The Tax Cuts and Jobs Act (TCJA) is the most comprehensive tax reform our country has seen in more than 3 decades, bringing broad and complex changes to businesses in every industry.
With more and more technology firms calling the Boston area home, I thought it might be helpful to discuss some of the implications of the TCJA specific to the tech world.
Below, I’ve broken down a few of the top impacts tech companies should be aware of:
Corporate Tax Rate
- Old law: C Corporations were taxed based on a graduated system with a top rate of 35%.
- New law: Flat 21% income tax for C Corporations.
- Impact: Since many tech companies are classified as C Corporations, this is a positive change for the industry – and it’s a permanent one, unlike some of the other changes in the TCJA which will be phased out over the next decade.
Research + Experimentation
- Old law: R+E expenses were fully deductible in the year incurred.
- New law: R+E expenses incurred after Dec 31, 2021 must be amortized over a five-year period.
- Impact: Since tech companies typically invest heavily in research and experimentation, this change is likely to have a big impact – companies should be proactive in planning any upcoming research and experimentation costs to take advantage of the window of time before the new law takes effect.
- Old law: Businesses could deduct 50% of expenses incurred for entertainment.
- New law: No portion of entertainment expenses is deductible, including transportation fringe benefits and commuting costs.
- Impact: Tech companies are known for offering employees workplace benefits and amenities. Employers will need to decide if they want to continue to offer these perks in light of the new law, and if so, should account for entertainment expenses separately from food and beverage costs going forward.
Net Operating Losses (NOLs)
- Old law: In general, A Net Operating Loss (NOL) is the amount of a taxpayer’s business deductions that exceed its gross income. In the past, an NOL has been carried back two years, and carried forward twenty years to offset taxable income. Certain special circumstances allow for extended carryback periods.
- New law: Under TCJA, NOL deductions in tax years after 2017 are generally not allowed to be carried back, however they may now be carried forward indefinitely. NOL deductions in tax years after 2017 may only reduce 80% of taxable income in a carryback or carryforward year.
- Impact: This change could significantly impact cash flow for tech companies. In the past, tax refunds generated by NOLs have helped many companies with limited cash flow (like technology start-ups, for example) reduce tax liabilities as they became profitable. Since NOL carryforwards are now limited to 80% of taxable income, tech companies may have to pay tax even if their carryforwards aren’t completely exhausted. Tech companies should speak to their advisor about how to plan for this change in their tax liability.
These are just a few of the impacts of the TCJA that technology companies should be aware of. If you have any questions about the TCJA and how it may impact your business, please leave a comment below or feel free to contact me directly, I’m happy to help!