Filing taxes is a complex and time consuming process with bottom-line repercussions — and this year’s process is no different. As the March 17 deadline for filing corporate tax forms swiftly approaches, CFOs should be strategizing, planning and preparing. From multi-national tax compliance and transfer pricing concerns, to the expiration of the Research & Development (R&D) tax credit, CFOs should be acutely focused on getting their taxes right. Here are three distinct chapters of this tax season’s story.
Chapter 1: The R&D Saga
According to the BDO 2014 Technology Outlook Survey, 19 percent of 100 CFOs at leading U.S. technology companies are most apprehensive about the expiration of tax incentives. This is a significant increase from last year, when only 9 percent of such finance chiefs reported it as a leading concern. The worries are likely related to the failure of Congress to pass an extenders bill before the expiration of such tax incentives at the end of 2013, such as the R&D tax credit.
By allowing the credit to lapse, Congress has once again given not only technology companies, but many companies with an emphasis on innovation, a reason to focus on their R&D tax position.
The federal R&D tax credit is available for expenses paid or incurred during 2013. But it’s not currently available for expenses incurred during 2014.
From a cost perceptive, the credit is equal to up to 7 percent of qualified spending. A company must be in the pursuit of developing or improving a business’ products, manufacturing processes, software or other business components in order to qualify.
So, how will the December 31, 2013 expiration affect companies filing this year?
For the 2013 calendar year, it will be business as usual:
- Include 12 months of the credit benefit for both the 2013 tax return and financial statements.
- For fiscal-year taxpayers, unless and until the credit is extended, the credit benefit for estimated tax payments and financial statement recognition purposes can include expenses paid or incurred only through December 31, 2013.
- No credit benefit can be included for 2014 estimated tax payments and financial statement recognition, unless and until the credit is extended to include expenses paid or incurred during 2014.
If you claim the credit, be ready to claim it again for 2014 expenses: all indications from Washington are that both parties will vote to extend the credit retroactively, as they did on January 2, 2013 for 2012 expenses. And keep your fingers crossed: there are nine bills under consideration to make the credit permanent, increase its rate and make other enhancements — such as making it more beneficial for start-up companies, for example.
In the meantime, though, most states provide similar credits and other incentives, some of which are more generous than the federal benefit. Some of the credits are refundable or transferable, meaning that they could provide a current benefit to companies even if they are in a loss or Alternative Minimum Tax position.
Chapter 2: Multinational Penalties
The Internal Revenue Service continues to increase its foreign information reporting requirements for U.S. businesses with international transactions. Thus, it’s no surprise that non-filing or filing incomplete forms may result in significant penalties being assessed by the IRS.
Depending on the nature of the omitted filing, those penalties can start from $10,000 per form. Certain unreported transfers of property to foreign entities may also result in a penalty as high as 10 percent of the fair market value of transferred property (up to a maximum amount of $100,000).
Certain provisions also enacted in the 2010 Hiring Incentives to Retire Employment (HIRE) Act provide for an extension of the statute of limitations for the entire corporate tax return, if certain international information reporting is omitted or is incomplete within a U.S. tax return. This includes, among others, Forms 5471, 8858, 8865, 926 and 5472.
The HIRE Act provision applies to any tax return filed after March 18, 2010. The extension of the statute of limitations may prevent companies from releasing any reserves for uncertain tax positions until the omitted or incomplete returns are actually filed. An extended statute increases the period of time for the IRS to examine the corporate income tax returns and assess additional taxes on items not necessarily related to the omitted or incomplete filings.
In September 2010, the IRS finalized Schedule UTP (Uncertain Tax Positions), which certain corporations must use to report uncertain tax positions for which a reserve was recorded in the audited financial statements (or for which no reserve was recorded in anticipation of tax litigation).
For taxable years 2012 and 2013, the asset threshold triggering Schedule UTP filing requirement has been reduced to $50 million, and starting with taxable year 2014, the applicable asset threshold is $10 million.
This new filing requirement creates more transparency for the IRS to be able to identify potential non-compliance with its guidelines.
Chapter 3: Transfer Pricing in the Spotlight
Transfer pricing compliance continues to be an area of focus not only for the IRS, but also for tax authorities worldwide.
The IRS requires taxpayers to have transfer-pricing documentation in place when they file their U.S. corporate tax returns. Otherwise, a taxpayer may be subject to penalties of 20 percent to 40 percent of additional tax owed resulting from transfer-pricing adjustments.
The timing of having transfer pricing documentation in place should be considered in light of a taxpayer’s foreign jurisdictional transfer-pricing requirements as well. Many foreign jurisdictions, including Mexico and Canada, require transfer-pricing documentation to be in place concurrently with local filings, and the timing of these can often be ahead of U.S. filings.
There are many areas where mistakes can be made. For example, the information regarding intercompany transactions documented in a taxpayer’s transfer-pricing report should coincide with the information reported on the previously mentioned Forms 5471, 8858, 8865, 926 and 5472.
Inconsistencies or discrepancies between transfer-pricing documentation and these forms can often lead to increased scrutiny from the IRS by highlighting inaccurate forms or incomplete documentation.
In light of the lapsed credits, multinational considerations and transfer pricing developments, taxpayers should, more than ever, be concerned with ensuring that their tax filing strategy is sound. The potential cost for failure is too great for a laissez-faire attitude.
Chris Bard is national leader of R&D Tax Credit Services and Kirk Hesser is senior director of transfer Pricing at BDO USA. Bill Roth. a partner of National Tax Services at the accounting and professional services firm, co-wrote this article. Material discussed is meant to provide general information and should not be acted on without professional advice tailored to individual needs.