An abundance of proposed regulations, new tax laws, and tax opportunities emerged during Q3 2019 that will impact a variety of businesses in the technology, communications and media, and life science industries, both domestically and internationally.
Below is an overview of recent updates that you and your business may want to keep front of mind.
Proposed Regulations for Electronic Commerce Transactions
Although digital transactions have existed for more than 20 years, the continuing evolution and increasing popularity of business models involving digital content and cloud computing prompted the IRS to provide much-needed guidance for taxpayers to determine how to classify and source digital and cloud-related income.
The proposed regulations classify electronic commerce transactions as a sale, lease, license, or provision of services. The classification is important when applying various international provisions of the Internal Revenue Code (IRC).
A comment period is now open for the proposed regulations, and additional insight on this topic will be provided by our professionals shortly.
Qualified Small Business Stocks
As venture-backed companies increase in value, the tax benefit of the qualified small business gain exclusion provided in the IRC is becoming more valuable. Though more businesses seem to be taking advantage of the benefit, many questions remain relating to technical issues and requirement satisfaction, documentation, and communication.
Qualified small business stock (QSBS) is the stock held in a qualified small business (QSB). An investor may exclude between 50% and 100% of the capital gain on the sale of the QSBS depending on when the stock was first acquired.
To receive the benefit, the IRC requires that QSBS shareholders:
- Not be shareholders in a corporation
- Have acquired the stock at its original issue and not on the secondary market
- Have purchased the stock with cash or property, or accepted it as payment for a service
- Have held the stock for at least five years
There are also requirements for companies holding QSBS, including the following:
- The aggregate gross assets of the corporation must not have exceeded $50 million at the time of and immediately after the issuance of the stock
- At least 80% of the issuing corporation's assets must be used in the operations in a qualifying trades or businesses
Investors and employees of QSBs may also want to consider taking advantage of the QSBS benefit.
Proposed Regulations for New Tax Revenue Recognition
On September 5, 2019, the IRS issued proposed regulations under IRC Sections 451(b) and (c) addressing the tax year of income inclusion for accrual method taxpayers. The proposed regulations reflect the amendments to Section 451 made by the 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA). A new revenue procedure was also issued to help taxpayers address changes to accounting methods due to the new guidance.
The TCJA modified Section 451 and treatment of items of gross income in relation to the all-events test for taxpayers using an accrual method of accounting. According to the proposed regulation, any item of gross income—or portion thereof—won’t be treated as met any later than when the item—or portion thereof—is included in revenue for financial accounting purposes on an applicable financial statement (AFS) or other financial statement specified by the IRS.
The proposed regulations provide a number of definitions and clarifications to highlight tax differences with revenue recognition for generally accepted accounting principles (GAAP) for Accounting Standards Codification Topic 606. They also provide guidance on permitted deferral methods for certain advance payments for taxpayers with or without an AFS.
Our professionals will provide additional insight into how the proposed regulations may impact businesses shortly.
California Conformity with Tax Reform
In July 2019, California enacted legislation that incorporated some of the provisions of TCJA into state law. These provisions generally favor taxpayers and help simplify tax calculations and reporting.
Elements of the TCJA now incorporated into California law include:
- Increase of thresholds that permit more taxpayers to use simplified methods of accounting
- Disallowance of net operating loss carrybacks for losses sustained in tax years beginning after December 31, 2018
- Treatment of like-kind exchange limited to exchanges of real property under California’s personal income tax and corporate income tax provisions
To learn more about the new California law, read our Alert.
California Marketplace Relief
The California Governor’s Office of Business and Economic Development (GO-Biz) announced the application rounds for California Competes Tax Credits for fiscal year 2019–2020. Total credits of up to $237 million are available to successful applicants, with upcoming application rounds in January and March 2020, respectively.
The CCTC is available to businesses—regardless of size—that plan to add full-time jobs in California with specific requirements.
To learn more about the CCTC application process, dates, and available funds, read our Alert.
Final Global Intangible Low-Taxed Income Regulations
On June 21, 2019, the final Global Intangible Low-Taxed Income (GILTI) regulations were published, dramatically changing reporting requirements for US partnerships and S corporations.
Under the proposed regulations published in September 2018, GILTI inclusions were to be calculated at the entity level and reported on each owner’s Schedule K-1. However, this approach introduced a significant tax burden for individuals.
Under the final regulations, GILTI is now calculated at the partner and shareholder level. This change means that any partner or S corporation shareholder with an interest in a controlled foreign corporation (CFC) less than 10% generally won’t have a GILTI inclusion from that entity.
Our professionals will provide additional insight on the final GILTI regulations shortly.
French Digital Services Tax
In July, France became the first country in Europe to impose a Digital Services Tax (DST). The new law imposes a 3% gross receipts tax on social media and targeted advertising services. The tax only affects companies with at least €750 in French gross revenues.
Due to the particularities of the DST, companies may need to increase their international compliance and data-collecting efforts to remain compliant. Collecting monthly receipts for the enumerated services and computing the DST may be burdensome, but maintaining this practice can help your company provide documentation to the French tax authorities if it’s requested.
In addition to France, Hungary has also implemented a DST. Other European countries that have proposed plans for a DST, include:
Countries that have announced plans for a DST include:
- Czech Republic
To learn more about the tax and how your business may be impacted, read our Alert.
United Kingdom Value-Added Tax Changes
Britain’s impending exit from the European Union and recent changes to the value-added tax (VAT) rules may leave US sellers of goods to the United Kingdom unsure of how to remain compliant with new regulations.
Adding to the complexity, sellers must also be familiar with the United Kingdom’s new tax initiative, Making Tax Digital, which aims to evolve UK tax operations to become more effective and efficient through a digital transformation.
To learn more about how to prepare your business for these changes, watch our Webcast.
We’re Here to Help
These new developments will impact every industry and business differently. To learn more about these updates and how your business may need to respond, contact your Moss Adams professional.