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Top tax planning opportunities to use right now

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Man with beard discussing with team The Democratic tax platform is dominating headlines, but it shouldn’t be the only planning focus. Businesses shouldn’t lose sight of the valuable planning opportunities right now under existing tax rules.

Companies should be looking at opportunities to act in anticipation of potential tax changes, including potential reverse tax planning. But that’s only part of the story. It’s just as important to seize on the planning opportunities still available under the Tax Cuts and Jobs Act (TCJA), the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and many long-standing tax provisions. We’ve compiled a list of our top 10 planning options available right now under existing tax rules:

  1. Employee retention credit – The employee retention credit was created by the CARES Act, but has since been extended and enhanced through 2021. It’s now available for taxpayers whose quarterly gross receipts have dropped 20% compared to the same quarter in 2019. The credit is equal to 70% of up to $10,000 in wages per employee per quarter in 2021 for a maximum credit of up to $28,000 per employee. All wages and health care costs qualify for employers with 500 or fewer employees, but above this threshold, wages and healthcare costs qualify only if they were paid for not performing services. IRS guidance has been fairly generous in allowing employers to claim the credit for wages paid to employees who are working but not providing full services. Employers can use any reasonable method to determine amounts paid to salaried employees for time not worked, although mere reductions in productivity do not qualify.
  2. FDII deduction – The deduction for foreign-derived intangible income (FDII) may be the TCJA’s most overlooked tax benefit. Many people assume it applies to a narrow set of activities. In fact, the deduction is potentially available for any domestic corporation that sells, licenses or leases any products to any foreign entity for use outside the United States. It also may be available for providing services consumed outside the United States. Many businesses left considerable deductions on the table from 2018 to 2020. A detailed review of sales contracts, transfer pricing, fixed assets, accounting methods, and expense apportionment can often uncover a surprisingly robust benefit. It’s even more important to seize on this benefit for past years if Democrats succeed in repealing it.
  3. GILTI – The tax on global intangible low-taxed income (GILTI) was designed to capture intangible income in low-tax jurisdictions, but it is a mechanical computation that can result in unexpected and unfavorable tax outcomes. Planning can help manage these issues, particularly with foreign tax credits. Taxpayers should also assess whether a retroactive election for the high-tax exception in the IRS regulations could result in a prior-year refund. There also may be planning opportunities to benefit from rate arbitrage by adjusting the timing of items before Democrats potentially increase the GILTI rate and adjust the rules.
  4. Accounting methods – The timing of deductions and income is becoming more critical both because of recent CARES Act changes and the prospect of tax increases. The CARES Act allows net operating losses arising from 2018 to 2020 to be carried back five years for immediate refunds. Increasing deductions in these loss years can provide a rate arbitrage opportunity to use them against the higher rates in place before the TCJA. On the flip side, some taxpayers may be looking to accelerate income for a similar rate arbitrage opportunity should Democrats increase tax rates in the future. Either way, a comprehensive review of a business’s accounting methods can turn up many opportunities to adjust the timing of both income and deductions. Most companies employ dozens of separate accounting methods on everything from inventory and rebates to software development and advanced payments.
  5. R&D credit – The R&D credit is one of the longest-standing tax incentives in the code, so it’s surprising that it’s still underused. Even taxpayers in industries that use the credit heavily, such as manufacturing and technology, suffer from misconceptions. Taxpayers outside these industries often aren’t aware of how broadly it’s available. The thresholds for qualifying aren’t as daunting as many fear. While research does have to meet certain standards of experimentation to resolve uncertainty toward a qualifying activity, this threshold is hardly insurmountable. The Tax Court has specifically held that taxpayers don’t need to “reinvent the wheel” and that even “routine” research can qualify. In addition, recent guidance has expanded the ability of taxpayers to qualify internal-use software and pilot models. Finally, statistical sampling can greatly reduce the burdensome record-keeping hurdles and administrative hassle of identifying and documenting qualifying costs.
  6. Research cost amortization – The TCJA is poised to end the ability of businesses to deduct research expenses in the year incurred, and beginning in 2022, these costs must be amortized over five years for costs inside the United States and 15 years for costs outside of the United States. It is possible that this provision is repealed before it takes effect, but there are few guarantees in the legislative process. Businesses are facing a costly compliance challenge to identify all of the costs covered by this rule because the tax definition of research expenses is broader than capitalization rules for financial accounting. Taxpayers may need to begin preparing to track these costs now in order to be able comply for 2022.
  7. Meals and entertainment – A pair of changes from the TCJA and CARES Act have combined to make it more difficult for businesses to unpack the deductibility of meals and entertainment. The TCJA repealed any deduction for entertainment, but left in place a 50% meals deduction with specific rules for separating meal costs from entertainment. The TCJA also repealed a pre-existing exception from the 50% limit. Under the CARES Act, a full 100% deduction is available for meals provided by a restaurant in 2021 and 2022. New IRS guidance excludes most meals provided to employees from onsite or employer-operated facilities, plus food from vendors like grocery stores and convenience stores. Businesses may not have the tracking and processing in place to properly identify which meal costs may be eligible for a 50% deduction, a 100% deduction or no deduction at all. Statistical sampling and process changes can help with the tracking burden and uncover refund opportunities.
  8. Opportunity Zones – The Opportunity Zone tax incentives are among the most powerful created by the TCJA. The ability to exempt capital gains from income may become even more valuable if Democrats raise rates. The tax benefits for opportunity zones are twofold. First, taxpayers can defer recognizing capital gains on any transaction by investing the gains in a qualified Opportunity Zone fund. Only 90% of the original deferred gain is recognized if the investment is held for five years before it is sold (or recognized on the Dec. 31, 2026, mandatory recognition date). Even more importantly, if the investment is held for 10 years, taxpayers recognize no gain on any appreciation in the Opportunity Zone investment itself. There are more than 8,700 census tracts that qualify as Opportunity Zones, including multiple tracts in every major U.S. city and many other areas ripe for development.
  9. Automation and analytics – Many tax departments at even the largest companies are still dedicating most of their time to basic numbers crunching and repetitive processes. These kinds of inefficiencies make it hard to meet deadlines, present audit and tax risks, and cost businesses money. Data analytics and automation can help mitigate these problems and enable the tax function to operate leaner and focus on business and tax planning. Optimizing the tax function isn’t solely about technology. Businesses should also assess their processes for effectiveness, including analysis of data gathering and integration of work papers with tax systems. This is even more critical with major tax changes looming, as businesses will want to free up their tax departments to work on critical planning opportunities.
  10. Sales and use tax – Companies routinely report that compliance with various state tax responsibilities is more burdensome that federal tax compliance. Companies caught up in compliance often don’t realize the significant sales and use tax refund opportunities. For example, many states and localities offer sales and use tax exemptions from machinery and equipment, or from property purchased for further manufacture or resale. Any company that makes frequent or large purchases should consider a comprehensive review of purchase records to identify whether sales use tax exemptions apply, and if there are any misapplied rates or overpayments.

It’s critical to keep one eye on the future, as there may be opportunities to perform valuable planning in advance of tax changes. But this shouldn’t come at the expense of a company’s current tax planning. The tax code is loaded with planning opportunities that can be implemented right now under existing rules.

Contact:
Dustin Stamper
Managing Director, Washington National Tax Office
T +1 202 861 4144

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