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The Build Back Better Act in a legislative lull 

02.11.22

Read this if you are a business interested in the Build Back Better Act. 

2021 was a busy legislative year. A new administration took office. The American Rescue Plan was enacted in March. The Infrastructure Investment and Jobs Act (IIJA) was signed into law in November. The last major piece of legislation the Biden administration sought to enact in 2021 was the Build Back Better Act (BBBA). But in the face of opposition by some moderate democratic senators regarding certain policy provisions and its price tag, the BBBA did not make it through the Senate by December 31. With the calendar having turned the page to 2022, what is the future of the BBBA?

With a recent Supreme Court retirement announcement, global affairs issues and voting rights legislation, both Congress and the administration have much on their plate as we enter February 2022. With such a crowded agenda, the BBBA seems to have faded of late. Nonetheless, the bill has what appear to be three possible paths ahead.

First, the bill could get new life and be taken up in its current form, or close to it, in the Senate. Given the opposition to some of the bill policy provisions, recent comments from a senator about the bill’s being “dead,” and its price tag—even after the bill was reduced by nearly half over the past several months—it seems unlikely that it would pass the Senate in a form close to what it was in December.

Second, the bill could simply die on the vine. Having entered 2022, and with midterm elections on the calendar in November, it may be too difficult to revive any part of the bill this year.

Finally, the bill could be split up into separate pieces of legislation. While some provisions in the current bill do not have adequate support to ensure passage in the Senate, some provisions likely do. For example, climate issues, energy provisions, and tax matters could be taken up in separate bills or included in other legislative packages, such as the fiscal year 2022 spending bill. If legislative priorities are addressed this way, we may see these provisions revived or even enacted into law throughout the year.

One thing is certain: No matter how powerful a crystal ball one can find it cannot predict what is going to happen in an unpredictable legislative year. As events develop, we will follow them and provide our insights along the way.

Written by Todd Simmens. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com

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Read this if you have offices in more than one state or are a SaaS company.

For many software-as-a-service (SaaS) providers, sales tax compliance remains a challenge. Approximately 20 states currently subject SaaS to tax, and taxability varies from state to state, which impacts many SaaS companies that scale rapidly and unknowingly expand their nexus footprint into these states.

In South Dakota v. Wayfair, Inc., the Supreme Court held that states may assert nexus on an out-of-state business that exceeds a reasonable economic threshold, whether or not the business has physical presence in the state. The 2018 ruling is particularly impactful to SaaS companies because:

  • Cloud-based offerings are delivered electronically without the need for in-state presence.
  • Following the decision, all states have enacted some form of legislation that adopts an economic nexus threshold (typically, this threshold is $100,000 in sales or 200 transactions).
  • With Wayfair standards now in place for over three years, historical noncompliance is becoming more material, and states are expected to increase enforcement.

The issue of sales tax compliance has become more pressing now for two key reasons:

First, liabilities and exposures are cumulative, and material exposures may continue to mount for companies that are noncompliant. This is especially relevant for companies that have failed to adhere to the Wayfair nexus standards. In addition, the increasing presence of remote employees will expand the nexus footprints of many technology companies that offer flexible work arrangements.

Second, while tech M&A activity is expected to slow for the remainder of 2022, some SaaS firms may still be looking to sell or raise capital. Sales tax exposure will remain a priority consideration during the due diligence process for any strategic deals taking place. Due to the short lifecycle of most technology companies, tax due diligence is key in preparing for an exit or capital raise.

The impact of evolving tax policy

An increasing number of states are amending the statutory definition of taxable services to include SaaS or are categorizing SaaS as taxable “tangible personal property.” For example, Maryland recently enacted legislation that imposes sales tax on certain digital products, including SaaS.

Adding to the complexity, states often construe certain technology-based services as taxable SaaS. For example, state administrative guidance and case law may interpret online advertising and data analytics services as taxable SaaS if software is the predominant component of the offering. Also, as noted above, the state-by-state treatment varies widely. For instance, New York aggressively subjects cloud-based offerings to sales tax, whereas California does not subject SaaS or electronically downloaded offerings to sales tax.

Remote work

The recent adoption of remote-work models further complicates the determination of nexus and sales tax obligations, as companies hire employees in states where they have not previously had a physical presence. The vast majority (84%) of all technology businesses surveyed in BDO’s 2022 Technology CFO Outlook Survey expect to see some impact on their total tax liability as a result of onboarding out-of-state remote workers.

The presence of in-state employees is a nexus-creating activity irrespective of whether the company’s sales exceed economic nexus thresholds. Therefore, if a SaaS company has employees working in a different state than its headquarters, it is critical to track employee start dates by state and consider the potential sales tax obligations.

Understanding your risk exposure

In an exit scenario, CFOs don’t want surprises, and buyers don’t want to absorb liabilities. SaaS companies must carefully analyze their sales and use tax posture in the deal context to understand risks and proactively address any shortcomings. Failure to adopt appropriate tax compliance procedures at the onset of nexus-creating activities can lead to a material exposure.

Given the complex nature of SaaS sales tax, technology companies must address compliance in a step-by-step phased approach:

  • Nexus study
    An initial nexus study consists of an examination of a company’s state specific activities in determining whether it has a filing obligation in various states. This includes an analysis of both physical presence (e.g., property, payroll, in-state services, etc.) and state-by-state economic nexus standards.
  • Taxability analysis
    Once the company’s nexus profile is established, a comprehensive taxability analysis is required to determine whether the states identified in the nexus study subject SaaS and other ancillary services to sales tax. Depending on the nature of the company’s offerings, this may involve in-depth research on a state-by-state basis. For instance, if the company is providing a technology-based service that is potentially classified as a nontaxable service rather than SaaS, research in the material states is required to develop a supportable position. In addition, the taxability process will include an assessment of potential mitigating factors, such as tax-exempt customers, sale-for-resale exemptions and use tax remittance, on a customer-by-customer basis.
  • Potential exposure quantification/remediation
    If the company has nexus in states that subject its offerings to tax, the exposure should be quantified to determine the magnitude of exposure in those states. This will help to determine whether to proactively remediate the exposure through participation in state voluntary disclosure programs. Voluntary disclosure participation allows a company that is historically noncompliant to pay the applicable back taxes in exchange for a limited lookback period (typically three to four years) with the waiver of penalties. 
  • Sales tax compliance automation
    Once the company has addressed its potential exposure in the applicable states, it will have a subsequent filing obligation. Depending on the complexity, an automated sales-tax solution is often recommended to assist with the nexus, taxability and filing compliance going forward. An automated solution often increases efficiencies, saves time and helps mitigate tax compliance risk. 

Developing a plan to address sales tax prior to undergoing a diligence process is key to better understanding and controlling the compliance process. Failure to do so may lead to material escrow or purchase price allocation to remediate a sales tax issue that could have otherwise been prevented. 

Way forward

Understanding state and local taxes (SALT) can make a big difference for technology companies, especially SaaS businesses. Non-compliance with tax standards could lead to financial risks and even affect customer relationships.

There is ample M&A opportunity to consider in 2022, with valuations leveling off and cash reserves ready to be spent. Nearly two-thirds of tech firms (65%) plan to buy, sell, or partner this year, according to BDO data. Tech companies should prepare for deal making by being proactive about sales and tax compliance. Not doing so can block deals in the pipeline, as buyers and investors are keenly aware of tax compliance obligations.

Consulting a third party on SALT compliance, especially regarding economic nexus standards and taxability, may help SaaS firms receive the full value of their companies, mitigate exposure and liability, and empower company leaders to feel prepared when it comes time to sell.

If you have questions about your specific situation, please contact our Consulting and Compliance team. We're here to help.

Written by Angela Acosta, Thomas Leonardo, and Matthew Dyment. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com

Article
Breaking down sales and use tax compliance for SaaS companies

Read this if you are a community bank.

The Federal Deposit Insurance Corporation (FDIC) recently issued its first quarter 2022 Quarterly Banking Profile. The report provides financial information based on Call Reports filed by 4,796 FDIC-insured commercial banks and savings institutions. The report also contains a section specific to community bank performance. In first quarter 2022, this section included the financial information of 4,353 FDIC-insured community banks. BerryDunn’s key takeaways from the report are as follows:

Community banks continue to feel the impact of shrinking net interest margins and inflation.

Community bank quarterly net income dropped to $7 billion in first quarter 2022, down $1.1 billion from a year ago. Lower net gains on loan sales and higher noninterest expenses offset growth in net interest income and lower provisions. Net income declined $581.3 million, or 7.7 percent from fourth quarter 2021 primarily because of lower noninterest income and higher noninterest expense.

Loan and lease balances continue to grow in first quarter 2022

Community banks saw a $21.5 billion increase in loan and lease balances from fourth quarter 2021. All major loan categories except commercial & industrial and agricultural production grew year over year, and 55.3 percent of community banks recorded annual loan growth. Total loan and lease balances increased $35.1 billion, or 2.1 percent, from one year ago. Excluding Paycheck Protection Program loans, annual total loan growth would have been 10.2 percent.

Community bank net interest margin (NIM) dropped to 3.11 percent due to strong earning asset growth.

Community bank NIM fell 15 basis points from the year-ago quarter and 10 basis points from fourth quarter 2021. Net interest income growth trailed the pace of earning asset growth. The yield on earning assets fell 28 basis points while the cost of funding earning assets fell 13 basis points from the year-ago quarter. The 0.24 percent average cost of funds was the lowest level on record since Quarterly Banking Profile data collection began in first quarter 1984. 

Community bank allowance for credit losses (ACL) to total loans remained higher than the pre-pandemic level at 1.28 percent, despite declining 4 basis points from the year-ago quarter.


NOTE: The above graph is for all FDIC-Insured Institutions, not just community banks.

The ACL as a percentage of loans 90 days or more past due or in nonaccrual status (coverage ratio) increased to a record high of 236.7 percent. The decline in noncurrent loan balances outpaced the decline in ACL, with the coverage ratio for community banks emerging 57.9 percentage points above the coverage ratio for noncommunity banks. 

The banking landscape continues to be one that is ever-evolving. With interest rates on the rise, banks will find their margins in flux once again. During this transition, banks should look for opportunities to increase loan growth and protect and enhance customer relationships. Inflation has also caused concern not only for banks but also for their customers. This is an opportune time for banks to work with their customers to navigate the current economic environment. Community banks, with their in-depth knowledge of their customers’ financial situations and the local economies served, are in a perfect position to build upon the trust that has already been developed with customers.

As always, please don’t hesitate to reach out to BerryDunn’s Financial Services team if you have any questions.

Article
FDIC issues its First Quarter 2022 Quarterly Banking Profile

Read this if you are a solar energy investor, developer, or installer. 

Solar energy is a popular choice for businesses looking to reduce their carbon footprint through alternative energy sources. In addition to supporting a company’s environmental, social and governance (ESG) strategy, converting to solar energy can potentially lock-in lower energy rates. Further, Section 48 of the Internal Revenue Code provides businesses that invest in solar energy a 26% Investment Tax Credit (ITC) on qualifying solar property placed in service before January 1, 2026—but only if construction begins on the property before January 1, 2023. Otherwise, the credit is phased down to as low as 10%.

The IRS has provided special rules to determine when construction begins on solar energy property for ITC purposes. Businesses seeking to maximize the available tax credits should consider beginning solar projects before the end of 2022 to be able to take advantage of the 26% ITC rate.

Phasedown of ITC for solar energy property

Under current rules, the ITC percentage for qualifying solar energy property is determined based on when construction begins, and the credit is taken in the year the qualifying property is placed in service.

For property placed in service prior to January 1, 2026, the credit is as follows: 

  • 26%, if construction begins after December 31, 2019, and prior to January 1, 2023;
  • 22%, if construction begins after December 31, 2022, and prior to January 1, 2024; or
  • 10%, if construction begins after December 31, 2023.

For property placed in service after December 31, 2025, the credit is 10% regardless of when construction begins. Unused credits may be carried back one year and carried forward 20 years.

Legislative developments

The Biden Administration has indicated its support of clean energy incentives. While the Build Back Better proposals approved by the US House of Representatives in 2021 would have modified the ITC and extended the credit to qualifying solar projects for which construction begins before 2027, the legislation was not passed by the Senate. Therefore, the above phasedown of the credit remains in force. Solar energy developers and businesses planning to invest in solar energy projects should continue to monitor potential legislative developments in this area.

Determining when construction begins

The IRS issued Notice 2018-59 to provide specific guidance on when construction begins for purposes of determining the solar ITC percentage. The notice provides two methods a taxpayer can use to establish when construction begins: (i) the physical work test, or (ii) the five percent safe harbor. Both methods include a continuity requirement.

Physical work test

Construction begins under the physical work test when the taxpayer begins physical work of a significant nature on the project. The analysis is based on the nature of the work performed—not the amount or cost of the work—with no minimum requirements. Physical work can occur on-site or off-site and includes, for example, manufacturing components, inverters, transformers, or other power conditioning equipment. The notice clarifies that physical work does not include preliminary activities (as defined) or work to produce components of energy property that are included in existing inventory or that are typically held in inventory by a vendor.  

Five percent safe harbor 

Under the five percent safe harbor, construction begins when the taxpayer pays or incurs five percent or more of the total cost of the solar energy property. Whether a cost has been incurred for this purpose is based on the taxpayer’s method of accounting. The notice provides special rules for solar energy projects consisting of multiple qualifying properties.

Continuity requirement

Both the physical work test and the five percent safe harbor include a continuity requirement, under which the taxpayer must show continuous progress toward completing the project. This means maintaining a continuous program of construction under the physical work test and satisfying a continuous efforts test under the five percent safe harbor. Whether the continuity requirement is satisfied under either method is determined based on the relevant facts and circumstances.

Notice 2018-59 also provides a continuity safe harbor, which allows solar projects to satisfy the continuity requirement if the project is placed in service by the end of the calendar year that is no more than four calendar years after the year construction began. In response to the pandemic and associated supply chain issues, the IRS issued Notice 2021-14 to extend the continuity safe harbor to six years for projects for which construction began during calendar year 2016, 2017, 2018, or 2019, and to five years for projects where construction began in 2020.

Timeline pressure

Solar energy developers and businesses investing in solar energy projects are on a tight timeline to determine whether they want to begin construction on projects in their pipeline before the end of 2022 to be able to take advantage of the 26% ITC rate.

Given the persistence of supply chain and workforce issues and the potential rush to begin construction prior to the end of the year, taxpayers should keep in mind that contractors and equipment may not be available or could be difficult to secure in time to meet the year-end beginning of construction deadline. In addition, supply chain and inventory issues may drive cost increases and thus cost overruns that must be considered when analyzing when construction begins using the five percent safe harbor.

If you have questions on this or other renewable energy tax topics, please contact our Renewable Energy team. We’re here to help.

Article
Year-end planning for the solar energy investment tax credit

Read this if you use QuickBooks Online.

With gas prices so high, you need to track your travel costs as closely as possible. Consider getting a tax deduction for your business mileage.

If you drive even a little for business, it’s easy to let mileage costs slide. After all, it’s a pain to keep track of your tax-deductible mileage in a little notebook and do all the calculations required. If you do rack up a lot of business miles, you probably forget to track some trips and end up losing money.

QuickBooks Online offers a much better way. Its Mileage tools include simple fill-in-the-blank records that allow you to document individual trips. You can either enter the starting point and destination and let the site calculate your mileage and deduction or enter the number of miles yourself.

If you use QuickBooks Online’s mobile app, it can track your miles automatically as you drive (as long as you have the correct settings turned on). Here’s a look at how all of this works.

Setting up 

To get started, click the Mileage link in QuickBooks Online’s toolbar. The screen that opens will eventually display a table that contains information about your trips, but you need to do a little setup first. Click the down arrow next to Add Trip in the upper right corner and select Manage vehicles. A panel will slide out from the right. Click Add vehicle.

 
You’ll need to supply information about your vehicles before you can start entering trips.

You’ll need to supply the vehicle’s year, make, and model. Do you own or lease it, and on what date was the vehicle purchased or leased and put into service? Do you want to have your annual mileage calculated by entering odometer readings or have QuickBooks Online track your business miles driven automatically? When you’re done making your selections and entering data, click Save.

Entering trip data

You can download trips as CSV files or import them from Mile IQ, but you’re probably more likely to enter them manually. Click Add Trip in the upper right corner. In the pane that opens, you’ll enter the date of the trip and either the total miles or start and end point. You’ll select the business purpose and vehicle and indicate whether it was a round trip. When you’re done, click Save. The trip will appear in the table on the opening screen, and your current possible total deduction will be in the upper left corner, along with your total business miles and total miles.

If you want to designate a trip as personal, click the box in front of the trip in that table. In the black horizontal box that appears, click the icon that looks like a little person, then click Apply. Now, the trip will appear in the Personal column and will not count toward your business tax-deductible mileage. 

When you select a trip in the Mileage table, you can mark it as personal so it’s not included in your business tax-deductible miles.

Personal trips can count, too

If you use your vehicle(s) for personal as well as business purposes, tracking some of those miles can also mean a tax deduction. For tax year 2022, you can deduct 18 cents per mile for your travel to and from medical appointments. Note: Medical mileage is only deductible if medical exceeds a certain percent of AGI. Be sure to check with the IRS yearly tax code, as they update the mileage amounts annually.

And if you do volunteer work for a qualified charitable organization, the miles you drive in service of it can be deducted at the rate of 14 cents per mile. You can also claim the cost of parking and tolls, as long as you weren’t reimbursed for any of these expenses. Obviously, the IRS wants you to keep careful records of your charitable mileage, and QuickBooks Online can provide them.

QuickBooks Online doesn’t track these deductions, but you’ll at least have a record of the miles driven.

Auto-track your miles

The easiest way to track your mileage in QuickBooks Online is by using its mobile app. You can launch this and have it record your mileage automatically as you’re driving. Versions are available for both Android and iOS, and they’re different from each other. They also have more features than the browser-based version of QuickBooks Online, like maps, rules, and easier designation of trips as business or personal.

 
The iOS version of Mileage in the QuickBooks Online app

In both versions, you’ll need to click the menu in the lower right corner after you’ve opened the QuickBooks Online app and select Mileage. Make sure Auto-Tracking is turned on. Your phone’s location services tool must be turned on, too. There are other settings that vary between the two operating systems. You can search the help system of either app to make sure you get your settings correct if the onscreen instructions aren’t clear enough.

Of course, you won’t see the fruits of your mileage deductions until you file your 2022 taxes. But you can factor these savings in as you’re doing your tax planning during the year. Please contact the Outsourced Accounting team if you’re having any trouble with QuickBooks Online’s Mileage tools, or if you have questions with other elements of the site.

Article
How QuickBooks Online helps you track mileage

Read this if you use QuickBooks Online.

You should be running reports in QuickBooks Online on a weekly—if not daily—basis. Here’s what you need to know.

You can do a lot of your accounting work in QuickBooks Online by generating reports. You can maintain your customer and vendor profiles. Create and send transactions like invoices and sales receipts, and record payments. Enter and pay bills. Create time records and coordinate projects. Track your mileage and, if you have employees, process payroll.

These activities help you document your daily financial workflow. But if you’re not using QuickBooks Online’s reports, you can’t know how individual elements of your business like sales and purchases are doing. And you don’t know how all of those individual pieces fit together to create a comprehensive picture of how your business is performing. 

QuickBooks Online’s reports are plentiful. They’re customizable. They’re easy to create. And they’re critical to your understanding of your company’s financial state. They answer the small questions, like, How many widgets do I need to order?, and the larger, all-encompassing questions like, Will my business make a profit this year?

Getting the lay of the land

Let’s look at how reports are organized in QuickBooks Online. Click Reports in the toolbar. You’ll see they are divided into three areas that you can access by clicking the labeled tabs. Standard refers to the comprehensive list of reports that QuickBooks Online offers, displayed in related groups. Custom reports are reports that you’ve customized and saved so you can use the same format later. And Management reports are very flexible, specialized reports that can be used by company owners and managers.


A partial view of the list of QuickBooks Online’s Standard reports 

Standard reports

The Standard Reports area is where you’ll do most—if not all—of your reporting work. The list of available reports is divided into 10 categories. You’re most likely to spend most of your time in just a few of them, including:

  • Favorites. You’ll be able to designate reports that you run often as Favorites and access them here, at the top of the list.
  • Who owes you. These are your receivables reports. You’ll come here when you need to know, for example, who is behind on making payments to you, how much individual customers owe you, and what billable charges and time haven’t been billed.
  • Sales and customers. What’s selling and what’s not? What have individual customers been buying? Which customers have accumulated billable time?
  • What you owe. These are your payables reports. They tell you, for example, which bills you haven’t paid, the total amount of your unpaid bills (grouped by days past due), and your balances with individual vendors.
  • Expenses and vendors. What have I purchased (grouped by vendor, product, or class)? What expenses have individual vendors incurred? Do I have any open purchase orders?

The Business Overview contains advanced financial reports that we can run and analyze for you. The same goes for the For my accountant reports. Sales tax, Employees, and Payroll will be important to you if they’re applicable for your company.

Working with individual reports


Each individual report in QuickBooks Online has three related task options.

To open any report, you just click its title. If you want more information before you do that, just hover your cursor over the label. Click the question mark to see a brief description of the report. If you want to make the report a Favorite, click the star so it turns green. And clicking the three vertical dots opens the Customize link. 

When you click the Customize link, a vertical panel slides out from the right, and the actual report is behind it, grayed out. Customization options vary from report to report. Some are quite complex, and others offer fewer options. The Sales by Customer Detail report, for example, provides a number of ways for you to modify the content of your report so it represents exactly the “slice” of data you want. So you can indicate your preferences in areas like:

  • Report period
  • Accounting method (cash or accrual)
  • Rows/columns (you can select which columns should appear and in what order, and group them by Account, Customer, Day, etc.)
  • Filter (choose the data group you want represented from several options, including Transaction Type, Product/Service, Payment Method, and Sales Rep)

Once you’ve run the report, you can click Save customization in the upper right corner and complete the fields in the window that opens. Your modification options will then be available when you click Custom reports, so you can run it again anytime with fresh data.


You can customize QuickBooks Online’s reports in a variety of ways.

We’ll go into more depth about report customization in a future article. For now, we encourage you to explore QuickBooks Online’s reports and their modification options so that you’re familiar with them and can put them to use anytime. Contact our Outsourced Accounting team if you have any questions about the site’s reports, or if you need help making your use of QuickBooks Online more effective and productive.

Article
Getting started with reports in QuickBooks Online

Read this if you use QuickBooks Online.

Are you taking on a worker who’s not an employee? QuickBooks Online includes tools for tracking and paying independent contractors.

The COVID-19 pandemic created millions of self-employed individuals and small businesses. Whether they chose to, or circumstances forced them to, these new entrepreneurs had to learn new ways to get paid and to prepare their income taxes.

If you’re thinking about taking on a contract worker, you, too, will have to educate yourself on the paperwork and processes required to comply with the IRS’ rules for his or her compensation. It’s much easier than hiring a full-time employee, but it still takes some knowledge of how QuickBooks Online handles these individuals.

You’ll also need to make certain that the person you’re hiring is indeed an independent contractor and not an employee. The IRS takes this distinction very seriously. If you’re at all unsure of your new hire’s employment status, we can help you sort it out.

Creating records for contractors

Once new contractors have accepted your offer, you’ll need to have then fill out an IRS Form W-9. You can download a copy here. Employees complete the more detailed Form W-4 so that the employer can withhold income taxes correctly, but you won’t have to withhold taxes for your contract workers. They will be responsible for calculating and paying quarterly estimated taxes and filing an IRS Form 1040 every year. 

You, though, will be responsible for sending them an IRS Form 1099-NEC (Non-Employee Compensation) every January if you paid them more than $600 during the previous year. You do not need to send a 1099-NEC to a corporation or to an LLC that is treated as a C Corp or an S Corp. 

You can complete the Vendor Information window for each independent contractor, checking the box in front of Track payments for 1099.

Using the information the contractors provide, you can create records for them in QuickBooks Online. If you don’t have a QuickBooks Payroll subscription, you can set them up as 1099 vendors. Click the Expenses tab in the toolbar and then on the Vendors tab. Click New vendor in the upper right to open the Vendor Information window. Complete the fields for the worker and be sure to check the box in front of Track payments for 1099, as shown in the partial image above.

The vendor records you create will appear in QuickBooks Online’s Vendors list (again, Expenses | Vendors). Click on one to open it. You can toggle between two tabs here. The first, Transaction List, will eventually display all your financial dealings with that contractor. Vendor Details opens the record you just created, which you can edit from this screen.

Paying contractors

When independent contractors send you invoices, you’ll return to this same screen. There are three ways you can pay them. Click the down arrow next to New Transaction in the upper right corner to see your options (or look down at the end of the row while you’re in list view). You can record the debt as a Bill if you want to pay it later (or if that’s the way you structure your recordkeeping). If you’re paying it right away, you can create an Expense or write a Check

You can choose an option from this vendor action menu to pay your independent contractors.

When you click one of these, QuickBooks Online opens a form with many of the contractors’ details already filled in. You’ll need to complete any additional fields at the top of the screen, and then either record the payment or debt under Category details or Item details, depending on how you do your bookkeeping. Either way, you’ll be able to enter the quantity and rate and/or amount and mark it billable (with a markup percentage, if you’d like) to a customer or project.

You’re probably going to want our help here, since there’s more than one way to pay independent contractors. If you subscribe to QuickBooks Payroll, you can use the service’s contractor features, which include the ability to invite your contractors to fill out their own records in QuickBooks Online. You may also want to add an account to your Chart of Accounts, and we’d want to offer guidance there. And you need to ensure that you’re classifying payments correctly, so they’ll appear in 1099 reports and 1099s themselves.

Creating records for independent contractors and paying these individuals seem like they should be simple operations. But anytime you’re dealing with payroll issues, you’re dealing with peoples’ livelihoods – and the IRS. We strongly encourage you to let us help you get this right. Contact the Outsourced Accounting team, and we’ll make sure you’re handling your worker payments with absolute accuracy.

Article
Hiring an independent contractor? How QuickBooks Online can help

Read this if you invest in research and development. 

Businesses that invest in research and development, particularly those in the technology industry, should be aware of a major change to the tax treatment of research and experimental (R&E) expenses. Under the 2017 Tax Cuts and Jobs Act (TCJA), R&E expenditures incurred or paid for tax years beginning after December 31, 2021, will no longer be immediately deductible for tax purposes. Instead, businesses are now required to capitalize and amortize R&E expenditures over a period of five years for research conducted within the U.S. or 15 years for research conducted in a foreign jurisdiction. The new mandatory capitalization rules also apply to software development costs, regardless of whether the software is developed for sale or license to customers or for internal use.

Tax implications of mandatory capitalization rules

Under the new mandatory capitalization rules, amortization of R&E expenditures begins from the midpoint of the taxable year in which the expenses are paid or incurred, resulting in a negative year one tax and cash flow impact when compared to the previous rules that allowed an immediate deduction.

For example, assume a calendar-year taxpayer incurs $50 million of US R&E expenditures in 2022. Prior to the TCJA amendment, the taxpayer would have immediately deducted all $50 million on its 2022 tax return. Under the new rules, however, the taxpayer will be entitled to deduct amortization expense of $5,000,000 in 2022, calculated by dividing $50 million by five years, and then applying the midpoint convention. The example’s $45 million decrease in year one deductions emphasizes the magnitude of the new rules for companies that invest heavily in technology and/or software development.

The new rules present additional considerations for businesses that invest in R&E, which are discussed below.

Cost/benefit of offshoring R&E activities

As noted above, R&E expenditures incurred for activities performed overseas are subject to an amortization period of 15 years, as opposed to a five-year amortization period for R&E activities carried out in the US. Given the prevalence of outsourcing R&E and software development activities to foreign jurisdictions, taxpayers that currently incur these costs outside the US are likely to experience an even more significant impact from the new rules than their counterparts that conduct R&E activities domestically. Businesses should carefully consider the tax impacts of the longer 15-year recovery period when weighing the cost savings from shifting R&E activities overseas. Further complexities may arise if the entity that is incurring the foreign R&E expenditures is a foreign corporation owned by a US taxpayer, as the new mandatory capitalization rules may also increase the US taxpayer’s Global Intangible Low-taxed Income (GILTI) inclusion.

Identifying and documenting R&E expenditures

Unless repealed or delayed by Congress (see below), the new mandatory amortization rules apply for tax years beginning after December 31, 2021. Taxpayers with R&E activities should begin assessing what actions are necessary to identify qualifying expenditures and to ensure compliance with the new rules. Some taxpayers may be able to leverage from existing financial reporting systems or tracking procedures to identify R&E; for instance, companies may already be identifying certain types of research costs for financial reporting under ASC 730 or calculating qualifying research expenditures for purposes of the research tax credit. Companies that are not currently identifying R&E costs for other purposes may have to undertake a more robust analysis, including performing interviews with operations and financial accounting personnel and developing reasonable allocation methodologies to the extent that a particular expense (e.g., rent) relates to both R&E and non-R&E activities.

Importantly, all taxpayers with R&E expenditures, regardless of industry or size, should gather and retain contemporaneous documentation necessary for the identification and calculation of costs amortized on their tax return. This documentation can play a critical role in sustaining a more favorable tax treatment upon examination by the IRS as well as demonstrating compliance with the tax law during a future M&A due diligence process.

Impact on financial reporting under ASC 740

Taxpayers also need to consider the impact of the mandatory capitalization rules on their tax provisions. In general, the addback of R&E expenditures in situations where the amounts are deducted currently for financial reporting purposes will create a new deferred tax asset. Although the book/tax disparity in the treatment of R&E expenditures is viewed as a temporary difference (the R&E amounts will eventually be deducted for tax purposes), the ancillary effects of the new rules could have other tax impacts, such as on the calculation of GILTI inclusions and Foreign-Derived Intangible Income (FDII) deductions, which ordinarily give rise to permanent differences that increase or decrease a company’s effective tax rate. The U.S. valuation allowance assessment for deferred tax assets could also be impacted due to an increase in taxable income. Further, changes to both GILTI and FDII amounts should be considered in valuation allowance assessments, as such amounts are factors in forecasts of future profitability.

The new mandatory capitalization rules for R&E expenditures and resulting increase in taxable income will likely impact the computation of quarterly estimated tax payments and extension payments owed for the 2022 tax year. Even taxpayers with net operating loss carryforwards should be aware of the tax implications of the new rules, as they may find themselves utilizing more net operating losses (NOLs) than expected in 2022 and future years, or ending up in a taxable position if the deferral of the R&E expenditures is material (or if NOLs are limited under Section 382 or the TCJA). In such instances, companies may find it prudent to examine other tax planning opportunities, such as performing an R&D tax credit study or assessing their eligibility for the FDII deduction, which may help lower their overall tax liability.

Will the new rules be delayed?

The version of the Build Back Better Act that was passed by the US House of Representatives in November 2021 would have delayed the effective date of the TCJA’s mandatory capitalization rules for R&E expenditures until tax years beginning after December 31, 2025. While this specific provision of the House bill enjoyed broad bipartisan support, the BBBA bill did not make it out of the Senate, and recent comments by some members of the Senate have indicated that the BBB bill is unlikely to become law in its latest form. Accordingly, the original effective date contained in the TCJA (i.e., taxable years beginning after December 31, 2021) for the mandatory capitalization of R&E expenditures remains in place.
 
The changes to the tax treatment of R&E expenditures can be complex. While taxpayers and tax practitioners alike remain hopeful that Congress will agree on a bill that allows for uninterrupted immediate deductibility of these expenditures, at least for now, companies must start considering the implications of the new rules as currently enacted. 

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Mandatory capitalization of R&E expenses—will the new rules impact your business?