CHICAGO — Tax functions are at a crossroads heading into the 2020 tax season. Sweeping tax reform in 2017 upended traditional tax planning, creating opportunities and challenges. Public and private companies alike wrestled to implement the changes as the internal revenue service (IRS) raced to provide guidance. Now, significant guidance from the IRS is available and it’s time to shift from survival to strategy.
To help companies understand their planning options, Grant Thornton LLP has released Tax Planning Guides for both public and private companies in 2020.
“2018 returns were difficult, but companies survived, and now it’s time to transition from defense to offense,” said Dustin Stamper, managing director in Grant Thornton’s Washington National Tax Office. “Old planning strategies won’t cut it. Tax reform created new tax and growth opportunities, and businesses need to seize them.”
“Companies should start by making sure they’re asking the right questions. Could you benefit from opportunity zone investments? Is your state tax structure still aligned efficiently in the post-tax reform era and post-Wayfair era? Have you reassessed your transfer pricing strategies in light of the changing global landscape? The list goes on – and without a plan, businesses will lose out on benefits,” concluded Stamper.
Here are some of the most important 2020 tax-planning considerations for public and private companies:
Public company tax-planning considerations
- Examine your tax function. Tax departments at even the largest public companies still dedicate too much of their time to basic number crunching and repetitive processes. Shareholders expect better. Tax reform brought new challenges and opportunities, and your tax function should be focused on forward-looking planning that drives business results. Data analytics and automation could free your tax function from unnecessary compliance burdens. You should also assess your processes to reduce wasted time on inefficient data gathering and integration of work papers.
- Use timing to your advantage. Public companies are driven by financial statements, and often ignore timing benefits that don’t affect book income. This is a mistake. The savings in current tax from scores of special tax rules for accelerating deductions and deferring income could be reinvested immediately in the business. An accounting method review may unlock the potential benefits available under new rules for capitalizing costs to inventory, recognizing revenue, and deducting advance payments.
- Scrub your one-time tax calculation for a refund. Tax reform required companies to pay a painful, one-time tax on unrepatriated offshore earnings. You may be relieved this calculation is behind you, but it’s worth revisiting. The final rules weren’t available by the time most companies filed, resulting in widespread overstatements of cash. Earnings held in cash are taxed at an additional 7.5%, so a reduction in cash accounts can generate large refunds. The final tax rules may allow you to make many adjustments to the book calculations of accounts receivable and accounts payable that may significantly lower the calculation of cash.
- Make sure you’re not overpaying on exempted purchases. You may be preoccupied with the implications of the South Dakota v. Wayfair Inc. decision on sales tax as a seller, but don’t forget you also may make large purchases. Many states offer sales tax exemptions for things like machinery and equipment or property bought for further manufacturing or resale. Consider performing a sales and use tax “reverse audit” to review your purchase records and identify potential missed exemptions, misapplied rates, and overpayments.
- Look to accelerate deductions after M&A activity. Shareholders expect sound investment and continual growth, so you’re either growing or you’re dying. It’s no surprise M&A activity remains strong. The professional fees involved can be substantial, so the tax treatment is important. Many costs are generally required to be capitalized, which may mean no depreciation in a stock acquisition. But there may be exceptions. Identifying investigatory costs and success-based fees may unlock immediate deductions and substantial savings.
Private company tax-planning considerations
- Organize business activities to boost pass-through deduction. The Section 199A deduction is the most powerful incentive offered for private businesses in decades. Unfortunately, it can be limited with insufficient investments in employee wages or business equipment, and is generally not available for certain service businesses. Planning is critical. How these limits apply depends on how you organize your business activities. Aggregating qualified activities could boost the deduction in many cases, while separating disqualified activities into a separate trade or business could open up new opportunities.
- Re-examine entity choice. Entity choice is one of the most fundamental questions for private businesses, and the new 21% corporate rate is more tempting than ever. Start with a rate comparison, which will depend on how much earnings you plan to distribute. Pass-through business income is taxed at individual rates as high as 37%, but C corporation income is taxed twice, first at the corporate level and then again at the individual level when distributed as dividends. You may also want to consider factors like the potential cost of the conversion itself, differing rules such as the cash method of accounting, state taxes, eventual exit plans, and international operations.
- Supercharge you investment with opportunity zones. Opportunity zones are one of the most powerful incentive ever offered by Congress for investing in specific geographic areas. In certain scenarios, not only can you potentially defer paying tax on gains invested in an opportunity zone until as late as 2026, but you only recognize 90% of the gain if you hold the investment five years. Additionally, if you hold the investment for 10 years and satisfy the rules, you pay no tax on the appreciation of the opportunity zone investment itself. The opportunity is more broadly available than most businesses realize. There are more than 8,000 opportunity zones throughout the United States, and many types of business and development activities can qualify.
- Leverage business assets in unique estate planning opportunity. A private business may be an owner’s most valuable asset, and passing the benefits to the next generation requires planning. Fortunately, we’ve reached a historic boon for estate planning. Tax reform doubled the estate and gift tax exemption, and many transfer tax strategies hinge on the ability of assets to appreciate faster than interest rates prescribed by the IRS. The current historically low interest rates and all-time high exemptions create a favorable environment for estate planning. Business assets also may offer unique planning options such as a family limited partnership. But the opportunity may not last forever as the current exemptions are set to expire in a few years.
- Consider state sales tax requirements. The Wayfair decision isn’t just about imposing tax on internet retail sales. You may have reporting requirements even if you’re not selling to consumers. The economic nexus standards adopted in most states have consequences beyond retailers, particularly for manufacturers and distributors. These and other companies who don’t sell to the final consumer may still be required to register and collect and maintain customer resale and exemption certificate documentation to substantiate exempt transactions.
These tax-planning tips are just the start. Technology innovation is revolutionizing the business of tax, and businesses need to assess whether its tax functions are built for the modern world to transition from compliance to strategy. For additional private and public company tax-planning insights, visit Grant Thornton’s 2020 Tax Planning Guides: private companies.
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