Whether you’re filing for a startup, a corporation, or yourself, it’s that time of year again. And this year the Internal Revenue Service has an extra $60 billion earmarked for enforcement. The IRS is also launching compliance initiatives aimed at common taxpayer issues. What does that mean for you? Two experts, Rick Gove, Grant Thornton Principal, Tax, and EisnerAmper Partner Kevin Harris, weigh in with tips and helpful information as we count down to Tax Day. 

Implications for startups and entrepreneurs 

It’s no secret that Dallas-Fort Worth, and indeed, the entire state of Texas, has a reputation for being an economic juggernaut. “Y’all Street” was floated into the vernacular eight years ago when Forbes published an article called “Welcome to Y’all Street” that talked about financial services expertise no longer being exclusive to the coasts. The article pointed to things like lower costs and rapid population growth, driving companies and job opportunities south.  

Rick Gove is a principal in Grant Thornton’s M&A tax services practice in Dallas.

It’s a trend that continues to grow and can have tax implications for founders. Gove has some specific advice: You may want to think about your exit when you start. 

“We’ve seen some founders who don’t think carefully about typical tax structures on exit and how historical tax exposures can affect the exit,” says Gove. If the founder can take an early look at their tax classification or even revisit the structure in advance of a planned exit, they can identify a structure that aligns with their plans for how earnings are reinvested or removed to the owners and what future owners would like to see in an exit.”

If this isn’t evaluated carefully, he says, it can create risks for the founders. “In particular, a lot of older closely held entities are taxed as C corps, and these owners try to plan around double taxation of C corps to minimize taxes. So, they pay themselves large bonuses, which can present a significant risk if the IRS takes the view that the bonuses aren’t deductible,” Gove said.”That can result in purchase price adjustments when a prospective buyer evaluates how the business has been handling taxes historically.”

That’s something the Tax Cuts and Jobs Act tried to neutralize by creating a deduction for households of up to 20 percent of their pass-through business income from federal income tax. Below, are a few tips to guide local founders. 

1. Entity choice. This is the biggest tax question facing startups and entrepreneurs: how to structure the business? All other questions or decisions flow from that decision, and depending on their structure, there are some tax maneuvers they could and should take. Limited Liability Corporations (LLCs) continue to be the most common entity, as they provide the liability protection of a corporation but the flexibility to be taxed as a partnership or corporation.

        2. Important dos and don’ts for Dallas-Fort Worth entrepreneurs: 

• • Partner with a reputable service firm provider to help avoid missteps. 
  • Avoid strategies that sound too good to be true, and consider whether there may be ways to optimize your tax structure that better aligns with how you operate your business.

       3. Critical steps for organic and inorganic growth: 

• • Controlled growth is imperative, as growing too quickly can lead to unintended consequences from neglect of certain aspects of the business. 
  • Work with your tax advisor to consider the structure of capital investments, and acquisitions. This will help you find ways to optimize the tax benefits of your investments. 

Q&A With the Experts

Gove and Harris discuss IRS enforcement focus areas, taxpayer preparation, energy credits, the public stock buyback tax, SALT deductions, handling of fixed assets, and more.

What areas is the IRS likely to focus on with the extra enforcement money, and how do taxpayers prepare for that? 

The IRS has announced its intention to pursue complex partnerships, large corporations, and high-income, high-wealth individuals who do not pay overtax bills. The focus seems to be on large taxpayers, and it has identified prioritization of high-income cases, large partnership balance sheet discrepancies, foreign-owned corporations with transfer pricing, and partnership self-employment tax. 

Kevin Harris is a partner in EisnerAmper’s private client services group.

Document, document, document—and substantiate. Taxpayers should expect increased scrutiny around important positions, including:  

• research and development (R&D) credit claims;  
• transfer pricing positions; 
• partner capital accounts;  
• M&A transaction costs. 

“Taxpayers should prioritize properly documenting the positions taken on their tax returns,” says Harris. “We’ve seen that the most successful resolution of IRS audit issues happens when clients have the right supporting documentation. Items lacking substantial support tend to ultimately be at the mercy of the auditor’s judgment.”  

Gove adds, “When it comes to documentation, taxpayers should have easier access to the IRS to ask questions with the extra funding this year. Yes, part of that money is for enforcement, but part of it is to facilitate the inquiry process—including for taxpayers looking for help with documentation of past elections.” 

Are energy credits only for energy companies? How is this related to the Inflation Reduction Act? 

Energy credits are not only for energy companies, so don’t miss out, no matter what industry you’re in. The Inflation Reduction Act means it’s economically advantageous for companies to pursue renewable energy, conservation, and efficiency improvements, especially when tied to environmental, social, and governance (ESG) goals. For example, the Energy Efficient Commercial Building Deduction is available to any company that installs energy-efficient equipment as part of a qualified building they own.   

Businesses not pursuing energy projects can also purchase credits as a tax mitigation strategy, but this does come with increased risk.  

Finally, individuals can qualify for energy credits on their personal returns by making energy-efficient improvements to their residence or by purchasing electric or fuel-cell vehicles. 

What should companies keep in mind with regard to the public stock buyback tax? 

The Inflation Reduction Act included a public stock buyback tax that levies a 1% excise tax on the total fair market value of the stock that certain corporations repurchase during the taxable year beginning January 1, 2023. This is intended to disincentivize publicly traded companies from using available cash to repurchase stock, which could increase earnings per share and benefit corporate executives who have stock-based compensation.   

The excise tax would be reported annually in the first quarter following the year of the buyback. For 2024, the form and payments are due by April 30.  

There are several exceptions, depending on the structure of the deal.  

• Public companies should keep in mind that new stock issuances can offset redemption activity that happens in the same year but not in future years—they’ll want to consider the timing of stock transactions more carefully. 

Are SALT (state and local tax) deductions impacted? 

There was some support to modify the $10,000 cap for state income tax deductions, but it was unsuccessful as part of this legislation.  

Pass-through businesses should still consider their elections as they relate to how they benefit owners affected by the $10,000 cap on state and local tax deductions. Many states now allow businesses to fully deduct state tax against the owner’s share of the business income by taxing at an entity rather than an individual level.   

• Determining whether to take advantage of this change is complex, and a thorough analysis is recommended.
  

   

Are there changes to the way fixed assets are being handled? What do you recommend doing to prepare? 

 Section 179 depreciation is available up to $1.2 million for qualifying equipment but must meet the criteria of total additions and taxable income to benefit. Taxpayers can no longer fully deduct the cost of new equipment in the same year it’s first used.  

This adds up to increased taxes because of shrinking deductions, for businesses. If you’re in this camp, consider:  

• an analysis to identify costs that are not considered improvements and can be deducted as repairs; 
• a cost segregation study. 

Additionally, bonus depreciation for property placed in service continues to decrease as part of the Tax Cut and Jobs Act.  It held steady at 100% from September 2017 through December 2022 but decreased to 80% starting in 2023 and continues to decrease to 60% in 2024, 40% in 2025, and 20% in 2026.   

As of this writing, there is proposed legislation that would increase bonus depreciation back to 100% starting Jan. 1, 2023, but the Tax Relief for American Families and Workers Act of 2024 has stalled in Congress.  

Voices contributor Nicole Ward is a data journalist for the Dallas Regional Chamber.

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