In this third quarter update, we cover some of the most important tax issues for companies in the technology, clean technology, life sciences, and communications and media industries and touch on what your organization can do to stay ahead of them.
California Proposes Amendments to Revenue Sourcing Regulations
The California Franchise Tax Board recently proposed amendments to the regulations governing revenue sourcing for apportionment purposes. These amendments are expected to be finalized soon and will be effective January 1, 2015. The most significant changes pertain to how securities dealers source income from the sale of marketable securities and how certain types of interest income are sourced. Most interest income (interest from bank accounts used to hold the working capital of a business, for example) continues to be excluded from the apportionment factor by operation of California Revenue and Taxation Code Section 25120(f)(2)(K). While these specific changes generally won’t impact most technology companies, this is a reminder to revisit these regulations and understand how they affect your changing business.
Unclaimed Property Reporting Requirements
Many states impose a November 1 deadline for filing reports of unclaimed property. This area of tax is frequently overlooked but can cause unexpected problems at inopportune times. With the deadline approaching, companies should evaluate whether they own reportable property and are current with state reporting requirements. Learn more in this Alert.
Reporting Requirements for Disregarded Entities Set Up by Foreign Entities
Additional reporting may be on the horizon for disregarded entities (DRE) in the United States that are wholly owned by a foreign person. If proposed regulations are enacted, a US DRE—such as a single-member limited liability company (LLC)—would be treated as a domestic corporation separate from its foreign owner for purposes of reporting, record maintenance, and other compliance requirements. This is the same standard that currently applies to domestic corporations that are at least 25 percent owned by foreign shareholders. Learn more in this Insight.
Recent IRS Guidance Covers Some Overseas Transfer Pricing Basics
If you’re conducting business overseas, it’s important to understand how the IRS approaches international tax issues. Fortunately, the Large Business and International Division of the IRS publishes international practice units (IPUs) that serve as job aids and training materials for IRS staff on these matters. Although IPUs can’t be used, cited, or relied upon as official directives or pronouncements of law, they’re nevertheless a great tool for taxpayers—and their advisors—to gain insight into the IRS’s audit approach. Since the first IPU was published in December 2014, they’ve covered a wide range of international tax issues, from general overviews of major topics to detailed explanations of specific technical areas. Two IPUs (Three Requirements of IRC 482 and Taxpayer’s Affirmative Use of IRC 482) serve as useful reminders to taxpayers of some very basic tenets of US transfer pricing rules under Internal Revenue Code (IRC) Section 482. Learn more in this Insight.
IRS Publishes Final Country-by-Country Reporting Regulations
The IRS released final regulations that require certain large, US-based multinational enterprise groups (MNEs) to report country-by-country information. This will help the IRS perform high-level identification and assessment of companies’ transfer-pricing risk.
Starting with tax years beginning on or after July 1, 2016, US-based MNEs with global revenue of at least $850 million in the prior year will have to submit the new Form 8975, Country-by-Country Report, with their tax returns. Because some foreign jurisdictions adopted these reporting requirements effective on or after January 1, 2016, the IRS intends to allow early filing of Form 8975. This will streamline the process for US-based MNEs that file similar reports in foreign jurisdictions.
Although Form 8975 is still under development, the information it requires is consistent with Action 13 of the base erosion and profit shifting (BEPS) project, conducted by the G20 countries and the Organisation for Economic Co-operation and Development. The final regulations generally adopt the proposed regulations issued in December 2015, but the IRS made certain revisions to address public comments. Learn more in this Alert.
Tax Accounting Updates
In May 2016, the IRS updated its List of Automatic Changes with the issuance of Revenue Procedure 2016-29, which replaces Revenue Procedure 2015-14 issued in January 2015. The new list identifies several accounting method changes that now qualify for automatic consent, removes some changes from the automatic consent list, and modifies several other automatic changes. One new change that’s eligible for automatic consent relates to a taxpayer’s treatment of start-up costs under Section 195.
Transaction Costs Deductibility Reminder
We’re seeing a lot of transactions in our market, so we want to remind our clients of the IRS rules regarding the deductibility of certain transaction costs. IRS Revenue Procedure 2011-29, issued in April 2011, provides a safe harbor method for allocating success-based fees. It allows certain taxpayers to elect to treat 70 percent of success-based fees paid or incurred by the taxpayer as an amount that does not facilitate a transaction under Treasury Regulation Section 1.263(a)-5, while requiring that the remaining 30 percent be capitalized. These provisions are complicated and require a thorough understanding of both the transaction and tax law.
Section 382 for Technology Companies
Technology companies that plan to use net operating losses and tax credits at a later time may be out of luck if they’ve had an ownership change. Given the tricky definition of such a change in IRC Section 382, they may not even realize they’ve had one. Moss Adams gave an overview of Section 382 during a webcast to help technology companies recognize the impact the rules can have on their ability to use tax attributes. Learn more about this webcast.
Washington B&O Tax Annual Reconciliations
Businesses subject to the Washington State Business and Occupation (B&O) tax that also reported apportionable income—service and other activities or royalties, for example—in 2015 are required to submit an annual reconciliation by October 31, 2016. Late filing fees may apply.
The state of Washington applies an economic-nexus standard rather than a physical-presence standard to certain activities. This means an out-of-state business without any physical presence in Washington may in fact be doing business in Washington. That business is required to file the annual reconciliation in addition to a Washington Combined Excise Tax Return. Learn more in this Alert.