The world of corporate tax risks and opportunities is constantly evolving. Here’s our advice for balancing your corporate efficiencies with tax risks. The goal is to help you meet business objectives while creating an environment for sustainable growth.

TAX RISKS

1. State Exposure – This is the new battleground. States are desperate for revenue and see a significant opportunity to potentially tax entities doing business in their states. This is even more relevant due to the 2017 Wayfair decision. This decision determined that if you ship products into another state, there is probably now a very good chance that you have a sales tax responsibility in that state. We are seeing this now spread to the corporate tax side with the receiving of questionnaires requesting further information about their dealings in states.

2. Offshore Risk – Even 4+ years after the passing of the TCJA, we still see situations where business owners have not changed their structures to make the most of those tax law changes. Owning a direct interest in an offshore entity that is a flow through is totally unnecessary and tax inefficient. By setting up the correct structure and taking advantage of the GILTI tax regime and the application of foreign tax credits at the federal level, you can dramatically lower your tax footprint.

The two items above are specific tax risks, but they can be mitigated by good tax planning and an attention to detail. On the first, just because you may invoice into a state, doesn’t mean you deliver there. Determine how, when and where the customer takes title. If you can legitimately relieve yourself of a sales tax burden, the same will probably hold true for potential corporate and franchise tax burdens.

For the second point, look at your tax structure to ensure it is optimized and also whether you are in compliance with IRS foreign reporting requirements. Failure to comply can lead to extremely heavy penalties.

3. State Residency Issues – This area has become the hottest tax topic as a result of the epidemic, with executives and employees relocating or simply working remotely. The states in the Tri-State Area are reacting very aggressively to protect their tax base. It will no longer be possible to take the position that just because the employee or executive moved to their home in Florida and works from there, rather than their apartment in NYC, they are no longer subject to NYS/NYC taxes. Any such move must be for the benefit of the employer. Otherwise you can expect an audit where the onus of proof of residence is on you.

TAX OPPORTUNITIES

1. Qualified Business Income Deduction – This was introduced to provide small and medium size pass through businesses a lower tax burden based upon the payroll it incurs. While not available to all types of businesses, if you qualify you can reduce your federal tax liability by up to 30%. If you are not in a disallowed industry and you are an independent contractor for example, a simple change of entity type can make this available.

2. Research and Development Credits – Most people have heard of this and assume they don’t qualify because they don’t do research and development. This may no longer be true. With a relaxing of the rules over the last few years, this is something to investigate. The rules are complex, but the benefits can be substantial. The definition of what expenditures now qualify has been expanded to include:

• Developing or designing new products, processes, and systems.
• Developing new or improved new or improved manufacturing processes or tools.
• Modifying or redesigning existing processes or systems.
• Developing internal software solutions and/or applications.

Think about your business and how the above descriptions can be utilized. A number of vendors provide this service on a contingency basis, meaning there is no up-front cost.

3. Cost Segregation Studies – Do you own a building? Buying a building? Consider undertaking a cost segregation study. We recently had a case where we were able to move 23% of the purchase of a building for $2.5m from a 40-year life to a 7-year life. That also qualifies for immediate cost deduction under section 168 of the code or in this case an immediate deduction of $575,000.

4. Employee Retention Credit – This is a less popular but very potent part of the same legislation that gave birth to the PPP loans. A technical change at the beginning of 2021 has made it more attainable. Qualification depends upon payroll and a shrink in revenue in 2020 due to Covid. It is taken on an amended payroll tax form. At a maximum credit of $5,000 in 2020 and $7,000 in 2021 per employee the benefit can be substantial. Again, a number of vendors will provide this service on a contingency basis.

5. Pass through Entity Tax at the State level – Several states have instituted a Pass-Through Entity Tax (PTET) that, following IRS approval at the end of 2020, results in a workaround on the state and local tax limitation of $10k on Federal tax returns. All three local states have a PTET statute available. It does not apply to all entities, so careful planning is a requirement. Generally, a shareholder in a pass-through entity can pay the state tax at the entity level, thereby lowering their Federal taxable income before it is reported on their tax return.

Please do not hesitate to contact us with any questions.

L.H. Frishkoff & Company

546 Fifth Ave. New York, NY 10036
212-808-0070

565 Taxter Road, Elmsford, NY 10523
914-523-2047

L.H. Frishkoff & Company

546 Fifth Ave. New York, NY 10036
212-808-0070

565 Taxter Road, Elmsford, NY 10523
914-523-2047