1. Sales and use tax recovery studies
Sales and use tax recovery studies often are underutilized because they’re seen as event based. They might be prompted by a state conducting a compliance audit or making a major change to its tax rate exemptions, or by a company expanding its taxable presence or geographic footprint. But refund recovery studies can be conducted in any given year, not only in the wake of major regulatory changes or business growth.
Sales and use tax recovery studies don’t just reduce the risks of noncompliance. They also can reveal unexpected tax advantages. And it doesn’t just have to be in the last tax year: Many states have lookback periods of three or four years.
In addition to uncovering past and current tax advantages, a review of sales and use taxes also can help identify tax planning opportunities for the future. This process can be time intensive, though, so look for experienced specialists from outside of your organization to help conduct a refund recovery study.
2. Research and development (R&D) tax incentives
A better time has not existed in recent years to take a fresh look at the treatment of your R&D investments as they relate to the R&D tax credit allowed under IRC Section 41 or expenses under IRC Section 174. The volume of regulatory changes to both credits and mandatory capitalizations provides taxpayers an opportunity to maximize their positions and proactively mitigate risk.
The R&D tax credit allows a dollar-for-dollar offset to your tax liability and can be a meaningful return on your R&D investments to help propel future R&D spending. The idea that only taxpayers performing obvious R&D activities can benefit from the credit is shortsighted, as the credit is available for any business that makes a qualifying research investment.
IRC Section 174 mandatory capitalization also is a game changer for a taxpayer’s overall footprint and tax strategy. Analyzing expenses against the new rules and the indirect relationship to your R&D credit is a must.
One caveat exists: Treatment of R&D-related expenses often is included in various IRS enforcement programs for violations and tax scams. It’s important for your tax team to know what the specific requirements are and what documentation is needed. Alternatively, you can work with outside tax specialists who understand those details.
3. Transfer pricing
Transfer pricing applies to a wide range of multinational businesses that conduct intercompany transactions. These transactions include the sale and purchase of tangible goods, license of intangible property, provision and receipt of services, financial transactions, and cost-sharing arrangements. Transfer prices are determined through a careful analysis of business and commercial factors and activities undertaken by the various entities in the transaction. Consequently, transfer pricing can affect other areas, such as customs and duties, financial reporting, and supply chain management. Within all of these activities, many organizations could find some untapped financial opportunities.
Transfer pricing frequently is viewed through the lens of tax compliance – having contemporaneous documentation provides penalty protection. However, transfer pricing also can be a useful tool to help optimize effective tax rates and improve cash flow.
The changing international tax landscape, due to the Organization for Economic Cooperation and Development’s Pillar 1 and Pillar 2 models, provides opportunities and challenges for taxpayers that would like to manage their tax footprint in an effective and efficient manner. The IRS is expected to assess more penalties in hopes of receiving better documentation from taxpayers. In 2022, the IRS issued an FAQ to provide taxpayers with guidance on what constitutes good documentation.
Your tax team needs to have a good understanding of U.S. and international tax and transfer pricing guidance when exploring potential cash flow options from transfer pricing realignment.
What are your goals for 2023? Our tax services and resources can help provide clarity on what’s ahead and uncover ways to help your organization’s bottom line.
