Since the start of the COVID-19 pandemic, a flood of information has circulated, which can make it challenging to determine the strategies that apply to your specific business. To help you navigate applicable strategies related to COVID-19, as well as existing opportunities that might have slipped from your radar pre-pandemic, Moss Adams provides a list of eight tax issues for companies in the technology and life sciences industries.
1. PAYCHECK PROTECTION PROGRAM LOANS
Many companies didn’t pursue the Paycheck Protection Program (PPP) loans due to the affiliation rules or the belief their company already had adequate funding. If you were able to secure a PPP loan, you’re likely well aware it may be forgiven. The Paycheck Protection Program Flexibility Act of 2020 provided some helpful changes that make PPP loans worth reevaluating if you haven’t pursued the opportunity. The changes are intended to allow certain businesses some flexibility to use loan proceeds and to qualify for forgiveness. The Act extends the covered period from the original eight-week period to the earlier of 24 weeks or the end of 2020. Learn more details in our article on the Paycheck Protection Program Flexibility Act.
2. EMPLOYEE RETENTION TAX CREDIT
Companies that don’t receive a PPP loan may able to claim an employee retention tax credit (ERTC). This credit allows eligible employers to generate a tax credit used to offset their employment taxes and apply for a refund for any excess credit generated. The credit is equal to 50% of wages paid to an employee after March 12, 2020, up to a total of $10,000 per employee. The maximum credit may be worth up to $5,000 per eligible employee. Learn more details in our article: New Tax Credit Opportunities for Employers Impacted by COVID-19.
3. EXPANDED NET OPERATING LOSS CARRYBACKS
Many companies have periods of net operating losses (NOLs) mixed in with periods of income. Life sciences companies may receive a large up-front or milestone payment in one year, and then revert back to losses; technology companies that may have been profitable in earlier years can often revert back to losses.
Tax reform in 2017 changed the law so that NOLs couldn’t be carried back. This was amended in the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in 2020, which allows companies to carryback net operating losses incurred in 2018, 2019, and 2020 up to five years. If your company had tax liability between 2013 to 2017, and generated losses in 2018, 2019, or 2020, a carryback is especially helpful because the maximum federal tax rate through 2017 was 35%. Learn more details in our article: How to Leverage Net Operating Loss Rules to Create Cash Flow.
4. ACCELERATED ALTERNATIVE MINIMUM TAX RECOVERY
Many companies have been hit with the alternative minimum tax (AMT) due to significant income in a prior year, generally offset with NOLs. This AMT was carried forward under law enacted by tax reform in 2017. Under the CARES Act, a taxpayer may claim a refund for any remaining AMT credit carryover in their first tax year beginning in 2019, or elect to take the entire credit amount in 2018. As with most tax laws, there are some nuances to consider, so it can be useful to consult with your advisor.
5. RESEARCH CREDITS
Technology and life sciences companies often generate significant research credits, especially in their early years. Since 2016, start-up companies may be eligible to apply the R&D tax credit against their payroll taxes for up to five years. If you didn’t apply for credits in previous years, there may still be an opportunity to do so. Eligible companies can use R&D tax credits to claim against payroll taxes each year up to $250,000. Learn more details in our article: How the R&D Credit Can Help New Companies Offset Payroll Taxes.
6. REDUCED SALES TAXES
As companies grow and build out their office space, manufacturing space, or research space, they will spend a lot on equipment. To help these growing companies, some states have reduced payroll taxes for certain research and manufacturing equipment. However, these opportunities are often overlooked or not properly applied. To avoid leaving money on the table, companies should review their purchases to see if they qualify for the reduced rate and are eligible for a refund from the state or their supplier.
- California Life Sciences and Technology Companies: California has a reduced sales tax rate of approximately 4% for manufacturing and R&D machinery and equipment.
- Texas Life Sciences and Technology Companies: Texas has a sales and use tax exemption for capital assets used in qualified research and development. There’s also an R&D credit for Texas franchise tax, however, taxpayers can’t claim the R&D credit and use tax exemption in the same reporting period.
- Washington Technology Companies: Washington has a sales and use tax exemption for capital assets used in the development of computer software for sale whether downloaded or provided via the cloud. Manufacturers may also claim a similar exemption for capital assets used in qualified R&D.
7. SALES TAX REVIEW
Companies generally pay sales or use taxes on all their purchases of tangible goods. Sales tax is frequently misapplied, miscalculated, and overpaid. These overpayments often go unnoticed because the individual sales tax per purchase is small, but the total numbers can be large. A sales tax review can help you secure sales tax refunds and reduce the risk of future overpayments. Learn more.
8. VALUE-ADDED TAX REVIEWS
Companies that have international supply chain or do research services overseas are frequently hit with value-added tax (VAT). VAT may be hidden in contract suppliers or logistic company invoices. U.S. businesses should review their non-US supply chain to verify taxes are minimized. In addition, indirect taxes that are incurred outside the United States on large purchases should be reviewed to ensure they can be recovered in reasonable time.
We’re Here to Help
During this unparalleled time, we’re closely monitoring the COVID-19 situation as it evolves so we can provide up-to-date guidance and support to help you combat uncertainty. For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources:
Rich Croghan has been in public accounting since 1991. He primarily serves small and midsize life science, technology, and health care organizations, including pharmaceutical companies, research companies, medical device companies, digital health companies, hospitals, physician groups, and ancillary service organizations. He can be reached at (415) 677-8282 or [email protected].
Brian Wong has practiced public accounting since 2010. He provides tax and consulting services related to ASC 740, income tax compliance, research and development tax credits, international tax planning, state and local tax planning, tax accounting methods, and mergers, acquisitions, and reorganizations. He can be reached at (415) 677-8238 or [email protected].