In this 2019 second-quarter (Q2) tax update, we cover some of the most important tax issues for companies in the technology, communications and media, and life sciences industries, highlighting what your organization can do to stay ahead of—and benefit from—the changes.
Meals and Entertainment Revisions
The 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA), subjects more costs for meals to a 50% limitation on the deduction. This limitation goes into effect in 2018 for meals provided for the convenience of the employer or meals provided at an on-premises eating facility.
Additionally, these costs will no longer be deductible after 2025, and the TCJA generally concludes that costs for entertainment are no longer deductible.
Convenience of the Employer
Employee gross income generally includes compensation for services, including fringe benefits, subject to certain exceptions. One of these exceptions is the value of any meals furnished by or on behalf of an employer, which are excludable if the meals are furnished on the employer’s business premises for the convenience of the employer.
However, the IRS and taxpayers have historically disputed over the meaning and definition of for the convenience of the employer. That’s because the question of whether meals are furnished for the convenience of the employer is specific to facts and circumstances.
To clarify this issue, the IRS supplied a technical advice memorandum in January 2019, providing guidance on the meaning of the for the convenience of the employer requirement. The guidance attempts to clarify the rules on the individual business reasons for taxpayers, stating that a business objective without a specific policy that’s communicated to the employees and meaningfully enforced doesn’t meet for the convenience of the employer requirements.
Payroll withholding tax-contingency accrual, including estimated penalty and interest consequences, may be applicable on financial statement reporting. Companies may wish to review the impact these changes could have on their formal and informal entertainment offerings.
Deductibility of Meals and Snacks
The TCJA also includes a number of changes to the deductibility of meals and snacks provided to employees. Read more in our Alert.
Revenue Recognition Tax Considerations
Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, introduces significant changes to financial reporting and tax reporting. Public companies are required to adopt the revisions in 2018, and private companies must adopt the changes in 2019.
As part of the TCJA, two new provisions were added under Internal Revenue Code (IRC) Section 451—IRC Section 451(b) and 451(c)—which provide clarification for the tax impact of ASC 606 when an accrual-basis taxpayer has an applicable financial statement (AFS). For this purpose, an AFS includes a financial statement audited by an external CPA. However, the US Treasury and the IRS have yet to issue proposed regulations under Sections 451(c) and 451(b) that provide guidance on the how the changes apply to taxpayers. The new rules are described below.
IRC Section 451(b)
For tax years beginning after 2017, IRC Section 451(b) requires taxpayers with an AFS to recognize gross income for tax purposes at the earlier of the following:
- When the all-events test is satisfied
- When the gross-income amount is recognized for book purposes
The all-events test is satisfied when the taxpayer has a fixed right to receive the income, and the amount can be determined with reasonable accuracy.
IRC Section 451(c)
IRC Section 451(c) provides a rule similar to the one-year deferral permitted by Rev. Proc. 2004-34 for certain advance payments.
Note that private companies without an AFS that aren’t early adopting ASC 606 may continue to follow prior generally accepted accounting principles (GAAP) and the former tax rules for 2018.
Automatic Accounting Method
If a taxpayer adopts ASC 606 for financial statement purposes and changes their tax-accounting method for an item of income to the ASC 606 method in the same year, they may be able to file an automatic accounting method change pursuant to Rev. Proc. 2018-29.
Taxpayers that are conforming to IRC Section 451(b) to meet the earlier of rule—but who aren’t conforming to ASC 606 in the same year—may be able to file an automatic accounting method change pursuant to Rev. Proc. 2018-60.
Despite the automatic change procedures provided, there are situations where advance consent is still required.
Contracts with Customers
Changes to ASC 340-40, Other Assets and Deferred Costs—Contracts with Customers, is effective with ASC 606 adoption and could impact the timing of expensing various contract costs. For instance, sales commissions related to revenue contracts lasting longer than 12 months may require amortization for book purposes. However, there aren’t any changes on the tax side for these items.
For a comprehensive overview of the new standard, see our guide.
Income Tax Simplification
On May 14, 2019, the Financial Accounting Standards Board (FASB) issued proposed Accounting Standards Update (ASU)—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The proposed ASU is intended to reduce complexity in accounting for income taxes and improve the information provided to financial-statement users. It’s anticipated the changes will eliminate certain exceptions, such as:
- Intraperiod tax allocations
- Outside basis differences
- Inclusion of franchise taxes
The ASU will likely change the calculation of income taxes for financial statements. That means companies and their service provides will need to make sure their processes, documentation, disclosures, and controls are updated.
Comments regarding the ASU are due June 28, 2019. The effective date for the ASU is unknown at this point.
R&D Credit Documentation
The US Tax Court recently disallowed R&D credits for taxpayers that fail to provide sufficient documentation supporting claimed R&D credits. Read more in our Alert.
State Tax Law
Under changing state tax laws, additional products and services may now be subject to income or sales tax. It’s important to stay up-to-date on the revisions and how they may affect you or your company. Read our articles about recent changes in Washington, Oregon, and California for details.
Foreign-Entity Tax Regulations
If your company operates outside the United States in branch form, it may be time to revisit your tax positions and consider new planning opportunities introduced by the TCJA.
Sales to Foreign Customers
Changes introduced in the TCJA allow companies a 37.5% deduction against qualifying income earned from the sale of foreign-use property or services. This provision is intended to incentivize foreign sales, and it’s available to most companies selling goods or services to foreign customers. The IRS recently issued proposed regulations. Find out more about the changes in our webcast or Insight.
Also, US persons are now required to file Form 8858: Information Return of US Persons with Respect to Foreign Disregarded Entities and Foreign Branches. This form must be filed for operations of true foreign branches (FBs), including qualified business units (QBUs), and foreign-disregarded entities (FDEs). Read more about foreign branches and filing requirements.
We’re Here to Help
For more information about how recent tax changes could affect you or your business, contact a Moss Adams professional, visit our dedicated tax planning guide, or review resources on our tax reform web page.