1. Sales and use tax recovery studies
Sales and use tax recovery studies often are underused 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 only reduce the risks of noncompliance – they also can reveal unexpected tax advantages. These benefits can extend beyond the past tax year: Many states have lookback periods of three or four years.
In addition to uncovering past and current tax advantages, reviewing 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
An R&D tax credit study can provide multifaceted benefits for companies interested in enhancing their financial positions, with the primary advantage being the potential to significantly increase cash flow. By identifying qualifying R&D activities and the associated expenses, businesses can claim tax credits that directly reduce their tax liability, freeing up capital that can be reinvested into further innovation or other areas of the business.
Businesses might be surprised by the broad definition of R&D under IRC Section 41, as it encompasses not only traditional scientific research, but also activities far more wide-reaching, including those related to developing or improving products and processes. This broader definition initially might seem to benefit high-tech and pharmaceutical sectors most, but it means that a wide array of industries can benefit from the R&D tax credit. Companies often overlook activities that could qualify for the credit, such as manufacturing process improvements, product enhancements, or even software development, which has become nearly ubiquitous in today’s business landscape.
Though IRS scrutiny is rapidly evolving (most notably with the latest draft of the Form 6765, “Credit for Increasing Research Activities” slated for the 2025 tax year, as well as recent taxpayer unfavorable court decisions), forgoing the R&D credit is shortsighted. Furthermore, because IRC Section 174 capitalization and amortization is mandated under the Tax Cuts and Jobs Act of 2017 – regardless of legislation to defer or repeal the law gaining traction in Congress – businesses already need to examine their R&D costs for tax planning and filing purposes. The R&D credit and Section 174 analysis contain several synergies, providing taxpayers with an opportunity to maximize their positions and proactively mitigate risk.
When evaluating spend for the R&D credit, it is important for businesses to know the specific requirements and to have a plan for documenting R&D costs. Alternatively, businesses can work with R&D tax specialists who understand the details and have extensive experience in substantiating claims.
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 international tax landscape in which multinational corporations are operating continues to change due to the to the Organization for Economic Cooperation and Development’s Pillar 1 and Pillar 2 initiatives. In particular, many countries have begun implementing Pillar 2 rules as of Jan. 1, 2024. Given that, in effect, these rules introduce a minimum effective tax rate of 15% on income arising from low-tax jurisdictions, it is likely that organizations will face an overall higher jurisdictional tax rate that could impact cash flow. However, these proposed changes also might provide opportunities for taxpayers that want to manage their tax footprint in an effective and efficient manner.
On the domestic front, the IRS has started reviewing information on taxpayers’ related-party transactions (based on their tax returns). Letters have been sent to inbound distributors that have recorded a low or negative margin, suggesting that the U.S. taxpayers’ transfer pricing arrangement might be amiss. While the IRS currently is focusing on inbound companies, it is expected to cast a wider net in 2024.
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 2024? Our tax services and resources can help provide clarity on what’s ahead and uncover ways to help your organization’s bottom line.
