relief Payments are gross income, the IRS should consider issuing safe harbor guidance to prevent recipients from having to include them in income if the recipient ultimately determines to return them. Generally, the IRS has broad discretion to regulate accounting methods to assure that they clearly reflect income. The circumstances attending HHS’s unsolicited payment of Relief Payments and the likelihood that some recipients will eventually determine that they are not entitled to keep the payments or do not wish to keep them, the IRS should assure that the claim of right doctrine is not applied in a manner that requires premature inclusion of Relief Payments in income.

Legislative Action May Be Required

As discussed above, a legislative fix may be needed if Congress intended to treat the Relief Payments as not taxable for all recipients. Morgan Lewis is currently working with clients in an effort to seek clarification on both the taxability of the Relief Payments, and if taxable, the timing of the income inclusion. If you are interested in learning more or joining these efforts, please contact Tim Lynch at 202.731.2021 or via email.


For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington DC
Jennifer Breen
Timothy P. Lynch
William F. Nelson
Howard J. Young

[1] 26 USC § 118.

[2] 26 USC § 61(a); see also Brokertec Holdings, Inc. v. Commissioner, T.C. Memo. 2019-32 (citing cases but finding the grants at issue qualified for the exclusion under 26 USC § 118), appeal docketed, 19-2603 (3d Cir.).

[3] 26 USC § 451.

[4] North American Oil Consolidated v. Burnet, 286 U.S. 417, 424 (1932).