X
X

Find Your Specialist

X

Contact Us

Go Back

Taxing Situation for Technology Companies

The Tax Cuts and Jobs Act of 2017 is unquestionably the most significant change to U.S. tax law since the 1980s. While it is true many businesses will now be subject to lower tax rates, the devil is always in the details when you’re dealing with Congress. Along with lower tax rates, taxpayers are also left with many other changes in tax law that could have a major impact on their annual tax liability.

So what are some of the most significant implications of tax reform for technology companies to consider?

Many technology companies are structured as “pass-through entities”, meaning the company’s profits are passed on to the owners as income on their personal tax return. To provide the owners of pass-through entities a tax benefit (and to provide a benefit similar to the reduced corporate rates described later), Congress added a potential 20% deduction of pass-through income for many pass-through businesses. Software, hardware and technology services companies structured as pass-through entities may all qualify for this deduction (assuming there are net annual profits to apply against the deduction).

The tax cut for C-corporations from 35% to 21% was the headline news of the tax package. As the C-corporation structure is often the preferred legal structure for both pre-and-post revenue technology companies, this change to tax law is significant for any companies with annual taxable income.

Another hot topic for technology companies organized as C-corporations is the changes in a corporation’s ability to utilize prior net operating losses (NOLs). In the past, a loss from one year could be “carried back” to offset income in prior years (thereby creating a refund) or carried forward to offset future income. Under the new law, NOLs generated in 2018 or later cannot be carried back to offset income in prior years. Further, the new law caps the ability to utilize NOLs generated after 2017 at 80% of taxable income (meaning 20% of your taxable income would be taxed at the 21% corporate tax rate, if pre-2018 NOLs are not available). If your company has NOLs, annual tax planning is advisable to evaluate your company’s ability to utilize NOLs and its impact on operating cash flows.

Another significant change for technology companies (that thus far has not received much attention due to its delayed implementation) is the ability to deduct Research and Development (R&D) expenses. In the past, taxpayers had the option to deduct, amortize, or charge R&D expenses to a capital account. Many technology companies choose to deduct as the costs are incurred. For tax years beginning after 2021, companies will no longer be able to immediately expense R&D costs; instead, they will be required to amortize R&D expenses over a period of at least five years. Research performed outside of the U.S. must be deducted over 15 years. This change may impact your R&D planning. Companies that invest heavily in R&D should monitor this situation, as we expect to see a great deal of lobbying to remove this provision.

While many of the implications of the new tax law remain to be determined, one thing that is immediately clear is the need to look carefully at how you operate your business under the new rules. Understanding the changes with your tax advisor to be sure you have adopted the most tax-advantageous positions possible should be a top priority for tech companies in 2018.

About the Author

Sasan Zamani is a Tax Partner with Frazier & Deeter CPAs and Advisors.

Originally published in the Nashville Post’s Techie Magazine

 

Related Articles

Privacy Overview

When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

You can enable or disable our use of cookies per category.

When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

You can enable or disable our use of cookies per category.

Necessary Always Enabled

Essential cookies enable you to navigate our Site and use certain features, such as accessing secure areas of our Site and using other features of our service that require us to keep track of certain information as you navigate from page to page. Although some of these cookies are “required” to enable certain functionality, you can disable them in the browser, but doing so will limit your ability to use the features supported by such cookies.

Functionality cookies are cookies that support features of the Site, such as remembering your preferences.

These cookies collect information about how you use our Site, including which pages you go to most often and if they receive error messages from certain pages. These cookies are only used to improve how our Site functions and performs.

From time-to-time, we may engage third parties that track individuals who visit our Site. These third parties may track your use of the Site for purposes of providing us with certain marketing automation features (to help us improve our outreach to current and prospective clients) and providing you with targeted advertisements.