In this first 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.
Possible Tax Reform
With Congress and the White House both controlled by the Republican party, there’s a general consensus among those in Washington that now is the time to enact significant tax law changes. However, reaching an agreement on the details of such comprehensive tax reform will be incredibly complex, and it’s not clear how the legislative process is going to play out. Some things to be aware of:
- Health care changes. To date, Congress has been focused on repealing and replacing the Affordable Care Act, a task seen by many congressional Republicans as essential before they could get to work on tax law changes. However, the House pulled its legislation on Friday, March 24, after it became clear there weren’t enough votes for it to pass. This inability to address health care may complicate their efforts on tax reform.
- Reconciliation process. Sixty votes are required to pass legislation in the Senate. This means a bill would need some Democratic support in the Senate. However, a special reconciliation process could be used that only requires 51 votes to pass, but it would place additional requirements on the legislation, making the process even more difficult.
- Rate reduction. The president and congressional Republicans have proposed significant reductions in the income tax rates for businesses (among other changes), but there isn’t agreement on how to pay for this rate reduction. One option proposed by Republicans in the House of Representatives is a “border adjustment tax” that’s designed to incentivize exports and penalize imports. However, some congressional Republicans are concerned about this type of tax as they believe it could increase consumer prices on many goods purchased in the United States, so it may not be a viable option without more support.
The details of any potential tax reform, including when such changes would be effective, will likely change as the legislative process moves forward. It’s also hard to know how long the process may take. The last time any significant tax reform was enacted was in 1986, and the process took more than one year.
FBAR Reporting Dates
FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), used to be due June 30. Now it’s due April 15 (or April 18 this year), but it can be automatically extended to October 16. This form is required by any US person who has a financial interest in, signature, or other authority over any foreign financial accounts if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. Corporations based in the United States and their executives are often required to file this form for their foreign subsidiary financial accounts. The penalties for failure to file start at $10,000 per year.
Export Tax Incentives for the Tech Industry
The tech ecosystem has been global from its earliest days, and exports are good for the economy. While tech companies regularly take advantage of R&D credits, there are other federal tax incentives that may be available. An Interest Charge-Domestic International Sales Corporation (IC-DISC) is used extensively by exporters in the manufacturing and agricultural sectors to lower overall US tax rates, but it’s often overlooked in the tech community.
What’s an IC-DISC?
IC-DISC is a corporate structure that can be implemented by manufacturers, resellers, and other exporters of goods made in the United States. The IC-DISC delivers tax benefits by carving off a portion of profit earned on export sales and converting the profit into dividend income, which reduces the tax rate from 35 percent to 23.8 percent (including the net investment income tax).
Around since the 1970s, IC-DISCs are largely paper entities and are exempt from most substance and arm’s length pricing rules. At the present time, IC-DISCs are the one tax incentive specific to exporters.
What Type of Activity Qualifies?
There are three criteria. Goods must:
- Have at least half of the value provided by domestic content
- Be exported
- Be profitable
How Would a Loss-Making Tech Company Qualify?
The IC-DISC rules have the ability to allocate and apportion expenses between domestic and export sales. One of the most beneficial rules applies when R&D is performed in the United States, which largely characterizes the cost of R&D as a domestic expense. We’ve often found that walking through selling, general, and administrative expenses—known as S, G & A—can identify opportunities to characterize certain items as wholly domestic, which can turn a loss-making tech company into a loss-making tech company with profitable exports.
The domestic content piece is often misunderstood. A significant amount of foreign value add can be incorporated into a finished product and still result in the product being classified as being made in the United States for purposes of the IC-DISC.
Exports can also include digital downloads of software—a number of Software-as-a-Service companies have a qualifying software component, for example. So, while a company may think of itself as a service company, for tax purposes that same company may be providing a product in the form of software.
It’s important to note that developers and distributors both qualify for benefits. If a tech company uses an app store to interface with the customer, the sale through that app store to a foreign buyer qualifies as an export.
New Partnership Audit Rules
The IRS issued 277 pages of proposed regulations on the new partnership audit regime that was enacted as part of the Bipartisan Budget Act of 2015 (the BBA, P.L. 114-74, 11/2/2015).
The proposed regulations provide rules for partnerships subject to the new regime, including procedures for:
- Electing out of the centralized partnership audit regime
- Filing administrative adjustment requests
- Determining amounts owed by the partnership or its partners attributable to adjustments that arise out of an examination of a partnership
They also address the scope of the centralized partnership audit regime and provide definitions and special rules that govern its application, including the designation of a partnership representative.
Following the issuance of these regulations, the Trump administration instituted a regulatory freeze, which resulted in these regulations being withdrawn by the IRS for further review and approval. It still remains to be seen whether and when they’ll be reissued, and, if so, whether they’ll be changed in the interim.
Tennessee has moved to a new factor-based economic presence standard. If you have customers in Tennessee you may have a potential new tax liability. Read more about it here.
San Francisco Gross Receipts Tax
Since 2014, San Francisco has imposed a gross receipts tax on persons and companies engaging in business within the city of San Francisco. This tax applies to companies that solicit or perform work in the city. Read more about it here.
We're Here to Help
Moss Adams continuously reviews the regulatory and tax landscape for technology, clean technology, life sciences, and communications and media companies. For more information about any of the issues discussed above or for insight on how they may impact your business, contact your Moss Adams professional.
If you’d like to find out whether an IC-DISC is right for your company, please contact Christine Ballard to help review your unique situation.