As 2022 comes to a close, we at FORVIS have summarized seven key tax considerations that companies in the technology, life sciences, and services sectors should be mindful of as they look to the new year. While identifying tax savings opportunities is critical, equally important is identifying and reducing areas of risk that may impact future growth.
- Section 174 R&D Capitalization – The new requirement to capitalize research and development (R&D) expenses under IRC Section 174 is impacting nearly all technology and life sciences companies beginning with years on or after January 1, 2022, including the impact on quarterly estimated tax payments as well as financial statements. This change impacts all taxpayers with R&D expenses regardless of whether they are currently claiming the R&D tax credit. There is potential for legislation that would either extend or reverse this change but, given the uncertainty, companies will need to work with their tax advisors to consider the potential impact on tax expense and cash flow.
- New Tax Benefits for Semiconductor Manufacturers – Passed by Congress on July 28, 2022, and signed into law on August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors (CHIPS Act) and Science Act of 2022 is intended to promote domestic manufacturing of semiconductor chips and related specialized tooling equipment. The CHIPS Act established the advanced manufacturing investment credit, a tax credit equal to 25% of qualified costs, which is available for property placed in service after December 31, 2022 and for which construction begins before January 1, 2027. Taxpayers may elect to treat the credit as a payment against tax, i.e., “direct pay.” As companies consider constructing or expanding their manufacturing facilities, they also should keep in mind additional federal and state tax benefits that may be available around cost segregation, R&D tax credits, or property site selection.
- Changes in Deferred Revenue – Accounting for deferred revenue in purchase accounting has traditionally been an area of complexity and uncertainty. Following the issuance from FASB of Accounting Standards Update (ASU) 2021-08 in October 2021, an acquirer essentially “carries over” the acquired company’s deferred revenue as is, rather than the fair value. For companies involved in M&A transactions, especially for services and SaaS companies, these changes may impact financial statements when accounting for deferred taxes, as the income tax rules for acquired deferred revenue differ from ASU 2021-08.
- Employee Retention Credit (ERC) – Though many companies have taken advantage of the Employee Retention Credit (ERC), there are still many that haven’t explored the tax savings opportunity and should speak with their tax advisor to avoid missing out on the potential for significant direct cash savings. To consider whether they qualify, companies will need to analyze their changing gross receipts on a quarterly basis between Q1 2020 and Q3 2021 to assess whether they had a decline in gross receipts as compared to the same quarter in 2019 of a magnitude that would meet the qualification threshold. With a potential tax credit available up to $5,000 and $21,000 per employee in 2020 and 2021, respectively, ERC has become a real benefit for qualifying companies.
- Tax Considerations Around ASC 842, Leases – Public companies have already adopted the new lease accounting standard, Accounting Standards Codification (ASC) 842, but private companies are required to adopt for years beginning on or after December 15, 2021. Such companies should be aware of the changes, which will generally require the capitalization of more leases. From an accounting perspective, companies will no longer see deferred rent accounts on their balance sheets and instead will recognize right-of-use assets and lease liability accounts for both operating and financing leases. Tax advisors will need to explore if there was any cumulative effect upon adoption that impacts retained earnings, as well as how the corresponding book-tax difference is being computed to ensure continued compliance with the appropriate tax accounting method.
- Sales Tax Compliance – With sales tax rules continuously evolving, sales tax compliance is an issue requiring frequent attention. Sales tax compliance can be especially tricky for service-based and SaaS companies that might not be thinking about sales tax the same way as those selling tangible products. Companies should be working with their tax advisors to consider the nature of their business and if any of their revenue streams are potentially subject to sales tax. They also need to understand the process around collecting and remitting sales tax to remain compliant with the appropriate taxing authorities, many of which have differing sales tax rules. Evaluating compliance may include assessing companies’ revenue streams, nexus profile, and customer base. Companies that determine they are not in compliance in certain jurisdictions can work with their tax advisor to explore voluntary disclosure agreement (VDA) programs.
- Impacts of the Inflation Reduction Act – Two key impacts of the Inflation Reduction Act that sizeable companies in the technology and life sciences industries should be aware of are the new 15% corporate alternative minimum tax (AMT) and the 1% tax on stock buybacks. The new 15% AMT would be applied to the book income of corporations that earn more than $1 billion in financial income. An analysis by the Joint Committee on Taxation shows companies in the pharmaceutical and computer and electronics manufacturing industry sectors are among those industries that account for nearly a quarter of new alternative corporate income taxes projected to be paid. The 1% excise tax is effective January 1, 2023 and is on the fair value of stock repurchased by a domestic corporation with publicly traded stock. Read more on the 1% excise tax here, including related accounting considerations.
How FORVIS Can Help
Maintaining tax compliance while simultaneously evaluating tax savings opportunities can become overwhelming, especially for fast-growing technology, life sciences, and services companies, or those navigating M&A transactions. To help discover ways to improve your tax posture, including the use of digital transformation or process improvement methodologies, reach out to a professional at FORVIS or fill out the Contact Us form below.
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