QUESTIONS ABOUT CORPORATE TAXES


In this section we answer corporate tax questions that we often hear.
It’s not a forum for getting detailed advice but it answers some common questions that we’ve categorized into our six service areas. Select one of the six service icons to see questions in that category.

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INCOME TAX

Recently reinstated through 2014, the R&D tax credit has historically been a big deal with worthwhile benefits for companies that qualify. While it remains a big deal in many states, Congress and the administration have not seen fit to make this incentive permanent. At this time, the federal credit is no longer available.

To determine whether or not to claim the credit, consider whether your research is technological in nature, whether the results will be useful in a new of improved business for your company and whether the research activity entails a process of experimentation. All three of the above are necessary to qualify for the credit.

If you need help figuring out if what you’re doing qualifies and how to determine the potential benefit, it’s time to get help. Don’t get sold a study. Historically, studies are expensive, sloppy and successfully challenged by the IRS.

Engage with an advisor that not only knows the rules but that knows how to work with your finance and technical people to establish a process to capture required information.

VPTax has successfully computed and successfully defended credit computations for over 20 years.

Internal Revenue Code Section 382 limits future utilization of net operating loss and tax credit carry forwards if there is a greater than 50% change in the ownership of a company’s outstanding shares over a three year period.

Sound simple? It’s not.

The result of Congress’s intention to limit trafficking in loss carry-forwards. Section 382 has sweeping implications to start-ups and growth companies. It not only imposes limits on acquirers use of NOLs but often limits use of NOLs in young companies with multiple rounds of preferred stock issuances.

It’s also a significant issue with independent audit firms. It is unclear what disclosures are necessary. Firms differ in their requirements. Even different offices of the same firm differ in their requirements. This is likely a function of risk.

Before you get sold a “382 Study”, talk to VPTax. Understand the implications of Section 382 and consider a lower cost solution to a full blown study.

Since 2011, all transactions that affect shareholder bases are required to be reported to the IRS on Form 8937 within 45 days of the transaction.

This doesn’t mean you must file form 8937 for all stock issuances. Typically, filing is required when companies issue stock dividends or undergo stock splits and reverse stock splits.

In private companies, reverse stock splits generally occur in connection with financings or an initial public offering. If you have any changes in your capital structure, a VPTax Director will advise you of your filing requirements.

VPTax recommends you bite the bullet – get it done and get it done early. Once your company has closed its books you have all the information you need and the finance team is still in the zone – everything is current in their minds. Even if you’re audited, you can save significant time and money by integrating the return preparation with your tax provision.

We see lots of calendar year corporations who get to March 15th, file an extension and forget about their returns. Other responsibilities quickly take priority. Nobody thinks about filing until August when the September 15th date for filing looms.

When the tax folks start asking questions of their finance department, disrupting the normal flow of their work schedules, everyone agrees that life would’ve been easier if back in spring they’d completed the financial statements, completed the audit/10K, worked on their tax returns, signed, filed, and been done with it.

Note to self for next year. File early.

If you’re running a business, you’ve probably got more important things to worry about. That being said, you should be working with tax professionals who do the worrying for you; who let you know the impact of tax proposals that will impact your business.

By all means follow taxation news as it applies to you. If you think your business might be hurt by a proposed change, consult your tax professional before you alter course. Decisions based on what might happen can be dangerous.

Corporations can be the most flexible type of entity. Investors typically prefer corporations. Stock options and restricted stock awards are easiest with a corporation. But double taxation, a consequence of a C corporation structure, can substantially increase the tax liability on a future sale.

Partnerships, limited liability companies, and S corporations have different short-term and long-term tax consequences. A benefit is that there’s only one level of tax at the shareholder and member level. However they’re much more complicated to administer. These three entities don’t pay income tax. There’s less tax to pay on a liquidity event.

When starting a business, choose a legal structure that aligns with your business needs, growth expectations and exit strategy.

Generally accepted accounting principles (“GAAP”) is the basis on which companies are expected to maintain their books. Taxable income is typically determined by making required adjustment to the GAAP books.

Unfortunately, when a company’s books are not GAAP compliant, the computation of taxable income becomes extremely difficult and expensive. Believing your tax return is correct when you’re books are not is akin to building a home on a faulty foundation and thinking you have a sound structure. You wouldn’t spend significant sums on your dream home when you knew it would fall down.

Don’t spend $$$ on expensive tax professionals when your books aren’t in order. VPTax Directors will advise you where to spend your precious resources to maximize their benefit and meet your obligations.

In the tax world, if your company has nexus in a state, you’re taxable in that state. Nexus applies for both income taxes and sales and use taxes.

The problem with Nexus determinations is that, as a practical matter, the taxing authority is almost always right. If your activity in a state is limited, you may not technically have nexus. It’s often more expensive and time consuming to fight the state, so plan accordingly.

States determine nexus differently. For sales and use tax, if you have any employee in a state, you have nexus. For income tax purposes, if you sell product into a state and you have personnel in that state doing more than “solicitation”, you have nexus. If you are SAAS provider and you have customers in a state with revenues above a specific threshold, you may have nexus.

Other states have gross receipts and business and occupations taxes that determine nexus, and accordingly taxability, based solely on revenues.

When you are expanding your operations on a national basis, make sure you know your employee activities and customer locations. Then speak with a VPTax Director.

Federal tax law allows a credit against tax, up to 50 percent of certain clinical testing expenses incurred in the development of drugs for rare diseases that are designated as orphan drugs by the FDA.

While the federal R&D credit expired at the end of 2013, under current provisions, the orphan drug credit remains in place.

The benefits of the orphan drug credit can be significant. If you are in this space and would like help maximizing a supportable credit, please contact VPTax.

Watch out for gross receipts taxes. They come in many forms and are gaining acceptance among revenue starved jurisdictions. While there may not much you can do to minimize them, you don’t want to get surprised.

You don’t have to be profitable to be taxable. Unlike sales taxes, which are collected from customers and paid to the states, gross receipts taxes are paid by you, the company. They represent a cash obligation based solely on the level and type of sales and do not get directly passed through to your customer.

For example, let’s say you make sales of $1,000,000 to customers into a state that has a gross receipts tax. Now assume the company reports a tax loss for the year of $5,000,000. Depending on the type of sale, you could owe $15,000 in tax. It’s not an income tax, so it’s not reported on your financials as income taxes. It’s actually going to hit operating income.

If your company is paying foreign contractors or vendors for services provided in the US, its likely you should be withholding taxes from each payment and sending it to the IRS. Conversely, payments to foreign vendors for services provided outside the US are not subject to withholding.

If a US company fails to withhold on a payment to a foreign vendor or contractor, because the IRS has little ability to collect the unpaid tax from the foreign service provider, the US company becomes liable.

Here are some examples of questions to ask yourself.

  1. Am I making payments to foreign vendors where the royalties are for use of intangible property in the US?
  2. Am I making payments to someone outside the US where, as a US person, I’m the debtor?
  3. Do I have a foreign vendor that comes to the US and actually performs services in the US?
  4. Have I obtained form W-8BEN or W-8BEN-e from corporate or individual foreign providers, respectively?

If you answered Yes in any of these instances, it deserves further investigation. Find our where you stand.

There are reporting requirements for companies making payments to vendors and independent contractors. Forms are due to the service provider by February 17, 2015 and the IRS by March 2, 2015 (March 31st if filing electronically).

The first thing that a company should do is to get a W-9 for everybody that they pay money to, including any vendor or any independent contractor.

If you are required to file more than 250 information returns, including 1099s, W-2’s, etc., you are required to electronically file with the IRS. There’s quite a bit of set-up involved in making that happen.

Penalties are imposed by the IRS on a per form basis, typically ranging from $30 per incorrect or delinquent return to $250 per failure depending on the overall level of compliance or lack thereof.

Compliance is actually very simple, but do not delay. Most accounting systems, if set up properly, provide the necessary information to facilitate timely compliance.

Contact VPTax to be prepared.

There’s a new thing in corporate taxation called an Uncertain Tax Position, otherwise known as a UTP.

For corporations with assets in excess of $50 million, if you implement tax strategies that tax authorities may not like, you must now tell the government what you’re doing. You may have heard about Fin 48, an accounting provision whereby you have to disclose all of your tax risks to the reader of financial statements. This IRS provision now requires you file Schedule UTP to also tell the IRS. (What happened to the good old days?)

The take-away here is that information is critical and risk is subjective. You must look at each individual issue at the financial statement level and determine how to report that to shareholders and now, the Internal Revenue Service. The role of your tax advisor is increasing (like it or not) because you will need them to help you assess these uncertain tax positions.

Many companies believe that if they’re in a loss position for a year there are no penalties for not filing tax returns on time. Generally that’s true.

Most civil penalties in the tax world are geared to how much you owe; so if no tax is due, there is generally no cash penalty. However, if a company has foreign operations, there can be civil penalties of $10,000 per failure.

Most common is the failure to file Form 5471. This is a domestic, informational return required to be filed by US owners of foreign subsidiaries. There are also informational returns for reporting foreign bank accounts (FBAR), contributions to foreign subsidiaries (Form 926), and US entities that have foreign ownership (Form 5472).

Failure to file all these types of forms will lead the IRS to assess a $10,000 per occurrence penalty.

Confusion reigns over state registrations by companies doing business across state lines. The following is a typical list of registrations that may be required by a state in which your company does business:

  • Payroll/Unemployment registration
  • Income tax registration
  • Sales/Use tax registration
  • Secretary of State/Department of Corporations registration

Companies typically engage a payroll service to assist with payroll registrations. Income and sales/use tax registrations are typically initiated by the company. But, Secretary of State registrations are often missed.

When a company registers to do business in a state, they generally file with the Secretary of State. Every year thereafter companies are required to file an annual report which is an informational return. The information is then on public record within the state.

The timing of the reports varies based on the state. Sometimes it’s a specific due date every year, such as April 15th. Other times it can be based upon when you actually first registered with the Secretary of State.

It’s more important than you may think to keep up to date with these filings. When companies are preparing to go public or something of that nature, they typically find out at the last minute that they are not in good standing in a variety of states. It then becomes a fire drill to get brought up to date.

Yes, that is a big focus of our government right now. They want more U.S. manufacturing. Since 2005, manufacturers can benefit from reduced tax rates in an effort to thwart the exodus of manufacturing to low tax rate countries.

Known as the production activities deduction, or Section 199, qualifying taxpayers can see reduction in their tax rate of approximately 3%. The bad news is that the computation can be very complex and it applies only to profits resulting from manufactured products (benefit is only available to companies actually paying tax.) So if you’re currently profitable but benefiting from loss carry-forwards, you cannot benefit today from the deduction.

The other great thing about this deduction is that it’s considered a permanent difference between your book income and your taxable income. So for financial reporting purposes, it reduces your effective tax rate.

Incorporating in Delaware has many benefits; the Delaware franchise tax not being one of them.

The tax is based on the assets and capital of the company. The variable the company can control is the assets. It’s based on the assets reported on Schedule L of your corporate income tax return (Schedule L). So while the balance sheet reporting may not impact your federal liability, it will impact you Delaware franchise tax.

There are two methods of computing the tax and the results are usually significantly different.

Delaware will send you an invoice for the tax computed using the method resulting in the highest tax. Don’t automatically pay it. Contact VPTax now. We might be able to help you reduce this liability.