Tech Industry Year-End Planning Tips
It’s that time of the year again...leftover turkey sandwiches, tightly fitting pants, an endless array of advertisements and shopping malls and, of course, anxiety over what needs to be done before the end of the year in order to ensure we minimize taxes and effectively plan for 2020. For those of you in the tech industry, this means taking into account any changes in tax law.
In 2020, Many Tax Laws Will Remain the Same
First, some good news: after having experienced many significant tax law changes in the past few years (see: TCJA (2017), PATH Act (2015), American Taxpayer Relief Act (2012), and Affordable Care Act (2011)), we are thankfully experiencing a much-needed year of stability when it comes to any sweeping tax reform.
Many of the programs and tax laws in effect in 2019 will remain in place for 2020, including:
- R&D tax credit and associated payroll tax offset for qualifying small businesses
- Work Opportunity Tax Credits
- 100% bonus depreciation rules
- Section 199A deduction
- Qualified small business stock capital gain exemptions
- Decreased federal C corporation tax rate (21%)
The R&D credit is even more valuable to businesses thanks in part to the repeal of the corporate AMT and changes to companies’ ability to offset current year earnings with prior year losses. Net operating losses (NOLs) sustained in 2018 and beyond will no longer offset 100% of each subsequent year’s earnings; the NOL deduction is capped at an 80% offset. This means that corporations will start incurring federal tax on 20% of their current year earnings the very first year they are profitable (unless they have losses from before 2018, because losses from those years remain eligible to offset 100% of taxable income earned in future years). In short, the change in NOL provisions encourages corporations to seek credits such as the R&D credit, Work Opportunity Tax Credit, and many others much sooner than they would have in the past.
Consulting With a Trusted Tax Advisor Is Critical
Unfortunately, some of the less business-friendly tax laws that went into effect in recent tax reform will remain in place. These include increased exposure to companies for sales and use tax reporting resulting from the Supreme Court decision in South Dakota v. Wayfair and the ever-increasing complicated reporting of foreign subsidiary reporting and related GILTI Global Intangible Low-Taxed Income (GILTI) income inclusions.
For many tech companies, funding and scaling are a way of life, and as your company continues to expand in size and geographical footprint, the need to proactively consult with your trusted tax advisor becomes more and more prominent. The changes in state and local tax in recent years have increased this need exponentially. Whether you are selling physical goods, Software as a Service (SaaS), or an outright service product, states are becoming increasingly aggressive as to which revenue streams are subject to sales tax and how and when they are able to subject your company to the requirement to collect and remit sales tax.
At the end of the day, the seller is ultimately responsible for this tax liability (plus penalties and interest) if sales tax isn’t collected. In many instances, going to your customer base and asking them to pay sales tax on retroactive transactions is not a solution. This unreported liability often first comes to light when going through a round of funding or an exit. The liability can lead to greatly diminished multiples or an outright failure of the deal. This has become one of the largest issues facing fast-growing companies in the United States in the past 12 to 24 months.
Our economy has drastically shifted in the past 10 years away from physical goods to more service-based spending, and as with all things government, it has taken considerable time for the states to adjust and enact laws. However, that time has come and the state and local tax landscape is quickly shifting to adapt to the changes brought about in large part by companies operating in the technology space. Speak to your CPA, plan ahead, maximize losses at the state level, minimize income apportioned at the state level, stay ahead of new collection and remittance obligations, and don’t become the poster child for disrupted deals and foreclosed companies.
Work to Avoid Audits and Minimize Taxes
As our world continues to shrink and international operations become more commonplace, we are seeing an increase in the attention paid to how global profits are divided between various countries, as well as how and when global profits are being included in the U.S. tax net. 2018 saw a monumental shift in our international tax laws, income recognition, and reporting requirements. Long gone are the days of ambiguity as reporting on international operations has tightened significantly. Technology companies are often no longer able to delay U.S. taxation on earnings from overseas operations through non-repatriation of foreign earnings back to the United States due, in large part, to the GILTI income inclusion changes that went into effect in 2018. These law changes and increased scrutiny have created an increased need to plan effectively and ensure that the transfer pricing policies and inter-company operations are adequately designed to mitigate unwanted audits and effectively minimize global tax rates.
As we approach the end of the year, check with your CPA to ensure identification of opportunities available to your company. Has the CPA accurately assessed any potential risk areas and issues before they become problematic? At a minimum, you should discuss eligible ways to maximize current year R&D spending and to take advantage of available prepayment options and other basic strategies that are afforded to you under your applicable method of accounting. Of course, if you don’t have a CPA, then we have professionals here at CLA who are more than willing to provide some guidance.