There have been many notable tax changes in 2019. While the updates weren’t as substantial as those in 2018, they included important international updates, federal tax guidance, and key state legislation responding to the US Supreme Court’s South Dakota v. Wayfair, Inc. (Wayfair) ruling.
Here are the top twelve tasks to tackle across the federal, state, and international tax landscapes before January 2020.
1. Account for net-operating-loss changes.
The tax reform reconciliation act of 2017, commonly referred to as the Tax Cuts and Jobs Act (TCJA), limits the deduction for net operating losses (NOLs) arising in years beginning after December 31, 2017, to 80% of taxable income before deduction. These limited NOLs now receive an indefinite carryforward period.
Additionally, the NOL carryback is eliminated for NOLs arising in years ending after December 31, 2017. NOLs generated prior to 2018 won’t be subject to the 80% limitation and remain limited to the 20-year carryforward period.
2. Review accounting methods.
Companies should review their tax accounting methods every year to verify they’re properly managing their tax burden and exposures. As companies adopt the new revenue recognition standards, they may need to change their deferred-revenue tax accounting methods.
When determining how to properly reflect income recognition and deferral, companies need to review their generally accepted accounting principles (GAAP) analysis as well as new tax laws and treasury regulations. There are at least six different ways to file Form 3115 to report changes in revenue recognition, so it’s important to know which method and related change procedure applies.
3. Explore qualified small business stock exclusion.
As discussed in our 2019 Q3 Update, the Internal Revenue Code’s qualified small business (QSB) gain exclusion is very valuable, so it can be worthwhile to figure out if your stock qualifies for this exclusion.
Qualified small business stock (QSBS) is stock held in a QSB. An investor may exclude between 50% and 100% of the capital gain on the sale of QSBS depending on when the stock was first acquired.
While the exclusion provides financial benefits to shareholders, there are still uncertainties relating to technical issues and requirement satisfaction, documentation, and communication.
4. Address employment issues.
Throughout 2019, we’ve seen an increased number of employment-related issues from our clients. These issues include classification and technical questions raised by the IRS, state tax authorities, financial statement auditors, and due-diligence reviewers.
In the 2018 Dynamex Operations v. Superior Court (Dynamex) ruling, the California Supreme Court determined that workers are employees instead of independent contractors. This ruling creates classification challenges for many employers, who now need to verify that their workers are properly classified as employees.
This ruling could have implications for companies’ payroll-tax obligations and employee benefits. To get up to speed, companies can review major classification changes in our article.
Convenience of the Employer Requirement
In January 2019, the IRS issued Technical Advice Memorandum (TAM) 201903017, providing guidance on tax-free meals to employees. The memorandum states that a business objective without a specific policy doesn’t meet the convenience of the employer requirement, even if it’s communicated to employees and meaningfully enforced.
Companies should review their policies and determine if a payroll withholding tax contingency accrual, including estimated penalty and interest consequences, may be applicable for financial statement reporting.
The TCJA changed the rules for the deductibility of employee fringe benefits. Learn about changes to employee deductions and exemptions in our article.
5. Claim and defend R&D tax credits.
R&D credits continue to provide important tax opportunities to the life sciences industry. The payroll tax-credit provision, in particular, can be helpful for early-stage companies. Learn how start-up companies can apply the credit against their payroll taxes for up to five years in our article.
In an April 2019 case, Siemer Milling Company v. Commissioner of Internal Revenue, the US Tax Court disallowed R&D credits to a taxpayer because the taxpayer failed to retain and provide sufficient documentation supporting claimed R&D credits. This case is a reminder that it’s critical for companies to retain documentation of research activities and be prepared to defend their research credits.
Read more about the court case and steps your company can take to remain compliant in our article.
Orphan Drug Tax Credit
The TCJA reduced the orphan drug tax credit (ODC)—a federal credit available to pharmaceutical companies that are working to find cures for certain rare diseases that affect small populations. However, the credit is still more generous than the regular R&D credit.
Learn more about ODC benefits and limitations in our article.
6. Prepare for the medical device excise tax.
The unpopular medical device excise tax was originally enacted as part of the Patient Protection and Affordable Care Act in 2010.
Previously suspended, the tax was expected to become effective again in 2018. However, as part of the January 2018 budget deal, the excise tax was suspended until January 1, 2020. Learn more about the tax and implications for medical device companies in our article.
7. Track tax changes.
Many states are still updating their laws to account for changes brought about in the TCJA. In 2019, a number of states enacted legislation to adopt all or a portion of the TCJA.
Nexus and Apportionment
States are also changing their income tax nexus standards to expand nexus to companies that may not have traditional nexus within the state. States are also changing the way they calculate the amount of income that’s apportioned to their state.
Companies should review their income-tax nexus for each state in which they operate to make sure they don’t have unexpected tax and filing requirements.
States continue to enact legislation to tax out-of-state companies in response to the 2018 US Supreme Court Wayfair decision. This legislation impacts all companies and affects income taxes and sales taxes. Nearly all states have enacted economic nexus laws for sales tax.
Sales tax exposures can grow quickly, so companies should make sure they’re properly assessing their nexus and taxability. These exposures are the most common issues found in tax due diligence cases. Learn more about review and compliance strategies in our article.
8. Understand the complexities of Form 5471.
Since the passage of the TCJA, the formation, taxation, and administration of international operations have become more burdensome. The TCJA introduced a number of significant changes to US international tax compliance effective for 2018 tax filings, including Global Intangible Low-Taxed Income (GILTI), Foreign-Derived Intangible Income (FDII), and IRC Section 965 previously taxed earnings and profits (PTI) reclassification.
In general, the scope and risk of information returns, such as Form 5471, have significantly increased. There are additional proposed changes that would make these tax filings even more complicated.
9. Utilize the FDII deduction.
The FDII deduction is a new benefit for C corporations that make sales from the United States to foreign persons. The deduction is based on foreign sales and is available to all corporations, even if they don’t have foreign operations.
For more information about FDII activities and calculations, read our article or watch our on-demand webcast.
10. Assess GILTI provisions.
Companies with foreign subsidiaries need to be aware of GILTI provisions, which affect US companies that own 10% or more of a controlled foreign corporation (CFC). These US shareholders may be required to include in their taxable income all or a portion of the foreign corporation’s taxable income in each year.
Learn more about GILTI’s impacts on US partnerships and S corporations in our article.
11. Reexamine international operations.
Companies should review their international operations annually to verify that their structure meets their evolving operational needs. These top tax requirements and savings opportunities can help multinationals review their international filings.
12. Stay informed about the value-added tax.
Value-added taxes (VATs) are frequently overlooked, but tax authorities assess these broad taxes relatively indiscriminately. Countries are continuously updating their VAT rules—adapting them for the digital economy—and broadening the transactions subject to VAT.
Companies should closely watch these taxes to determine how changing VAT requirements may impact their businesses.
We’re Here to Help
Implementing federal, state, and international tax changes can create operational and compliance challenges for many companies. To learn more about 2019 updates or how your company can implement the changes, contact your Moss Adams professional.