Navigating the complex landscape of tax regulations in the life sciences and technology industries requires a knowledgeable CPA and a proactive approach to identifying tax-saving opportunities and ensuring compliance. Here are the top 10 questions you should be asking your CPA this tax season.
- Do I own Qualified Small Business Stock (QSBS)? Qualified Small Business Stock (QSBS) offers potential tax exclusions for gains on the sale of eligible stock, which can significantly reduce your tax liability. Your CPA should be discussing your eligibility for QSBS treatment, the specific criteria that apply, and how you can strategically benefit from these exclusions.
- How can an 83(b) election benefit my equity compensation strategy? An 83(b) election allows you to recognize income on the value of restricted stock at the time of grant rather than at the time of vesting. This election can lock in lower capital gains tax rates if the stock is expected to appreciate substantially.
- What is the FDII deduction, and how can I leverage it for my international sales? The Foreign-Derived Intangible Income (FDII) deduction incentivizes U.S. corporations to generate income from serving foreign markets by providing a lower effective tax rate on qualifying income (as low as 13% versus the current 21% rate). A CPA can help you analyze your revenue streams, allocate expenses, and optimize your tax position to take full advantage of the FDII deduction.
- Should I be considering transfer pricing for my multinational operations? Transfer pricing involves pricing transactions between related entities within a multinational company to ensure compliance with international tax regulations. For emerging growth/startup companies with cross-border operations, proper transfer pricing strategies can mitigate the risk of tax audits, denied deductions, recharacterization of income, and double taxation.
- Are there limitations on my Net Operating Losses (NOLs)? Net Operating Losses (NOLs) can be used to offset taxable income in other years, providing valuable tax relief. However, there are limitations and carryforward rules, such as the Tax Cuts and Jobs Act (“TCJA’s”) 80% limitation on NOL deductions. Your CPA should be helping you navigate these rules, determining the optimal use of NOLs, and planning for future tax years.
- Am I compliant with all International Tax Filings? For life sciences/tech/emerging growth companies with global operations, staying compliant with international tax filing requirements is essential. Your CPA should be proactively ensuring you meet your obligations, to name a few:
- Form 5471/5472: Information returns for U.S. persons with interests in certain foreign corporations.
- Form 8865: Information return for U.S. persons with interests in certain foreign partnerships.
- BOI reporting: Beneficial Ownership Information reporting to disclose ownership in certain foreign entities.
- Am I filing in the correct state tax jurisdictions? State tax laws vary widely, and it’s crucial to determine where your business has nexus and filing obligations. A CPA with a proper State & Local Taxation background can perform a nexus analysis, review your business activities, and ensure you’re filing in the appropriate state tax jurisdictions to avoid penalties and optimize your tax strategy.
- Am I missing any sales/use tax obligations? Non-income measure taxes, such as sales and use taxes, are often overlooked by pre-revenue startups. After being ignored for years, this liability can cause quite a headache during a due diligence engagement. Identification of sales/use tax obligations can be ameliorated via “voluntary disclosure programs,” but you have to step forward before the taxing authority identifies the problem.
- How do IRC Section 174 capitalization rules apply to my research and development activities? Currently an extremely hot topic, IRC Section 174 requires capitalization of certain research and experimental (R&E) expenditures, which is particularly relevant for life sciences/tech/emerging growth companies engaged in innovation. Book-tax timing differences can lead to “phantom income” situations that must be carefully managed through proper tax planning.
- Am I fully leveraging the R&D tax credit for my innovation efforts? The Research and Development (R&D) tax credit provides substantial incentives for businesses that invest in qualified research activities. Collaborative CPAs work with their clients to conduct a comprehensive review of their R&D projects, expenses, and documentation to maximize eligible credits and reduce tax liabilities. Proper documentation is critical to ensure the credit is respected under IRS audit. Additionally, consider the “Orphan Drug Credit,” as well as state/local credits and programs.
Taking a proactive approach to your tax planning and compliance can lead to substantial benefits (and avoid substantial headaches) for your business. If you are unfamiliar with the majority of the “Top 10” discussed today, maybe the most important question is: Why are YOU asking the questions? Isn’t it time to partner with a CPA firm that anticipates and addresses your needs proactively?
For more information, please reach out to Withum’s Life Sciences Services Team.