Time to Apply 2020 Tax Lessons
2020 is finally behind us, and now it’s time to apply what we’ve learned to devise a strategic tax plan for 2021. Perhaps one of the most important business lessons from this past year is to be vigilant and nimble.
Business leaders are becoming increasingly innovative, taking advantage of relief opportunities as soon as they become available, and adjusting their operations and objectives to meet changing demands and mitigate challenges.
The rapid adoption of technology to enable businesses to shift their operations to a remote environment was beneficial for many companies in the technology space, but not all were as lucky. Whether your business experienced positive change or significant challenges in 2020, it’s a good idea to remain alert to new relief opportunities and potential tax code changes in 2021 and be ready to adjust course as necessary to secure your organization’s future success.
You should have a candid tax planning discussion with your advisors early in the year to be ready to act quickly for maximum benefit to your company.
Change is coming
While many tax experts believe that significant changes to the tax code will not take effect until 2022, there are a number of proposed changes that could affect your tax planning in 2021:
- Raising the corporate tax rate to 28% from 21% Implementing a 15% “alternative minimum tax” (AMT) for corporations with book income above $100 million
- Increasing the global intangible low tax income (GILTI) rate on foreign profits to 21% from 10.5%
- Repealing the temporary expansion of net operating losses (NOLs)
- Eliminating deductions for expenses associated with moving jobs out of the US
- Requiring companies to return public investments or tax benefits when they move US jobs overseas
- Expanding tax breaks and access to 401(k) plans
- Adding tax credits for employers that hire a person with a disability or invest in making their workplace more accessible
- Expanding tax credits for energy-efficient buildings
- Granting a 10% “Made in America” tax credit
As we’ve learned in the last year, things could change quickly. Having a tax plan in place is important, but the conversation with your advisors should be frequent and candid. Your plan should be nimble enough to withstand potential changes. Be prepared to act swiftly to take advantage of timely relief opportunities by remaining vigilant.
You could still take advantage of some CARES Act provisions
The Coronavirus Aid, Relief and Economic Security (CARES) Act contained several beneficial provisions for technology and public companies, some of which you could still benefit from:
- You may be able to take larger deductions for net operating losses (NOLs). The CARES Act grants a five-year carry-back period for NOLs arising in tax years beginning January 1, 2018 and ending December 31, 2020. It also temporarily suspended the 80% of taxable income limitation on the use of NOLs, allowing taxpayers to fully offset taxable income during the allowed tax years, regardless of when the NOL was generated.
- Qualified improvement property (QIP) is eligible for 100% bonus depreciation. The QIP period is now 15 years – this shorter cost-recovery period allows new QIP to be eligible for 100% bonus depreciation, applied retroactively to property acquired and placed in service after December 31, 2017 and includes tax year 2020.
You may consider filing amended 2018 and 2019 returns to take advantage of these and other potential benefits. Keep in mind that some CARES Act provisions may change under Biden’s administration, so you should take action on current provisions while you still can. Have this discussion early on with your tax advisors to determine the best course of action for your organization.
Don’t overlook the R&D tax credit
The research and development (R&D) tax credit applies to business activities that involve developing new or improving existing processes, software or products. This is especially beneficial for businesses reporting losses, as it could help to offset some of that lost revenue.
If your company has or is planning to work on these types of projects, you should contact your tax advisor to get an R&D tax credit study and determine whether your business qualifies for this dollar-to-dollar offset of income tax liability. A qualified professional with R&D tax experience can help you assess your eligibility, calculate the amount of tax savings you could expect from this credit, and advise and assist you with proper documentation for substantiating the credit.
In addition, start-ups with less than $5 million in revenue can, in the absence of a tax liability, instead apply the R&D tax credit to offset up to $250,000 in payroll taxes each year for up to five years.
As it stands now, 2021 will be the last year you can expense research and development costs rather than amortize them. After December 31, 2021, taxpayers will be required to capitalize and amortize research or experimental expenditures – which will include software development costs – over a period of five years.
Compliance with ASC 740 should remain a priority
Complying with ASC 740 – which governs accounting for income taxes and requires businesses to analyze and disclose income tax risks – is one of the most complex tax challenges public companies face. ASC 740 mistakes can result in restating financial statements and potential enforcement actions from the US Securities and Exchange Commission (SEC).
If your company does not have an internal tax department, a qualified tax advisor can calculate and prepare your global income tax provision, analyse uncertain tax positions and prepare the related footnote disclosures in the company’s financial statements to withstand the scrutiny of regulators. Having the appropriate accounting controls in place early can help you avoid headaches later in the year.
Wayfair ruling may affect your sales tax collection and reporting
If your technology company sells Software-as-a-Service (SaaS), mobile apps, hardware or other tangible goods, you need to understand how the states where your customers reside interpret Wayfair-related laws, as this will impact your collection and reporting of sales tax.
The coronavirus pandemic significantly impacted state and local governments’ tax revenues, so it’s possible they will look to tax rate increases to offset losses. Your tax professional should understand where you are doing business and analyze the sales tax requirements in each state.
In addition to sales tax nexus, technology public companies should review whether remote workers impact their state income tax, franchise tax, or sales and use tax. Many states provided COVID-19 relief to companies with remote workers to alleviate or avoid creating state tax nexus outside their home state, but this relief may not apply in 2021. If you have remote employees outside the state where you normally conduct business, you should consult a tax professional to advise on the potential impact of such arrangements.
As companies dive into 2021 tax planning, technology public companies should apply the lessons learned in 2020 to make the best decisions for their business. An early, candid discussion with a trusted tax advisor is the first step, but it should be a continuous conversation. As we learned in the last year, circumstances can change quickly – have a nimble plan that allows for timely adjustments and remain vigilant and well-informed of beneficial opportunities to be able to act quickly when relief is available.