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Updated: 5 hours 14 min ago

Startups can now offset up to $250,000 in payroll taxes with R&D tax credits

Wed, 04/26/2017 - 12:00am
The PATH Act of 2015 made permanent the federal R&D tax credit, which benefits large and small companies in virtually every industry. It also enabled startups to benefit from the credit—even if they’re not paying federal income tax—by using it to offset up to $250,000 of their FICA payroll tax for 2016, and each of their next five taxable years, if they have: 
  • Gross receipts less than $5 million in the tax credit year;
  • No gross receipts for any taxable year preceding the 5-taxable-year period ending with the tax credit year; and
  • R&D credits of up to $250,000 that they can use in that year.                                        

What companies are eligible? Although many businesses claim R&D credits—over 16,000 in 2013, the IRS estimates— our research shows many businesses that qualify are leaving money on the table, often for incorrect reasons. For more information on what companies are eligible check out the R&D FAQ section or take a short evaluation.
  Take the R&D Tax Credit Evaluation   Reasons Many Companies (Mistakenly) Don’t Claim R&D Credits In our annual survey of tax executives, many told BDO that they weren’t claiming R&D credits for one or more of the following reasons:


Source: 2017 BDO Tax Outlook Survey

Many of these reasons, however, are incorrect or overstated:
  • Activities do not need to be “groundbreaking”—or even succeed—to qualify;
  • Claiming credits on an original return doesn’t mandate a tax audit; and if credits are audited, they are no longer subject to the “Tier One” level scrutiny to which they had been a few years ago;
  • The size of a company isn’t directly relevant to the size of its credits; credits are calculated based on qualified spending, not on sales. In 2013, per the IRS, almost 250,000 corporations with receipts under $25,000,000 reported R&D credits;
  • Although prior to 2016 the credit couldn’t be used against AMT, it can be now, by privately-held companies with no more than $50 million in average gross receipts for the preceding three taxable years; and
  • There are no specific documentation requirements, and numerous court cases—including by the U.S. Tax Court—affirm that R&D credits can be substantiated with oral testimony.


What should companies do? The time to pursue these credits is now. Startups—and any business who meets the three criteria above—should not hesitate to contact a qualified agency to determine whether they can take advantage of the federal R&D tax credit and the new payroll offset. Many can still claim these credits during Q2 and into September if they file an extension.

BDO offers a simple, complimentary review that provides businesses information needed to make an informed decision about whether and how to pursue R&D tax credits generally, and the payroll offset in particular.

Our team of R&D software developers, engineers, scientists, accountants, and lawyers have helped thousands of companies claim over $3 billion in R&D benefits, and we’ve supported more than 90 percent of those benefits on examination by tax authorities.
Get a Complimentary R&D Review

Federal Tax Alert - April 2017

Tue, 04/25/2017 - 12:00am
IRS Requests Comments on Tax Accounting Method Change Procedures to New Financial Revenue Recognition Standards

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Summary The IRS and the Treasury Department recently issued Notice 2017-17 seeking to invite comments on a proposed revenue procedure that, if finalized, will provide procedures by which a taxpayer may request IRS consent to change a method of accounting for recognizing income when the change is made for the same taxable year for which the taxpayer adopts the new financial accounting revenue recognition standards, and the change is made as a result of, or directly related to, the adoption of the new revenue recognition standards.  In addition, the Notice solicits comments on various issues of conformity between the new standards and the Internal Revenue Code and regulations. 
  Details

Background
On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB) jointly announced new financial accounting standards for recognizing revenue (new standards), titled “Revenue from Contracts with Customers.”  See FASB Update No. 2014-09 and IASB International Financial Reporting Standard (IFRS) 15.  The new standards are effective for publicly-traded entities, certain not-for-profit entities, and certain employee benefit plans for annual reporting periods beginning after December 15, 2017.  For all other entities, the new standards are effective for annual reporting periods beginning after December 15, 2018.  Early adoption is allowed for reporting periods beginning after December 15, 2016.  See FASB Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date.”  Since the joint announcement, FASB and IASB have revised the new standards and provided guidance on how to implement the new standards in certain situations. See, e.g., FASB Update No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”; FASB Update No. 2016-10, “Identifying Performance Obligations and Licensing”; FASB Update No. 2016-12, “Narrow-Scope Improvements and Practical Expedients”; and FASB Update No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.

 
Subsequently, on June 15, 2015, the Treasury Department and the IRS issued Notice 2015-40, which requested comments on federal tax accounting issues related to the adoption of the new standards, including whether the new standards are permissible methods of accounting for federal income tax purposes, the types of accounting method change requests that might result from adopting the new standards, and whether the current procedures for obtaining IRS consent to change a method of accounting are adequate to accommodate those requests.  
Request for Comments Comments on Conformity Between New Standards and the Internal Revenue Code and Regulations  
Notice 2017-17 discusses that the adoption of the new standards may create or increase differences between financial accounting and tax accounting rules.  As such, the Treasury Department and the IRS recognize that there is interest in clarifying whether the new standards are permissible methods of accounting that may be used for federal income tax purposes.  Accordingly, comments are being solicited on the following specific issues relating to conformity:
 
  1. To what extent would using the new standards for federal income tax purposes result in acceleration or deferral of income under section 451 or other income provisions of the Code?
  2. What industry and/or transaction-specific issues might arise as a result of the new standards that may need to be addressed in future guidance?
  3. To what extent do the new standards deviate from the requirements of section 451? In what situations should the IRS allow taxpayers who adopt the new standards to follow their book method of accounting for tax purposes (for example, where income is always accelerated)?
  4. To what extent do the rules regarding allocation of standalone sales price and transaction price in the new standards affect taxpayers' ability to satisfy their tax obligations?
 
The Notice indicates that the government is considering addressing issues of conformity between the new standards and the Internal Revenue Code and regulations in future guidance. 
 
Comments on Procedures for Method Changes to New Standards 
Under section 446(e) and the regulations thereunder, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for any item for federal income tax purposes.  Changes in method of accounting are generally implemented through filing a Form 3115, Application for Change in Accounting Method.  The IRS is anticipating that many taxpayers will request consent to change a method of accounting for one or more items of income as a result of, or directly related to, the adoption of the new revenue standards for the same taxable year that the new standards are adopted for financial accounting purposes (a “qualifying same-year method change”).     
 
Notice 2017-17 sets forth a proposed revenue procedure for obtaining IRS automatic consent to make a qualifying same-year method change.  Taxpayers requesting consent for automatic changes for which existing guidance (including Rev. Proc. 2015-13 and Rev. Proc. 2016-29 or its successor) already provides automatic change procedures must use the existing automatic change procedures to make a request.  With respect to qualifying same-year method changes for which existing guidance does not provide automatic change procedures, but that comply with section 451 of the Code or other guidance regarding the taxable year of inclusion of income, the taxpayer must make the change under the proposed revenue procedure.  In general, the IRS contemplates that a qualifying same-year method change is implemented with a section 481(a) adjustment.  However, a cut-off basis is currently proposed for a taxpayer with one or more separate and distinct trade(s) or business(es) that individually have total assets of less than $10 million or average annual gross receipts of $10 million or less.  In addition, the proposed revenue procedure prescribes that multiple requests to make qualifying same-year method changes may be made in one request.    
 
The Treasury Department and the IRS are requesting comments on all aspects of the proposed revenue procedure and on the specific method change issues identified in Notice 2015-40.  For example, comments are requested on procedural issues such as:
  • What types of changes in methods of accounting do taxpayers anticipate requesting?
  • Do taxpayers anticipate requesting changes in methods of accounting prior to the effective dates of the new standards?
  • What changes do taxpayers expect will be requested in the year the taxpayer adopts the new financial standards, and should they be allowed as automatic changes?
  • What related accounting method changes do taxpayers anticipate requesting that may appropriately be made on a single Form 3115?
  • If multiple changes are requested on a single Form 3115, should the taxpayer report a separate section 481(a) adjustment for each change and should those adjustments be netted and a single spread period applied?
  • What alternatives to filing a Form 3115 would reduce the taxpayer’s burden of compliance?
 
Comments must be submitted to the IRS National Office by July 24, 2017.
  BDO Insights Notice 2017-17 underscores the government’s willingness to solicit public feedback to better understand the various implications arising from the forthcoming adoption of the new revenue standards, and whether the new standards are consistent with the existing federal tax rules on the timing of income recognition.  Adoption of the new revenue standards may create or increase differences between financial accounting and tax accounting rules, and potentially create complexity for certain industries or transactions.  As such, the Treasury Department and the IRS recognize that there is interest in clarifying whether the new standards are permissible methods of accounting that may be used for federal income tax purposes.  Furthermore, the IRS recognizes that there is growing interest from taxpayers and tax practitioners for the government to issue guidance on conformity issues as well as revenue procedures to help taxpayers to obtain consent to change accounting methods for income items affected.  While the IRS must balance taxpayers’ needs to comply with the new standards with its need to approve appropriate method changes, Notice 2017-17 is a positive sign that the government is willing to consider procedures that ease the burden of compliance.  Lastly, the Notice is a timely reminder that adoption of the new revenue standards are forthcoming and taxpayers need to begin anticipating the impact of the new standards on their revenue streams and conformity with the Code and regulations. 
 
For additional information, please refer to BDO’s Revenue Recognition Resource Center, which includes an in-depth Financial Reporting Letter that summarizes the new standards with examples and practical considerations.
 
The Accounting Methods group within BDO USA’s National Tax Office has extensive experience assisting taxpayers of all industries and sizes with their accounting method issues and filing accounting method change requests with the IRS. 
 
Contacts for Tax Accounting Method Issues:
 

Travis Butler
Tax Managing Director

 

Yuan Chou
Tax Managing Director

 

Connie Cunningham
Tax Managing Director

 

Dave Hammond
Partner

 

Marla Miller
Tax Managing Director

 
Contacts for Technical Questions on FASB Updates:
  Angela Newell
National Assurance Partner     Ken Gee
National Assurance Partner    Adam Brown
National Director of Accounting    Jennifer Kimmel
National Assurance Sr. Manager   

International Tax Newsletter - April 2017

Thu, 04/13/2017 - 12:00am
The Indian Tiffin XIII - from BDO India A bi-monthly publication from BDO India, "The Indian Tiffin" brings together business information, facilitating decision-making from a multi-dimensional perspective. The unique name of this thought leadership piece is inspired most literally by Indian tiffins, referring to home cooked lunches delivered to the working population by 'dabbawalas' – people who deliver the packed lunches (tiffins). In that same sense, the purpose of “The Indian Tiffin” newsletter is to deliver a variety of news to satiate your palate, from domestic and cross-border updates to India business perspectives. This issue covers:
 
  • India Economic Update by Milind S.Kothari, Managing Partner, BDO India LLP. Milind Kothari speaks on the Bharatiya Janata Party’s massive political victory in the heartland of India and how it will most likely affect the next General Election in summer 2019, as well as the impact that the next 12 months could have in ongoing reforms with the passage of key legislative changes passing through with ease.
  • Learn about deal announcements in the M & A Tracker from Rajesh Thakkar, Partner, Transaction Advisory Services.  Hear about 141 M&A deals that were completed between January 2017, and March 2017, with an aggregated value of approximately $2.28 billion USD, the sectors the deals came from, and targeted companies.
  • In the Featured Story, Manish Mishra, Partner Indirect Tax, shares the GST Story – The last Stretch.  The story will communicate that India has experienced tremendous growth by increasing the focus on the ease of doing business in India.  A simpler tax regime, easier to understand and is uniform across geographies will further the increase of economic growth. The Goods and Services tax, being implemented July 1, 2017, will be a positive step in this direction.
  • The Guest Column feature with Amitabh Verma, Executive Editor Head, Small and Medium Enterprises, DBA Bank Ltd, India. Amitabh Verma’s column, SME Opportunites - A Banking Perspective, discusses how the Indian Micro, Small and Medium Enterprise (MSME) has emerged dynamically as an important driver of economic growth.  The column also discusses the recent demonetization that affected 86% of the total currency and the disruption that ensued, as well as the upcoming Goods and Tax Services.
  View the Newsletter

BDO Indirect Tax News - April 2017

Thu, 04/13/2017 - 12:00am
Brought to you by BDO International, the latest quarterly edition of Indirect Tax News includes current developments in indirect tax from across the world, including, Australia, Argentina, Belgium, Colombia, Finland, Germany, The Gulf Corporation Council States, Indonesia, Italy, Japan, Latvia, Norway, Serbia, Singapore, South Africa, Spain, and Sri Lanka. Some highlights include:
 
  • Australia: Goods and Services Tax (GST) on intangibles, services, and low value imported goods
  • Finland: Changes in reporting and accounting for VAT
  • Japan: Revision of Consumption Tax rules related to provision of cross-border electronic services

View the Newsletter

State and Local Tax Alert - April 2017

Mon, 04/10/2017 - 12:00am
Massachusetts Department of Revenue Issues Directive to Adopt a Sales and Use Tax Economic Nexus Rule
Summary On April 3, 2017, Massachusetts became the sixth state to formally adopt an economic nexus position with respect to out-of-state sellers and sales and use taxes.  The new Massachusetts sales and use tax economic nexus position is effective beginning on and after July 1, 2017.
  Details In Directive 17-1 (April 3, 2017), the Massachusetts Department of Revenue (the “Department”) adopted an “administrative bright line rule” for out-of-state Internet vendors.  Under the Directive, an out-of-state Internet vendor that, for a preceding 12-month period, had in excess of $500,000 in sales to Massachusetts customers and made sales for delivery into Massachusetts in 100 or more transactions will be deemed to be “engaged in business in the commonwealth” and required to collect Massachusetts sales or use tax from its customers. 
 
Pursuant to Mass. Gen. Laws ch. 64H, § 1, a vendor is considered “engaged in business in the commonwealth” when it regularly or systematically solicits orders for sales of services to be performed in Massachusetts or for sales of tangible personal property for delivery to destinations in Massachusetts, or otherwise exploits the Massachusetts retail market “through any means whatsoever, including but not limited to, . . . computer networks or . . . any other communications medium.”  Based on § 1, Directive 17-1 concludes that an out-of-state Internet vendor is engaged in business in Massachusetts by using “computer networks” and “other communications mediums” to solicit Massachusetts customers and make sales. 
 
The Directive also distinguishes Internet vendors from more traditional mail order or catalogue vendors. On the basis of their factual distinctions, the Department reasons that the physical presence requirement for substantial nexus of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), does not apply to an Internet vendor.  Further, notwithstanding the Department’s restricted view of Quill, the Directive alleges that Internet vendors, especially “large Internet vendors” according to the Directive, routinely will have a physical presence with a state because of the in-state presence of software, applets, and/or “cookies” downloaded by their customers.  In addition, the Directive points to content distribution networks, online marketplaces, and delivery services operated by third parties pursuant to agreements with Internet vendors as creating an in-state physical presence on behalf of an out-of-state Internet vendor.
 
As a result, Directive 17-1 imposes Massachusetts sales and use tax collection obligations on out-of-state Internet vendors under the following circumstances:
 
  • For the six month period from July 1, 2017, to December 31, 2017, if during the preceding 12 months (July 1, 2016 to June 30, 2017), the Internet vendor had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions, then the Internet vendor is required to register, collect, and remit Massachusetts sales or use tax with respect to all of its Massachusetts sales.
  • For each calendar year beginning with 2018, if during the preceding calendar year the Internet vendor had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions, then the Internet vendor is required to register, collect, and remit Massachusetts sales or use tax with respect to all of its Massachusetts sales.

BDO Insights
  • Internet vendors with a place of business outside Massachusetts and no physical presence in Massachusetts, but with Massachusetts sales in excess of $500,000 between July 1, 2016, and June 30, 2017, must immediately evaluate the impact Directive 17-1 will have on their Massachusetts sales and use tax compliance. 
  • Massachusetts is only the most recent state to adopt a sales and use tax economic nexus rule with respect to out-of-state vendors, and joins Alabama, South Dakota, Tennessee, Vermont, and Wyoming, which are the other states that have adopted such a rule.  At least eight other states currently have similar sales and use tax economic nexus statutes or administrative rules pending.
   

For more information, please contact one of the following regional practice leaders:
 

West:   Atlantic: Rocky Cummings
Tax Partner
    Jeremy Migliara
Tax Managing Director
  Paul McGovern
Tax Managing Director   Jonathan Liss
Tax Managing Director   Northeast:   Central: Janet Bernier 
Tax Partner
    Angela Acosta
Tax Managing Director
  Matthew Dyment
Tax Principal
    Nick Boegel
Tax Managing Director
 
Southeast:   Joe Carr
Tax Principal
  Ashley Morris
Tax Managing Director
    Mariano Sori
Tax Partner
  Scott Smith
Tax Managing Director
    Richard Spengler
Tax Managing Director
  Tony Manners
Tax Managing Director






   
Southwest:
Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner
 

R&D Tax Alert - April 2017

Wed, 04/05/2017 - 12:00am
New Guidance for Research Tax Credit Payroll Offset Creates Opportunity for Small Businesses
Summary Under the Protecting Americans from Tax Hikes (“PATH”) Act of 2015, eligible small businesses may elect to utilize up to $250,000 of the Research Tax Credits (“RTCs”) they generate under Internal Revenue Code section 41 and after 2015 against their portion of payroll—i.e., Federal Insurance Contributions Act (“FICA”)—taxes. On March 28, 2017, the Internal Revenue Service (“IRS”) released Notice 2017-23 to clarify small business eligibility and how the offset is applied. It also enables taxpayers who didn’t make the election on their 2016 tax returns to amend it and claim the benefit.

Details In order to qualify as an “eligible small business,” a taxpayer must have (1) gross receipts of less than $5 million in the year in which it seeks to make the election and (2) no gross receipts for any tax year before the five years ending with the election year, e.g., before 2012 if the election year were 2016. The notice clarifies that “gross receipts” here includes total sales, net of returns and allowances, all amounts received for services, and any income from investments and other incidental or outside sources. This inclusive definition means that taxpayers with even small amounts of investment income or interest prior to 2012 may not elect the payroll offset. This is significant because it limits taxpayer eligibility, specifically for companies that had been in existence prior to 2012.
 
Taxpayers can benefit from the payroll offset in the first calendar quarter after filing their tax returns. The Notice explains that if the RTC exceeds the payroll tax due on a quarterly filing, the excess may be carried over to succeeding calendar quarters until the credit is used or the $250,000 limit is reached. In addition, the Notice enables taxpayers who failed to elect the payroll offset on their original returns for 2016 to take advantage of the provision by filing an amended return on or before December 31, 2017. The Notice provides specific filing instructions as it relates to amending returns to retroactively make this election.
 
Finally, the Notice provides guidance for members of a controlled group or group regarding aggregation and allocation of the benefit and requests public comment on other payroll tax credit issues to be addressed in future guidance.
 
BDO Insights With the new interim guidance, taxpayers now have more certainty in electing RTCs to offset their payroll tax starting in 2016. Allowing small businesses and startups to benefit from the RTC regardless of whether they pay income taxes frees up private capital and enables investment in resources to facilitate new or improved technologies.
 
For more information, please contact one of the following practice leaders:
 

Chris Bard 
National Leader 

 

Jonathan Forman
Principal

 

Jim Feeser
Managing Director

 

Hoon Lee
Partner

  Chad Paul
Managing Director   

Patrick Wallace
Managing Director 

  David Wong Principal     

BDO Italy Transfer Pricing Alert

Fri, 03/31/2017 - 12:00am
The latest BDO international affiliate alert comes to us from BDO Italy. 

With Legislative Decree no. 32 approved by the Italian Council of Ministers on 10 March 2017 and issued by the Italian government on 15 March 2017, the automatic exchange of information regarding cross-border rulings and APAs, between the Italian Revenue Agency and the tax Authorities of EU Member States, which was previously optional, has now become mandatory.

  Download

Expatriate Tax Newsletter - March 2017

Wed, 03/29/2017 - 12:00am
BDO's Expatriate Newsletter covers timely tax-related updates and regulations from countries around the globe. The March 2017 issue highlights developments in France, Ireland, United States of America, and more.

Topics include:
  • France: Income tax withholding.
  • Ireland: Significant changes to Irish payroll obligations on non-Irish employments.
  • United States: Global mobility - 2017 tax reform hidden surprises?
  Download

State and Local Tax Alert - March 2017

Wed, 03/29/2017 - 12:00am
Michigan Department of Treasury Issues Notice Regarding the Meaning of “Indirect Ownership” to Define a Unitary Business Group After LaBelle Management
Summary On February 28, 2017, the Michigan Department of Treasury (“Treasury”) issued a “Notice to Taxpayers Regarding LaBelle Management Inc v Department of Treasury.”  The Notice discusses the impact of the LaBelle case on the meaning of “indirect ownership” for purposes of the control test of the definition of a “unitary business group” or “UBG.”  Treasury also announced it would apply LaBelle retroactively and instructed taxpayers affected by LaBelle to file amended returns to conform to LaBelle by December 31, 2017.  The Department will not impose penalties and will waive interest on any late payments received on or before December 31, 2017.
  Details Under the former Michigan Business Tax (“MBT”), which was applicable in tax years 2011 and prior, and the current Corporate Income Tax (“CIT”), a group of U.S. corporations and other taxable entities under common control that are engaged in a unitary business, or a UBG, were required to file a Michigan unitary combined return.
 
On March 31, 2016, the Michigan Court of Appeals issued a decision in LaBelle Management Inc. v Department of Treasury, 315 Mich. App. 23 (2016).  In LaBelle, an MBT case, the issue was whether the term “indirect ownership” for purposes of the control test to determine the members of a UBG means “constructive ownership,” or “ownership through attribution.”  Before LaBelle, Treasury broadly interpreted indirect ownership to include ownership through attribution, or constructive ownership, similar to that required by IRC § 318.  The Court of Appeals rejected Treasury’s interpretation and held that indirect ownership means ownership “through an intermediary,” and it does not include “ownership by operation of legal fiction,” such as by the stock ownership attribution rules of IRC § 318 or constructive ownership.
 
On January 24, 2017, the Michigan Supreme Court denied Treasury’s Application for Leave to Appeal, making the Court of Appeals’ decision final and binding precedent.  The Supreme Court’s denial also lifted the stay on the effect of the Court of Appeals’ decision. 
 
The Notice indicates that Treasury’s position is that the decision applies to both MBT and CIT since the control test is the same. As detailed in the Notice, a group of commonly owned corporations with ownership based on a “brother-sister” relationship or “mere custodial or possessory interests” does not meet the requisite level of control for purposes of defining a Michigan UBG. 
 
The Notice also rescinds portions of RAB 2010-1 and 2013-1 to conform to LaBelle.  According to the Notice, UBGs and members affected by the LaBelle decision must correct their filings for all open years under Michigan’s four-year statute of limitations to conform to the decision.  The Notice specifies the following:
 
  • If the designated member of a UBG remains the designated member of a UBG that no longer contains all of its previous members after applying LaBelle, then the designated member must file amended returns for all open years, including only those members that meet the control test under LaBelle in the new UBG amended returns.
  • Members that do not meet the control test under LaBelle must determine (1) whether they meet the control test for inclusion in a separate UBG, or (2) whether they are a Michigan stand-alone filer for the open years.  However, Treasury will only require original returns for new stand-alone filers as if such entity had previously filed Michigan returns (i.e., a four-year look-back period).
  • Penalties will not be imposed on amended UBG returns or original stand-alone returns resulting from LaBelle.  Treasury will also waive interest on returns resulting from LaBelle, if those returns are filed by December 31, 2017.  Any return filed as a result of LaBelle should be labeled as a “LaBelle return.”
  BDO Insights
  • Although Treasury’s Notice primarily addresses the retroactive effect of LaBelle on taxpayers and the filing of amended returns, the effect of LaBelle also could impact Michigan UBG combined returns, and UBG members, with respect to 2016 original returns.
  • Michigan UBG returns (MBT or CIT) filed for the last four tax years should be reviewed to determine whether all of the members meet the control test under LaBelle.  Even though Michigan changed from the MBT to the CIT effective January 1, 2012, for most taxpayers, any MBT returns currently under audit should be reviewed, as they are also still open (as well as MBT returns for which audits were completed in the past year that may still be open).
  • There will be situations where filing amended or original stand-alone returns will favor the taxpayer, and situations that do not favor the taxpayer.  However, as currently interpreted, amended or original stand-alone returns must be filed regardless of whether the change affects the taxpayer favorably.
  • Taxpayers affected by LaBelle and Treasury’s Notice should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
 
For more information please contact one of the following practice leaders:
  Andrea Collins
Tax Managing Director    Richard Spengler
Tax Managing Director   Emily Irish
Tax Managing Director   Angie Acosta
Tax Managing Director   Paul Lukasik
Tax Managing Director    

International Tax Alert - March 2017

Mon, 03/27/2017 - 12:00am
Guidance Issued for Country-by-Country Reports for Early Reporting Periods Summary In Revenue Procedure 2017-23, the Internal Revenue Service (“IRS”) issued guidance for voluntarily filing Form 8975, Country-by-Country Report and accompanying Schedule A, Tax Jurisdiction and Constituent Entity Information (collectively, Form 8975), for early reporting periods.
  Details On June 30, 2016, the Department of the Treasury and the IRS published final regulations (T.D. 9773) (the “CbC reporting regulations”) that require certain U.S. business entities that are the ultimate parent entity of a U.S. multinational enterprise (“MNE”) group to file Form 8975 annually with the IRS.  Form 8975 requires the ultimate parent entity of a U.S. MNE group with revenue for the preceding annual accounting period of $850 million or more to report information, on a country-by-country basis, related to the group’s income and taxes paid, together with certain indicators of the location of the group’s economic activity.  Ultimate parent entities with the ability to file their returns and the Form 8975 electronically are encouraged to do so to ensure timely automatic exchange of the information for an early reporting period.  If Form 8975 is filed electronically, it must be filed through the IRS Modernized e-File system in Extensible Markup Language (“XML”) format, not as a binary attachment, such as a PDF file.  A paper version of Form 8975 will be available before the September 1, 2017, implementation date for filers that are ineligible to use Modernized e-File.
 
Other countries have adopted country-by-country reporting requirements for annual accounting periods beginning on or after January 1, 2016, that require reporting of country-by-country information by constituent entities of MNE groups with an ultimate parent entity resident in a tax jurisdiction that does not have a country-by-country reporting requirement for the same annual accounting period.  The CbC reporting regulations are not applicable for tax years of ultimate parent entities before June 30, 2016.  Specifically, the CbC reporting regulations apply to reporting periods of ultimate parent entities of U.S. MNE groups that begin on or after the first day of a taxable year of the ultimate parent entity that begins on or after June 30, 2016.
 
For additional details regarding the CbC reporting regulations see our Tax Alert, Country-by-Country Reporting Regulations Finalized”
 
However, in the preamble to the CbC reporting regulations, the Department of the Treasury and the IRS stated that they planned to allow ultimate parent entities of U.S. MNE groups and U.S. business entities designated by a U.S. territory ultimate parent entity to file country-by-country reports for reporting periods that begin on or after January 1, 2016 but before June 30, 2016.
 
Revenue Procedure 2017-23 provides that beginning on September 1, 2017, Form 8975 may be filed for an early reporting period with the income tax return or other return as provided in the Instructions to Form 8975 for the taxable year of the ultimate parent entity of the U.S. MNE group with or within which the early reporting period ends.
 
In order to file Form 8975 for an early reporting period, an ultimate parent entity that files (or has filed) an income tax return for a taxable year that includes an early reporting period without a Form 8975 attached must follow the procedures for filing an amended income tax return and attach Form 8975 to the amended return within twelve months of the close of the taxable year that includes the early reporting period.  Filing an amended income tax return solely to attach Form 8975 in accordance with Revenue Procedure 2017-23 will have no effect on the statute of limitations for the income tax return.
 
Early release drafts instructions, draft Form 8975 and draft Schedule A (Form 8975) have also been published. The draft instructions and forms may not be used for filing and are being provided by the IRS for informational purposes.
 
BDO Insights
 
BDO can assist with preparing and filing Form 8975 and assist U.S. MNE groups to voluntarily file country-by-country reports for early reporting periods rather than being subject to secondary country-by-country reporting requirements in certain foreign jurisdictions.
 

For more information, please contact one of the following practice leaders:

International Tax Services
  Robert Pedersen
Partner and International Tax Practice Leader      Chip Morgan 
Partner    Joe Calianno
Partner and International Tax Technical Practice Leader    Brad Rode
Partner    William F. Roth III
Partner, National Tax Office   Jerry Seade
Principal    Scott Hendon
Partner    Monika Loving
Partner    Annie Lee
Partner   Sean Dokko
Senior Manager 
     
Transfer Pricing
  Mark Schuette
Partner   Veena Parrikar
Principal   Michiko Hamada
Managing Director   Kirk Hesser
Managing Director   Sean Kim
Managing Director    Noyan Tulmen
Managing Director  

BDO Knows: Global Expatriate Services

Wed, 03/22/2017 - 12:00am
2017 Tax Reform, Hidden Surprises?  The possible effects of 2017 tax reform on Global Mobility Programs – a hidden surprise for multinational companies.
Download PDF Version

As a decision maker in a multinational organization responsible for deploying employees around the world, you may have been wondering how the proposed tax reform under the Trump administration and current GOP Congress will affect your bottom line. The prospect of lower individual tax rates may on the surface seem to be favorable when implementing tax reimbursement policy for a sizable global mobility program, however, you may be in for a few surprises.

New President, new Congress, the likelihood of tax policy change is very high. Indeed there are many proposals to reduce income tax rates on both individuals and their employers. The proposal to reduce individual income tax brackets to three and setting the highest marginal rate at either 25% or 33% seems moments away. Even though the reduced rates are also expected to be coupled with limitations on itemized deductions and the like, we are all anxious for news to plan mobility policy impacts.

How might the reduction in tax rates effect global mobility policy and assignees?
1. Outbound U.S. Assignees Tax Equalized: The reduction of individual income tax rates in the U.S. are likely to increase the employer’s costs especially at the middle management level. This is due to the fact that tax equalized assignees would be required to pay less hypothetical tax which is used to offset the company’s tax costs. The potential increase in cost will also be dependent on host country tax rates.

High tax host location – An assignee in a host country, like the UK for example, with a highest marginal tax rate greater than 25 or 33% is going to cost more. The company commits to paying the host country tax under equalization but will only be able to collect a fraction of that from the assignee as U.S. hypothetical tax… and that fraction is decreasing. This in turn leaves more foreign tax credits on the table to carryover and the amount of foreign tax credits that are potentially unusable in the U.S. will increase under the proposed tax reform. Unused foreign tax credits are to be carried forward for 10 years but may never be used.

Low/no tax host location – An assignee in a low or no tax host country, one where the highest marginal rate is not greater than
the proposed 25 or 33%, may also cost more in some cases. Foreign tax credit will be used, but there will likely be residual U.S. tax cost. Given the additional assignment benefits such as housing, school fees and other benefits, the reduced hypo tax collection will likely leave a balance for the employer to pay on behalf of the employee in the U.S. where before there may have been none. However, as we see in the higher income situations, the Trump proposed tax savings become greater.
  Effects of Trump Proposed Tax Administration High Tax Country Low/no tax country $125k base $425K base $125k base $425K base Company Cost Increase $1,400 $4,950 $1,000 ($5,650) Individual Tax Savings $1,400 $4,950 $1,400 $4,950
Tax estimates based on Married Filing Joint rates, 2 exemptions and standard deduction for both current tax and Trump tax. The Trump tax rate schedule assumed: 12% tax on Taxable Income (TI) up to $75,900; 25% on TI up to $233,350; and 33% on TI over $233,350.
2. Outbound U.S. Assignees Tax Protected: A tax protected assignee in a high tax country will again create greater tax reimbursement and gross-up costs for an employer. The low tax country protection may seem like a windfall for the employer because the employee pockets the lower tax cost, but don’t forget that employees tend to miss the connection between the lower tax costs in the foreign country and the higher cost in the U.S. When it comes time to pay at filing in the U.S. protected assignees may not have the additional funds to pay the additional tax cost that may be due in the U.S.
3. U.S. Inbound Assignees Tax Protected: This is best of both worlds. Whether from a high tax or low tax country, under the proposed tax reform, a foreign national working and paying U.S. and state income tax should have a reduced tax burden. The employer in turn gets reduced tax reimbursement costs on protected assignment related benefits and allowances.
4. Unexpected Mobility Side Effects: There two noteworthy side effects from the proposed tax reform.

Corporate Tax Deduction Value – Corporate tax rates are also proposed to be reduced from 35% to either 15% or 20%. The reduced corporate tax rate means that deductions have lower corporate tax value so while assignee tax reimbursement costs for the employer may increase the corporate tax deduction value for the employer decreases.

U.S. Becomes a Tax Haven – What has made corporate tax structures outside the U.S. so successful for global multinational organizations is the opportunity to reorganize where the corporation can take advantage of lower corporate tax rates in countries like Ireland or Luxemburg. If the U.S. corporate tax rate is reduced to the proposed 15% rate, the incentive to organize and structure U.S. corporate businesses outside the U.S. is significantly reduced making the U.S. now a tax haven country. With an equal playing field, non U.S. businesses may consider setting up U.S. corporate structures to take advantage of the opportunity to access U.S. markets. This may likely translate into an increase in foreign national inbound transferees to the U.S.

Tax reform does seem to be a high priority for the new administration and Congress. Even though there has been very few details provided and no hard timeline for implementation, we all seem to be anxiously waiting for news. Corporations unlike individuals don’t need visas to relocate around the world to take advantage of tax opportunities. With an open-for-business climate, the U.S. should become a very tax competitive place to invest and work. Coupled with other attributes such as an indestructible commitment to property protection and rights, the U.S. will likely become the destination of choice for global assignees in the near future.

For questions related to matters discussed above, please contact Mesa Hodson or Donna Chamberlain

Compensation & Benefits Alert - March 2017

Wed, 03/22/2017 - 12:00am
Accounting Change to Nonemployee Share-Based Payment Proposed  
On March 7, 2017, the Financial Accounting Standards Board (“FASB”) issued a proposed Accounting Standards Update (“ASU”) intended to improve financial reporting for some nonemployee share-based payments, by putting it more on par with accounting for employee share-based payments.  Comments are accepted on the proposal until June 5, 2017.

The ASU proposes six amendments, four of which apply to all entities, two of which apply only to nonpublic entities.
BDO Insights
  1. The proposal will allow for the measurement of the fair value (“FV”) of the award issued to nonemployees to be at the grant date, and removes the possibility of basing the FV on the consideration received by the grantor.
  2. The proposal generally conforms the measurement date to the grant date, consistent with the accounting for employee share-based payment transactions.
  3. Expense recognition for awards with performance conditions is based on the same probability analysis as for employee awards under Topic 718, rather than the lowest aggregate value.
  4. Awards remain subject to Topic 718 after the goods or services have been rendered, rather than becoming subject to other GAAP guidance, unless subsequently modified.
  5. Nonpublic entities may use calculated volatility rather than having to estimate their own expected volatility.
  6. Nonpublic entities may make a one-time election to use intrinsic value to measure liability awards issued to nonemployees, which is then marked-to-market until settlement date based on the intrinsic value, as opposed to using Fair Value.

Discussion Currently, Subtopic 505-50, Equity-Equity Based Payments to Non-Employees, provides the accounting treatment for share-based payments issued to nonemployees.  The proposed ASU would expand the scope of Topic 718, which deals with stock compensation, to cover payments for goods and services to nonemployees, thus, making it similar to accounting for equity compensation to employees.  This expansion of Topic 718 is intended to simplify the accounting for nonemployee awards, but does not apply to grants issued to raise capital.  The proposed amendments require that an entity would apply the requirements of Topic 718 to nonemployee awards, except for specific guidance on inputs to the option pricing model (e.g. Black-Sholes-Merton model), in that it does not change the requirement that the contractual term be used instead of expected term as an input to the option pricing model, and the timing of the amortization of the expense.

1. Overall Measurement Objective (Applies to ALL Entities)

The proposal requires that nonemployee share-based payment transactions within the scope of Topic 718 would be measured by estimating the fair value (“FV”) of the equity instrument to be issued when the goods are delivered or services rendered and all necessary conditions have been satisfied.

Current GAAP requires that nonemployee share-based payment transactions are measured at the FV of the consideration received or the FV of the equity instrument issued, whichever can be more reliably measured.

2. Measurement Date (Applies to ALL entities) 

The proposal requires that equity-classified awards to nonemployees are measured at the grant date (the date at which a grantor and grantee reach a mutual understanding of the key terms and conditions of a share-based payment award).
 
Under current guidance, the measurement date for equity-classified nonemployee share-based payment awards is the earlier of the date at which a commitment for performance by the counterparty is reached and the date at which the counterparty’s performance is complete.
 
3. Awards with Performance Conditions (Applies to ALL entities)

The proposal requires that an entity would consider the probability of satisfying the performance conditions on grants made to nonemployees, consistent with rules applicable to employee share-based payment.

The current guidance requires that nonemployee share-based payment awards with performance conditions are measured at the lowest aggregate value, which may be zero.

4. Classification Reassessment of Certain Equity Classified Awards (Applies to ALL entities)

The proposal requires that generally, the classification of equity-classified awards issued to nonemployees would continue to be subject to the requirements of Topic 718 unless modified after the necessary condition has been satisfied and the nonemployee is no longer providing goods or services.

The current guidance requires that generally, the classification of equity-classified nonemployee share-based payment awards is subject to another GAAP (e.g. Topic 815, Derivatives and Hedging) once the necessary condition has been satisfied.

5. Practical Expedient – Calculated Value (Applies to nonpublic entities ONLY) 

The proposal requires that a nonpublic entity could substitute calculated values for expected volatilities as inputs to the valuation of share options issued to nonemployees if it is not practical for the entity to estimate the expected volatility of their own share price.
 
The current guidance requires that the inputs to the valuation of equity issued to nonemployees by all entities include an estimate of the expected volatility.
 
6. Intrinsic Value (Applies to nonpublic entities ONLY)

The proposal requires that a nonpublic entity may make a one-time election to switch from measuring liability classified nonemployee awards at FV to an intrinsic value measurement. If this is chosen, these awards would be subject to re-measurement at intrinsic value until settlement.

The current guidance requires that entities are required to measure liability-classified nonemployee awards at FV.
Transition Requirements, Disclosures and Effective Dates A cumulative effect adjustment to retained earnings as of the beginning of the annual period of adoption would be necessary to apply these proposals.

For all nonpublic entities who substitute calculated volatility for estimated volatility, the proposed amendments would be applied prospectively to all awards that are measured at FV after the effective date. The proposed amendments would be applied to only outstanding awards.

Certain disclosures would be required at transition and would include the nature of, and reason for, the change in accounting principle and, if applicable, quantitative information about the cumulative effect of the change to retained earnings.

An effective date will be determined after the comment period has ended and the FASB has reviewed all comments.
 
For more information, please contact one of the following practice leaders:
 

Joan Vines
Managing Director, Compensation & Benefits

 

Alex Lifson
Principal, STSCompensation & Benefits

 

Peter Klinger
Partner, Compensation & Benefits

 

Kristin Peters
STS GES Sr. Manager - Compensation & Benefits

2017 BDO Tax Outlook Survey

Fri, 03/10/2017 - 12:00am

Now that election fever has passed, talk of tax reform is heating up. Both the president and Congress have spoken widely on their hopes for a tax code overhaul, leaving tax executives to closely monitor how changes might impact their bottom lines. According to our third annual BDO Tax Outlook Survey, all the tax executives polled think tax reform is likely to some degree under the Trump administration, with 60 percent believing it to be "very likely." Read on to learn what reforms are the highest priority for tax executives, and how they're navigating crucial shifts at both the national and international level. 
 

Download the Survey
 
Explore the Survey Click the graphics below to explore the different sections of the Survey.

   

   

   

   
 
For more information on BDO USA's service offerings, please contact one of the following regional practice leaders:
 

Matthew Becker
Grand Rapids

 

Chris Bard
Los Angeles

  Paul Heiselmann
Chicago   Robert Pedersen
New York   Todd Simmens 
Woodbridge   Joseph Calianno
Washington, D.C.  

Andrew Gibson 
Atlanta

 

Yosef Barbut
New York

 

Rocky Cummings
San Jose

 

Bob Haran
Boston

 
About the Survey The BDO Tax Outlook Survey of Tax Executives is a national telephone survey conducted by Markey Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to 100 tax executives, or those with tax director responsibilities, at public companies with revenues of over $1 billion using a survey conducted within a scientifically developed pure random sample. 

BEPS Gains Steam Causing Tax Planning Concerns

Fri, 03/10/2017 - 12:00am
While domestic tax reform continues to dominate headlines, major efforts on the international stage also remain a source of anxiety for tax executives. Unsurprisingly, 82 percent of the companies surveyed conduct operations outside of North America, and over half (54 percent) plan to enter or expand into international markets this year.

As tax executives look to optimize global growth, international tax planning is top of mind. But navigating the waters of international regulations is never a simple task, especially following the publication of the Organisation for Economic Co-operation and Development (OECD)’s action plan designed to address tax base erosion and profit shifting (BEPS) in 2015. The highest portion of those surveyed (35 percent) say international tax planning, including BEPS, is their primary tax issue for 2017.

In keeping with last year’s survey, BEPS recommendations around transfer pricing (Action Items 8, 9, 10 and 13) generate the greatest concern among tax executives, cited by 51 percent of respondents. Their concern is a valid one, as 76 percent of tax executives surveyed currently include transfer pricing mechanisms in their tax strategy.

While BEPS remains a critical issue for tax executives, strategies for responding to the initiative vary. A majority (57 percent) of respondents say they are proactively taking steps toward implementation based on the Action Item drafts. More than a third (35 percent), however, plan to wait for individual countries to implement BEPS measures before acting. Given recent criticism from China and other nations that the rules may not be appropriately tailored to the developing world, it remains to be seen how global implementation will shake out. 

Despite implementation uncertainty, some BEPS reporting rules are already coming into play, with country-by-country reporting rules beginning for tax years starting on or after Jan. 1, 2017. Nine out of 10 (91%) tax executives anticipate meeting the initial country-by-country reporting deadline at the end of this year.


  “When the OECD first released the BEPS Action Plan, implementation seemed far off in the future for most multinationals. Now that the country-by-country reporting deadline is looming, businesses need to take steps to proactively adjust their financial reporting practices and prepare for future changes related to transfer pricing mechanisms.” - Paul Heiselmann, national managing partner of Specialized Tax Services at BDO   Read Next Article   Return to Survey

Companies Look Inward to Cybersecurity Liabilities

Fri, 03/10/2017 - 12:00am
While tax executives are mulling over how they will need to shift tax planning strategies to accommodate domestic and international change, cybersecurity issues remain a critical business concern. With high-profile cyber-attacks on organizations ranging from the Democratic National Committee to Dropbox to Yahoo! to the IRS itself taking place in 2016, executives across all sectors are looking to their own cybersecurity as a potential risk. And tax executives are no different. Furthermore, as the BEPS country-by-country reporting draws near, businesses face obligations to securely transfer sensitive tax data.

When asked about their primary concern related to cybersecurity, 40 percent of tax executives point to company vulnerability, and 31 percent cite internal controls and data protection policies. The cost of recovery from a cyber-attack was cited by 16 percent, followed by complying with global information security regulations (9 percent), IRS vulnerability (4 percent) and obtaining cyber insurance (1 percent).


  “Cybersecurity isn’t just an IT issue—it’s an everyone issue, from the board of directors to the most junior employee. Tax executives are no exception: They deal with sensitive financial and transactional data that, in the hands of a sophisticated hacker, is the proverbial golden goose. Moreover, tax professionals are increasingly relying on tax and accounting software, which can serve as a gateway to the broader corporate network. As reporting and data demands increase, the more vulnerable all stakeholders touching that data are to attack.” – Shahryar Shaghaghi, national leader of Technology Advisory Services and head of International Cybersecurity at BDO   Read Next Article   Return to Survey

In the Near-Term, State and Local Considerations are Key

Fri, 03/10/2017 - 12:00am
Looking beyond slow-moving federal and international tax reforms, tax executives turn to state and local incentives to reduce their tax burden, as states themselves try to balance gathering revenue with attracting growth. When asked what programs they take advantage of in the U.S. market, 91 percent of respondents cited income or franchise tax credits and exemptions. Eighty-eight percent use sales tax refunds and exemptions, and 86 percent rely on property tax abatements and exemptions. Just over half (52 percent) benefit from training grants, and 37 percent take advantage of financing programs.

The new administration espouses policies that promise to put “America first,” and following the General Election, that sentiment of reinvestment in America has spread. Five states lowered their corporate income tax rates for 2017, and states like North Carolina and Arizona are contemplating rate-reducing reforms. Tax executives too are increasing their concentration on national expansion, with just under a third (32 percent) stating they will likely enter new geographic areas in the United States in 2017, up from 24 percent of respondents last year. For those planning domestic expansions, 48 percent cite income or franchise tax credits and exemptions as having the greatest impact on their decision to enter new markets. Over a quarter (28 percent) look to available property tax programs, and just eight percent prioritize financing programs, sales tax refunds and exemptions, and training grants. 


  “State governments are constantly working to balance the need to grow revenue while inspiring economic growth within their borders. Companies looking to expand within the U.S. should not undervalue the impact of state and local tax regulations and incentives when developing their tax strategies. – Rocky Cummings, tax partner and head of National Multistate Tax Services at BDO   Read Next Article   Return to Survey

Spotlight on Industry

Fri, 03/10/2017 - 12:00am

Spotlight: The GOP border tax-adjustment proposal

Fri, 03/10/2017 - 12:00am
Currently, U.S. public companies are subject to a 35-percent tax rate on worldwide income, and to the extent that taxes are paid in foreign jurisdictions, they are allowed a foreign tax credit to avoid having the same income taxed twice.

Both the president and GOP leaders in Congress have said they would like to change this system, and both have embraced to varying degrees the notion of a destination-basis tax system, also known as the border adjustment tax.

While subject to change as the administration further develops its tax reform policies, the border adjustment tax proposal, if passed as it is being proposed, would tax companies on their sales to U.S. customers while excluding foreign sales from U.S. tax entirely. This means sales of imported goods would be fully taxable while the sales of exported products would be exempt from tax.

Take a look at the graphic below for an illustration of the border adjustment concept: 


  The objective of a border adjustment tax is ultimately geared to reverse the U.S. trade imbalance. The impact it will have on individual businesses, however, will vary. The best gauge for its impact is a company’s business model: Does its reliance on imported goods overshadow sales revenue from global markets or the other way around?   Read Next Article   Return to Survey

Tax Executives Primed for Potential Federal Reforms

Fri, 03/10/2017 - 12:00am
With the implications of the 2016 General Election beginning to come into focus, tax executives are looking closely at the new administration to gauge how potential tax reform might impact their financial reporting strategies, cash taxes and ultimately their bottom lines.

Last year, BDO’s annual Tax Outlook Survey found that 77 percent of tax executives believed that significant tax reform would occur if a Republican won the presidency, and post-election, this belief continues to hold strong. All the tax executives surveyed in 2017 think tax reform is likely to some degree under the Trump administration, with 60 percent noting it to be “very likely,” and a just under a third of respondents (32 percent) believing it is “somewhat likely.” Only eight percent of respondents believe tax reform is only slightly likely.

While a barrage of executive orders took center stage in the opening weeks of Donald Trump’s presidency, the administration has consistently positioned itself as pro-business, which may bode well for tax executives in the long run. The majority (60 percent) of tax executives feel the cost of compliance within the tax and financial regulatory environment has increased in the past year, and many will be looking to the Trump administration to reverse that trend.

Reforms aimed at driving growth of American business top tax executives’ reform wish list, with 40 percent hoping for a reduction of the 35-percent corporate tax rate. One in five (20 percent) of respondents point to tax incentives to repatriate foreign earnings as a top interest, while 17 percent cite a shift to a territorial tax code. The portion of executives interested in lowering the tax burden of capital gains was nine percent, up from two percent in 2016. And just two percent cited changes to the tax treatment of carried interest, discussed by both candidates throughout the campaign, as their primary ask.

Despite positive signs for the likelihood of tax reform, the process will undoubtedly be complex, and tax executives are concerned about the uncertainty of how the developments will unfold. More than one in three respondents (34 percent) highlight planning for federal tax reform as their primary tax concern in 2017, up from 21 percent in 2016. Given talk from both the GOP and the president on reforms ranging from cutting investment income taxes to enacting a border adjustment tax, businesses will undoubtedly be adjusting to a changing landscape throughout the coming year. Tax reform, however, is subject to an often slow-moving legislative process and will require compromise on the part of both the president and Congress. More than half of tax executives (51 percent) believe congressional gridlock will be the primary obstacle to tax reform over the next four years. Others point to conflicting legislative priorities (19 percent), public opposition to proposed reforms (13 percent) and international actions related to multinationals (12 percent) as potential roadblocks. Just five percent believe the outcome of the 2018 midterm election will stall reform efforts.


  “Despite the widely-debated initiatives discussed during President Trump’s first months in office, federal tax reform is more like an aircraft carrier than a speedboat; it takes time and effort to change course. Any changes that do come to pass may look significantly different than what’s being proposed today. Businesses should stay abreast of how the potential outcomes could impact their bottom line and remain ready to pivot their tax planning strategies when important developments arise.”  – Matthew Becker, partner in the national Tax practice at BDO   Read Next Article   Return to Survey

The PATH Act One Year Later: Public Companies Taking Advantage of R&D Tax Credits

Fri, 03/10/2017 - 12:00am
The passage of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) put an end to the tumultuous history of the federal research and development (R&D) tax credit after decades of repeated expirations and renewals at the eleventh hour or even later. The PATH Act permanently extended the credit while expanding it to benefit startups and small business. This allowed tax executives to include the credit in their long-term business planning without concerns about expiration.

In the year following the implementation of the PATH Act, the survey found that use of the credit grew. Eighty-two percent of tax executives surveyed make use of some form of R&D credit, up from 75 percent in 2016. The majority (64 percent) use both federal and state credits, while one in three (33 percent) claim only the federal credit.

For the 18 percent of those surveyed who said they do not use any form of R&D credit, half believe they are not doing “groundbreaking” work. It is important to note that the credit doesn’t require activity to be groundbreaking to qualify, or even that the activity succeed. Instead, in general, it requires only that the activity attempt to develop or improve the functionality or performance of a product, process, software, or other component.

Interestingly, concerns over the cost to pursue the credit dropped significantly, from nearly half of respondents (44 percent) in 2016, to just 13 percent. This drop may be attributable to an increased level of comfort in annually claiming the now-permanent federal credit.

Despite the increasing number of R&D credit claims, more executives this year say they are not reporting them due to audit concerns (18 percent), up from 13 percent last year. Worry over the alternative minimum tax bar and documentation requirements both dropped to 13 percent, compared to 22 percent each in 2016. 

“Now that the PATH Act has been in effect for a full year, we’re seeing more businesses work the permanent federal R&D credit into their tax planning strategies. A lot of startups and smaller businesses are using the credit to offset up to $250,000 of their payroll taxes or against their AMT; and with the potential to save up to 15 percent of qualified spending, companies of all sizes are using the credit to increase their cash flow. If your company is financing attempts to develop better, faster, cheaper or greener products, processes, software or other components, they would be well advised to look at the federal R&D credit and the myriad of related state and local credits and incentives designed to promote such investments, to ensure they’re not leaving money on the table.” - Chris Bard, national leader for Specialized Tax Services, Research and Development at BDO
Read Next Article   Return to Survey

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