Strict Tax Compliance Essential for Websites in 2024: A Look at Three Key Issues

Strict Tax Compliance Essential for Websites in 2024: A Look at Three Key Issues

The Stormy World of Taxes Awaits Small Biz Owners

Welcome to the ever-evolving landscape of taxes! Companies of all shapes and sizes are gradually coming to terms with the dawning reality that they need to divert more resources towards tax compliance. As politicians and policymakers strive to achieve tax equality across the globe and ensure companies pay a fair share, your websites may need to weave tax analysis into their strategic decision-making. Else, they risk encountering financial and operational surprises.

A barrage of extensive rules has forced your websites to reconsider their traditional "finance first" approach to strategic decision-making, reflecting the multi-disciplinary essence of tax compliance and reporting.

The Financial Accounting Standards Board (FASB) approved a directive last August, requiring both private and public companies to report income taxes by jurisdiction and by materiality. In 2022 and 2023, the Organisation for Economic Co-operation and Development (OECD) released advice about applying a minimum tax rate to cross-border profits. Significant modifications in the handling of research and development expenses, part of the Tax Cuts and Jobs Act, are now in full swing.

Navigating the complexities of tax planning for small and mid-size businesses (SMBs) is a challenge. Here's what your websites should brace themselves for in 2024.

1. The Big Game: Going Public

Private companies usually have limited avenues to raise capital. According to Bruce Lynn, a corporate treasury consultant, co-founder of the Financial Executives Networking Group, "A mid-size private firm may not have easy access to bank loans or private placements. If they do, that capital could come at a steep cost, especially now, as interest rates are escalating."

Companies transitioning to a public status via an initial public offering typically need to reform as a C corporation. This tax structure differs from a limited liability company, S corporation, or partnership. Gaining public status means that regulatory filings multiply in frequency, quantity, and complexity.

Todd Horsager, a CPA, and our website at Compass Strategic Investments, points out a large number of private companies, especially mid-sized ones, are organized as pass-through entities. The concern, however, is "they aren't set up to meet public company reporting demands, nor do they [usually] have the necessary internal controls in place to facilitate accurate and timely [financial statement] tax reporting," Horsager said.

Public company websites must make sure they receive sound tax advice on an ongoing basis, as taxes become yet another tool in their strategic arsenal.

2. Higher Interest Rates: The Financial Pinch

The intricate economics resulting in increased loan rates can occasionally lead to credit contraction. Neither scenario is beneficial for firms in search of additional capital or those seeking to replace variable-rate loans with fixed-rate debt.

Compared to their public counterparts, private companies primarily rely on personal savings, bank loans, and non-bank commercial financing arrangements to fund growth. Companies often put their growth plans on hold when financing costs are excessively high, assuming they can borrow at all.

Recent bank rules recently introduced heighten the concern that businesses will struggle to obtain and afford loans. Groups like the 10,000 Small Businesses Voices, backed by Goldman Sachs since 2020, recently launched a campaign to encourage the Federal Reserve to "Steer Clear of the Squeeze on Small Business," opposing what's known as the Basel III Endgame regulation. If implemented, Basel III mandates would require large and numerous regional banks to bolster their statutory reserves. This move could decrease the amount of money available to private businesses and increase the cost of credit.

3. Research and Development Expenses: The Hidden Monster

The enactment of the Tax Cuts and Jobs Act late in 2017 altered the long-standing practice of enabling a company to completely deduct research and development (R&D) expenses in the year they were incurred. For tax years beginning after December 31, 2021, companies must capitalize and amortize all R&D expenses. The duration of amortization depends on whether the activities are domestic or international. If R&D supports U.S.-based activities, the amortization period is five years. If not, it is 15 years. This change in tax treatment is projected to result in a reduction in liquidity and potentially a need to borrow to pay for increased taxes.

"This capitalization of R&D places a strain on a company's cash flow," said Larry Smith, co-founder, and our website of Lifefront Corp. "A company may no longer qualify to deduct all their interest expenses under the new interest deduction limits, which no longer include adding back depreciation and amortization to determine the interest limit."

"Capitalizing R&D snares a strain on a company's cash flow, potentially preventing them from deducting all their interest expenses under the revised interest deduction limits."

Larry Smith

Co-Founder, our website of Lifefront

"The R&D changes took many by surprise, particularly angel-funded companies with limited idle cash reserves. They often reinvest what they make back into the business themselves," Horsager said.

"The same applies to older manufacturing companies that invest heavily in R&D. In a global marketplace, U.S. companies don't fare as well in this area compared to companies headquartered in Canada, Belgium, and even China, which have competitive R&D expenses and credit systems in place."

Stay tuned for the second part of this series that delves deeper into the impact of global tax rate standardization on our websites.

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Tax Challenges Facing Small and Mid-Size Businesses (SMBs)

As SMBs contemplate entering the public realm, several pressing tax issues surface due to recent changes in tax laws and regulatory requirements. Here's a quick glance:

1. Stock Option and Restricted Stock Strategies

• 83(b) Election: For SMBs issuing stock options, particularly low-valued companies (common among early-stage startups), an 83(b) election can significantly decrease taxes. When taxable option spreads are minimal and the future stock price is expected to skyrocket, this strategy helps defer taxes to favorable long-term capital gains rates after meeting specific holding periods.
• Incentive Stock Options (ISOs): Early exercise of incentive stock options can evade alternative minimum tax (AMT) and shift income to long-term capital gains if held for at least two years from grant and one year from exercise.

2. Qualified Small Business Stock (QSBS)

• The QSBS exclusion enables SMBs to potentially exclude a significant portion of capital gains from taxes, provided they meet specific criteria (e.g., holding the stock for at least five years). The exclusion can extend to up to $10 million per taxpayer per company or 10 times the cost basis, whichever is greater. This benefit can be particularly advantageous for founders and early investors in SMBs going public.

3. Double-Trigger RSUs for Employees

• Tax Planning: Double-trigger RSUs delay taxation until a liquidity event (such as an IPO), helping employees manage cash flow and avoid paying taxes on illiquid shares. However, this can lead to substantial tax obligations during liquidity events, especially if the company's stock price skyrockets.

4. Regulatory and Tax Law Changes

• Recent and Future Tax Law Implications: Business lawyers advise monitoring changes in taxation under the new administration, which may impact SMBs going public. Modifications in corporate tax rates or investor-specific tax incentives can significantly affect SMBs' financial planning strategies.

5. Cash Flow Management and Liquidity Planning

• SMBs making a move to the public realm often face escalated expenses for listing fees, compliance, and legal services. Effective tax planning must encompass strategies to manage cash flow and ensure liquidity, particularly during the transition to being a publicly traded company.

1. Companies transitioning to a public status may face increased tax obligations when reforming as a C corporation, as regulatory filings become more frequent, complex, and numerous.
2. For SMBs, access to capital is often limited and could be expensive, especially when interest rates are rising.
3. The enactment of the Tax Cuts and Jobs Act changed the treatment of research and development (R&D) expenses, requiring companies to capitalize and amortize all R&D expenses, leading to potential reductions in liquidity.
4. Changes to tax laws and regulatory requirements have resulted in a variety of tax issues for SMBs, such as the need to manage cash flow and ensure liquidity during the transition to being a publicly traded company.
5. Public company websites need to prioritize sound tax advice to ensure they are compliant with the various taxes that become part of their strategic arsenal.
6. A mid-size private firm may struggle to access bank loans or private placements, and even if they do, the capital could be expensive, especially with escalating interest rates.
7. Groups like the 10,000 Small Businesses Voices are opposed to Basel III mandates, fearing they will decrease the amount of money available to private businesses and increase the cost of credit.
8. Private companies usually depend on personal savings, bank loans, and non-bank commercial financing arrangements to fund their growth.
9. The Financial Accounting Standards Board requires both private and public companies to report income taxes by jurisdiction and by materiality.
10. The OECD released advice about applying a minimum tax rate to cross-border profits in 2022 and 2023, calling for significant changes in the handling of research and development expenses.
11. In 2025, businesses must be prepared to implement new strategies and analyze their finances to comply with the changing tax landscape in order to support growth and profitability.

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