Year-End Tax Planning for Technology Companies
Three Strategies to Consider Now
Although there were no major tax laws enacted in 2019, you can still be proactive with your year-end tax planning. Consider the following moves to lower your 2019 business tax bill before ringing in the New Year.
Take Advantage of the Research & Development (“R&D”) Tax Credit
The R&D Tax Credit was enacted in 1981 to encourage innovation in the United States. The credit applies to qualifying activities related to the development or improvement of products, processes, techniques or software. The Tax Cuts and Jobs Act (“TCJA”), which went into effect for the 2018 tax year, indirectly increased the after-tax benefit for certain companies. Businesses can offset an income tax liability dollar-for-dollar, while still writing off certain costs attributable to the research and development. Startups with less than $5 million in revenue can also benefit from the credit in the absence of a tax liability. In certain circumstances, the credit can offset up to $250,000 in payroll taxes each year for up to five years. Many companies overlook this credit because they are not producing a tangible product; however, the credit also applies to innovation related to processes and techniques. Beginning in 2022, taxpayers will be required to capitalize and amortize all research and development costs. These costs can be fully deducted now, while still benefitting from the R&D credit. If your technology business is expecting substantial growth and spends a considerable amount of time and money on these activities, you may want to consider taking advantage of the R&D credit now.
Maximize Your Qualified Business Income Deduction
Owners of certain pass-through businesses may be able to take advantage of a 20% deduction on qualified business income. The deduction may be limited to 50% of your W-2 wages or the sum of 25% of your W-2 wages plus the cost of 2.5% of certain depreciable assets. Now is the time to look at how close your business is to these limitations and do a year-end compensation analysis so you can plan to maximize this deduction. If your business is limited or close to being limited, now may be the time to pay bonus wages to your employees. In addition, closely held businesses should look at owner compensation to optimize the deduction.
Tax Implications of Revenue Recognition
Companies should be aware of major changes that could impact the timing of revenue recognition for federal income tax purposes. Payments which in the past have typically been deferred for one year for tax purposes may no longer be able to be deferred. Under the new financial reporting standards, non-publicly traded entities may have to accelerate income into revenue starting in 2019. Technology companies will likely account for transactions quite differently under these new financial accounting standards and will need to determine if the GAAP changes in revenue recognition will impact the revenue recognition for tax purposes. Transactions that may be affected include upfront payments for software licenses, commissions and other advanced payments where revenue recognition for tax purposes is tied to revenue recognition for financial reporting purposes. Taxpayers may be required to change their method of accounting for recognizing revenue for tax purposes by attaching an automatic consent Form 3115 request to a timely filed federal income tax return.