State and local tax cash-flow strategies for technology businesses
INSIGHT ARTICLE |
Technology businesses are no strangers to flexibility and adaptability in a fast-paced and evolving market. Technology sectors are critical to keeping the economy moving as more work and production are being performed remotely. Now more than ever, technology and people are entwined in an unprecedented alliance to keep business connected and imperative information flowing. The COVID-19 pandemic has created new challenges necessitating all functional lines of a business to synergize and address financial viability concerns. The tax function can be a valuable contributor to meeting the cash flow needs of a company by customizing tax strategies.
During an economic downturn, maximization of cash is critical. Technology businesses should be aware of COVID-19 relief measures and tax optimization planning opportunities that are available. Staying up to date on the most current information and implementing a tax plan that is specific to your business needs can strengthen a business’s financial circumstances during difficult times.
Addressing short-term cash needs
Low-hanging fruit: State and local tax extended due dates for filings and payments
Monitoring state and local tax extended compliance due dates for filings and payments can be a significant solution for immediate and short-term cash needs. Customizing an approach to extended deadlines may be more complex than merely extending to the furthest date possible. Companies expecting refunds from compliance filings may consider accelerating certain filings to obtain refunds of overpayments. Companies with a fiscal-year end may face complexities in determining how extended due dates are applicable to their business.
For more information on resources to aid in addressing extended filing and payment deadlines, please read our article, State taxing authorities address COVID-19 filing and business changes.
Opportunities for tax liability reduction and risk management
The foundations of state and local tax include nexus, apportionment that determines state taxable income, and transaction tax from revenue earned in a market. Inaccuracy in reporting may result in asymmetrical state tax positions and, as a result, inaccurate tax liabilities.
As tax filings and payments become due in the short term, consider the following:
- State income tax and sales tax: Proper characterization, for sales tax purposes, of the products and services your company offers is paramount. As an example, software-as-a-service (commonly known as SaaS) may be classified for tax purposes as a taxable sale of tangible personal property in one state but a non-taxable service in another state. Such classifications also have a distinction for state income tax purposes as proper characterization of revenue streams can impact the amount of state taxable income determined to be subject to tax in a state according to state apportionment rules. Are tax classifications for business transactions and revenue streams understood and up to date? State tax laws are, by nature, evolving and must be applied to the specific facts of your business. Improper classification may result in unnecessary overpayments.
- Credits and incentives: Credits and incentives, such as federal and state research and development tax credits, are relied heavily on by the technology industry. Upon review, many companies find they are eligible for numerous other state tax credits and incentives opportunities, such as hiring credits and training grants, or investment incentives. As the technology industry evolves within the dynamic nature of the current business environment, previously established credit and incentive quantification and qualification methodologies may need to be reviewed or updated to ensure maximization of this benefit. For more information on potential opportunities especially with the COVID-19 pandemic, please read our article, Middle market relief for businesses impacted by the coronavirus.
- Employment tax: Many businesses will be laying off employees. Most professional businesses will have employees working remotely. And, some technology sectors will see an increase in employment. All three scenarios often have significant employment tax implications. There are a number of unemployment tax considerations for businesses eliminating jobs during the pandemic.
- Refund claims: Performing prospective tax planning and developing cash-flow maximization strategies often provides visibility into potential refund claim opportunities as the application of current tax laws to your business is understood. When present, this provides an opportunity for both the immediate prospective savings and potential future cash flow in the form of tax refunds from historic overpayments.
Capturing efficiencies and maximizing cash tax opportunities
Short-term tax planning starts with understanding your business. A review of current operations for efficiency and compliance improvement can lead to substantial savings. For example, the identification of prospective tax planning may lead to current refund claim opportunities. Analysis performed for one tax may have application to another tax (e.g., tax classification analysis for state income tax may have application to sales tax). Efficiencies in the tax function save valuable time, reduce unnecessary cost and maximize tax savings opportunities.
Addressing longer-term cash needs
The dynamics of social distancing and a largely remote workforce has led to extensive and more creative uses of technology. The COVID-19 crisis has also highlighted opportunities for internal technology infrastructure solutions that meet business objectives. This has been particularly true with respect to accounting and finance functions. Technology industry leaders should consider several solutions that may address longer term cash needs.
- Internal tax processes: Inefficient processes for tax compliance and reporting are unnecessarily costly. Process inefficiencies also create opportunity costs as internal tax and accounting professionals are prevented from performing value added work such as identifying savings and planning opportunities. In both instances, an efficient streamlined internal tax process is of great value in terms of cost control, tax savings, and strategy adjustment.
- Sales and use tax automation: The impact of sales tax compliance workforce and process disruptions may be mitigated by the implementation of an appropriate automation solution, particularly for businesses that have a highly manual process or are relying on outdated or incompatible systems. Automation also ensures that valuable tax classification analysis is applied consistently across potentially thousands of transactions. Identifying and implementing an automation solution that suits the company’s specific needs can reduce overhead costs and costly errors.
- Technology solutions: The increase in remote workforce as a result of the pandemic may provide companies with additional insight into needed technology solutions for the finance function. Companies may also consider, with prudence, accelerating technology implementation timelines to provide short-term solutions for the remote workforce with long-term, post-crisis, benefit.
The COVID-19 crisis is creating economic challenges for most businesses. As companies strategize addressing serious cash flow concerns, it is crucial for companies to consider how potential tax savings and cash tax optimization planning can result in significant changes to cash flow. RSM’s state and local tax (SALT) team has the technology industry experience and tax expertise to provide comprehensive and efficient services to all sectors of the technology industry, tailored to your business needs.