When you think about tax strategies, what comes to mind?

Most probably, you may think it involves reducing costs a little here and there and shifting some budgets around. Well, let’s get real here – superficial tweaks are not going to get you to where you want to go. Tax optimization, especially for tech companies, is about applying the rules to your advantage, legally and comprehensively. And that requires an in-depth analysis, not just adjusting numbers in Q4.

This guide alerts you to tricks that are far beyond the standard deductions and shows you how your tech company can use the tax code in a very positive manner to manage cash flow, follow expense accounting, and ultimately boost growth.

R&D Tax Credits

If your company is creating new software, making innovative products, or improving existing ones, you’re likely spending on some activities that qualify for R&D tax credits. Unfortunately, many tech companies underutilize these benefits mainly because they misunderstand what constitutes “R&D”.

The reality? Qualified activities can include designing an enhanced algorithm for a process, the creation of new and improved systems or software and so forth. What’s important is to know IRS qualification requirements surrounding research.

These activities must be directed toward eliminating the uncertainty about new or improved functions, performance, or reliability. With proper application, there is always a possibility of using the R&D tax credit to offset payroll tax liability. This way, smaller, newer tech firms would immediately benefit from a cash flow boost. For large, established players, it can significantly reduce tax pressures, free up funds for re-investment.

Section 179 and Bonus Depreciation

For most tech companies, investments in infrastructure and equipment are a standard practice. To manage these expenses, Section 179 and bonus depreciation provisions come into play. With Section 179, you can expense up to the total purchase price of qualifying assets like servers, computers, and even certain software, in the year it is put into service, and not spreading it out over several years. Your business would be getting an immediate tax break to make up for the heavy upfront costs and enhance cash flow.

Then you have bonus depreciation. This allowance gives you the opportunity to expense a huge percentage of the cost of equipment in the first year. Up to 80% of the purchase price of a qualified asset placed into service in the calendar year. While your company is in growth-mode, combining both expense deductions (Section 179 and Bonus Depreciation) will allow for considerable tax savings.

Employee Stock Options

A lot of tech companies looking to retain or incentivize their employees offer them ESOs or employee stock options. It is a common perk. But when it comes to tax strategy, there’s more to ESOs than just employee retention. The timing of the grant and exercise (taxation begins only after exercise) options can make a big difference to the tax scenario of your company.

You might use qualified Incentive Stock Options that help to lessen the tax effect both on the company side and employees. While no tax deduction takes place during the issuance of ISOs, the benefits of these might come in the long term in cases where the exercise is timed correctly. This is particularly relevant if your company is going to experience high expenses or lower revenues during those years.
Your aim should be to avoid AMT (Alternative Minimum Tax) complications for your employees by fixing an appropriate timing for option exercises. This will make your team happy and ensure that tax liabilities are not huge.

State and Local Tax Incentives

Since most technology companies operate across state lines or even around the globe, it becomes crucial to account for state and local tax (SALT) planning. Federal caps on SALT deductions established recently make this one of the more important considerations.
Some states, such as California and Texas, have individual incentives for technology companies – from local credits and rebates to grants. But if you want to benefit fully from the process, you’d require a thorough understanding of each state’s requirements and the skills to strategically structure your operations.

Certain states have favorable corporate tax laws and it may be a good idea to open set up operations or subsidiaries in these states. Suppose you would save a lot of money if you locate your R&D departments in a state that offers high credits for research activities. Income shifting is also possible for tech companies that run multistate operations. This is a practice where income is transferred to states with lower tax rates while higher costs are assigned to states with higher tax rates. When done appropriately, your total state tax liability will be drastically lowered.

Foreign Tax Credits in International Business

In the event of a border-crossing business venture, FTCs should enter your tax planning toolkit. The FTC lets a firm offset taxes paid to foreign governments against their U.S. tax obligations. You won’t be doubly taxed on income earned abroad. It can be particularly useful when dealing with countries with very high tax rates.

You would need some expertise in foreign tax credits. The IRS is strict about what’s allowable and how those credits might be used. The process requires you to classify income into “baskets” such as general category, passive category and so on. You are not allowed to use credits from one category to offset taxes on another category. Even though the administration burden is heavy, with the right kind of planning FTC gives a massive tax relief and cuts through some of that financial complexity involved in branching out internationally. If you are looking to take advantage of your foreign tax credits, you could work with a finance advisor who specializes in international taxation. They would be aware of the subtleties of U.S. tax regulations as well as those of other countries.

Net Operating Losses (NOLs) Strategically

There is a provision for Net Operating Losses (NOLs) that allows tech businesses to carry forwards their losses, spreading them out over several years in order to offset taxable income in subsequent years. Tech companies tend to make heavy initial investments in their early years, so they typically gather a significant number of NOLs. Business owners need to manage these losses to their maximum advantage.

The Tax Cuts and Jobs Act eliminated the carryback provisions in all cases except for certain agricultural businesses. If you don’t have pre-January 1, 2018, carrybacks, you’re restricted to carrying forward NOLs with an 80% limit on taxable income offset. . It’s a game of tax timing that would get you to time your deductions based on years that you incurred losses to delay your tax liabilities until the next time you can enjoy some profitability in the future. Strategically lining up your expenses and revenue recognition patterns could maximize the value of the NOLs and decrease your tax burden in the long run.

At this point, a finance advisor here might really help structure the financials so that they are aligned with the latest tax laws, thereby effectively helping manage NOLs.

Conclusion

It isn’t about ticking off a few boxes and getting a quick return. It is in fact, for a technology company, using available credits and deductions; utilizing planning tools in ways that best keep capital in the hands of your company and maximize the value. All such strategies come with the need for specialized knowledge and application in fitting the business goals unique to each firm.

If you need any consulting services from tech company CFO in Califonia, then visit our website.