This was one of our most popular blog posts of 2018. We've updated this post with new information to continue providing valuable content.
There’s been a lot of chatter, online and off, about the new tax law. Here’s what everyone needs to know about how it affects FinTech (financial technology).
How The New Tax Law Affects FinTech
The law went into effect on January 1, 2018 and will affect 2019 tax filings. Regulators are still hashing out how to enforce the code, so it will take some time to predict the exact impact of the changes to the tax law.
The corporate tax rate will drop from 35% to 21%. This means more liquidity, greater revenue and the possibility for increased wages. FinTech companies have already paid lower tax rates than other companies so the news is just getting better for them.
The bill retains the carried interest tax break. The share of a venture capital fund’s profit that goes to partners will be taxed at 23.8% versus the 39.6% ordinary income rate.
The new law offers incentives to bring cash home instead of keeping it in foreign banks. However a one-time tax will be levied on every company that has accumulated overseas profits. Cash and liquid assets will be taxed 15.5% while other assets, like factories and equipment, will be taxed 8%. Whether or not these companies choose to move their money back to the U.S. this one time tax will be levied but it can be paid over 8 years. The ability to access foreign cash may reduce the need for debt.
Future foreign profits will include a tax of 10.5%. The 21% tax rate for money made in the U.S. will still apply. Many believe this is fair to large tech companies who do work abroad but unfair to smaller U.S.-based tech startups.
The Tax Cuts and Jobs Act (TCJA) of 2018 has had a mostly positive effect the FinTech industry. Here are some of the ways the new law has changed things.
Increased Bonus Depreciation. This new bonus allowed businesses to fully depreciate property on federal tax returns and provided incentive for business owners to invest and purchase new assets. It is important to note that some states do not allow this bonus depreciation. If you do business in one of these states, the federal laws will still apply for 2018 tax filing purposes.
New Deduction for Qualified Business Income (QBI). The new tax law gives owners of pass-through entities like subchapter S corporations, partnerships and limited liability companies, a QBI tax break. Qualifying owners will now receive a 20% deduction. This reduces the tax rate from 37% to 29.6% in 2018. Owners also keep this deduction on entity-level state and local taxes.
Shift of liability for online purchases. Passed in May 2018, the Wayfair Ruling shifted tax liability for online purchases from the consumer to the business. This means retailers now collect sales tax instead of consumers paying a use tax. The ruling eliminated the need for a physical presence in order to be taxed by the law of the state. Different states have varying sales volume thresholds that determine a business’ liability so it’s necessary to pay attention to each state’s interpretation of the Wayfair laws.
Self-made intellectual property is no longer a capital asset. The TCJA eliminated the ability to consider self-made property like patents, inventions and designs as capital assets. Starting in 2018, self-made property is taxed as regular income rate rather than at the previous lower capital gains rate of 20%
Income tax postponement for startup employees. In 2018 it’s possible for employees of startup companies who are paid in restricted stock to postpone income tax payment for up to 5 years. Many people in the tech industry will be reaping the benefits of this new approach.
Increased Research Development (R&D) tax credit. The increased R&D credit is a huge perk for tech innovators and entrepreneurs. The law also removed the corporate alternative minimum tax (AMT) which gives more companies a chance to cash in on the R&D credit. In 2018, businesses must reduce the amount of R&D expenses deducted from their taxable income by the amount of their credit. This means a larger net benefit to your company. Instead of 35%, the new 21% rate is applied to the disallowed deduction.
Limited deductibility of net operating losses. Under the TCJA businesses can only offset up to 80% of their taxable income using net operating losses that occurred after 2017. Tech companies taking advantage of the R&D tax credit can apply it against the balance of taxable income that can’t be offset by net operating losses.
Stay In The Loop
CRA will update readers as the implications of the new tax law become clear. At this point it’s easy to understand the letter of the law (how it’s written) but it’s anyone’s guess how it will be applied.