In this 2019 first-quarter update, we cover some of the most important tax issues for companies in the technology, communications and media, and life sciences industries and highlight what your organization can do to stay ahead of the changes.
Federal Tax Reform
Tax Return Filing Considerations
The 2017 tax reform reconciliation act, also known as the Tax Cuts and Jobs Act (TCJA), brought significant changes to the Internal Revenue Code. The US Department of the Treasury and IRS are continuing to issue interpretative regulations and administrative application guidance for tax years affected by enactment and beyond.
Changes enacted by the TCJA will likely take years to fully comprehend. While some current-year uncertainties may be clarified with issued guidance, it’s important to consider nuances in the changes and inherent risks when filing under the new tax rules.
Filing for an extension will give taxpayers time to analyze the complexities of new revisions, support favorable positions, and mitigate the risk of incomplete analysis due to unavailable information when filing. This is especially true because many states are still determining if they’re conforming or decoupling from all or certain aspects of the TCJA.
However, given the breadth of changes and substantial uncertainty resulting from limited guidance, it’s important to consider whether filing federal or state income tax extensions for the current tax year will allow adequate time for uncertainties to be clarified. Given these uncertainties, it’s likely beneficial to wait for further clarification before filing.
For more information on common tax changes, read our Alert.
Nondeductible Fringe Benefits
The TCJA delivers an unexpected favorable outcome for employers by classifying parking as a qualified transportation fringe (QTF) benefit. It generally disallows employers from claiming deductions for expenses related to QTF benefits they provide to employees. Companies should review their transportation fringe benefits, including parking-related costs, to verify they’re compliant with this revision.
The IRS has provided preliminary guidance on this matter and plans to issue proposed regulations. Until regulations are issued, taxpayers who own or lease employee parking facilities may use any reasonable method to determine the amount of nondeductible parking expense, and they may rely on the guidance provided in the IRS guidance. For taxable years beginning on or after January 1, 2019, a method that fails to allocate expenses to reserved employee spots can’t be a reasonable method. Learn more in our Alert.
Changes to International Tax
The TCJA introduces a number of significant changes to US international tax compliance effective for 2018 tax filings, including global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and Section 965 previously taxed income (PTI) reclassification. In general, the scope and risk of information returns, such as the Form 5471, has been significantly increased.
Historically, some companies haven’t been concerned with international filings like Form 5471, which they deemed solely informational. Over the past few years, however, the IRS has increased penalties for improperly completing informational returns. Now, the new GILTI regime introduced by the TCJA renders the Form 5471 a fundamental component of a US shareholder’s tax return, including it in the taxable income computation.
The 2018 Form 5471 is greatly expanded with several additional schedules, requiring an extensive analysis of the controlled foreign corporation’s (CFC) earnings and profits. Taxpayers must compute each CFC’s tested income by conducting a book-to-tax analysis that’s similar to the analysis performed for domestic entities. This analysis may include fixed-asset depreciation computations based on alternative depreciation system (ADS) lives, accrual account balances, and paid income taxes.
Foreign Tax Credits
Foreign tax credits require further scrutiny. For GILTI inclusions, there’s no carryforward of unused foreign tax credits. That means there’s only one opportunity each year to obtain a foreign tax credit. In order to substantiate the foreign tax credit, the taxpayer must not only perform the computation correctly, but also be able to substantiate their paid foreign taxes. Using foreign book tax-accrual numbers likely won’t be sufficient to substantiate the foreign taxes claimed.
Final-Section 965 Regulations
The TCJA includes a provision requiring US companies to include a pro-rata share of accumulated deferred foreign income when filing, often referred to as the Section 965 transition tax.
According to the TCJA, some elections can be made relative to the Section 965 transition tax, which could mitigate potential consequences for foreign-loss companies. The elections relate to situations in which taxpayers have profitable specified foreign corporations (SFC) and loss SFCs, and the loss creates basis adjustments to reduce transition-tax income inclusion.
To make the elections, taxpayers will need to file an amended return for any return already filed within 90 days of February 5, 2019, or by May 6, 2019. Fiscal-year taxpayers that haven’t already filed their returns can make the election with their original filing.
Proposed FDII Regulations
If a company doesn’t have foreign subsidiaries, there’s still an additional deduction available for foreign sales: US companies can take an additional tax deduction based on their FDII. This deduction will require additional information, analysis, and computations.
The IRS has issued proposed regulations that would provide guidance for determining the amount of IRC Section 250 deductions domestic corporations are allowed for FDII and GILTI. The proposed regulations would also coordinate the deduction for FDII and GILTI with other provisions in the IRC. Stay tuned for more information on these proposed regulations.
German Value-Added Tax Rules
On January 1, 2019, new value-added-tax (VAT) legislation took effect in Germany. The legislation impacts the sale of US goods to German consumers, requiring online marketplace operators to collect, retain, and provide information on sales to German tax authorities. The legislation also holds the online marketplace liable for taxable transactions where VAT isn’t collected and remitted.
Companies that currently sell into Germany through online marketplaces can expect this enforcement mechanism to increase the amount of VAT that’s assessed and withheld form sellers. Companies should consider VAT implications when making sales and determine if the tax is properly considered in their pricing.
State and Local Tax Updates
Federal Tax Conformity Updates
The following states have recently published updates on the treatment of federal GILTI and FDII.
On December 24, 2018, New Jersey published Technical Bulletin TB-85(R), prescribing a unique approach to allocating GILTI and FDII to New Jersey. According to the bulletin, taxpayers should use the ratio of New Jersey’s gross domestic product (GDP) to the GDP of every US state where the taxpayer has economic nexus to allocate GILTI and FDII income to New Jersey.
On January 16, 2019, Massachusetts published guidance indicating taxpayers should apply the 95% Massachusetts dividends received deduction (DRD) to GILTI income. Massachusetts doesn’t conform to the federal deduction of FDII and doesn’t include any GILTI or FDII in the apportionment factor—even though most taxpayers include 5% of GILTI or FDII income in their tax base since the DRD allows for a deduction of 95% of GILTI or FDII income.
On January 24, 2019, Pennsylvania published Corporation Tax Bulletin 2019-02, which provides guidance indicating Pennsylvania will treat GILTI as foreign dividend income and allow a subtraction for this income when computing Pennsylvania taxable income. This means Pennsylvania will exclude GILTI income from the receipts factor used for apportioning income within and outside of Pennsylvania.
Economic Nexus and Wayfair
New York has finally announced its position on economic nexus for sales tax purposes, which is available from the New York Department of Taxation and Finance. In short, New York holds the position that an out-of-state business without physical presence in the state must file a sales-tax return if it sells more than $300,000 in New York-source in-bound sales or engages in more than 100 transactions with New York customers.
New York has stated the South Dakota v. Wayfair, Inc. case made already existing New York tax law effective, which makes the effective date for New York’s economic position unclear. Prior to filing in New York, it can be beneficial to consult with a tax professional on potential application and ways to mitigate exposure.
State Nexus Standards
As of February 2019, 34 states had adopted economic nexus standards for sales tax. Read our Insight discussing state nexus standards and developments following last year’s landmark US Supreme Court decision in Wayfair for more information.
We’re Here to Help
For more information about tax updates introduced in the first quarter of 2019, contact your Moss Adams professional. You can also visit our dedicated tax reform page to learn more.