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Navigating Pillar Two and Supply Chain Challenges for Your Global Business

Key Takeaways:

The OECD’s Pillar Two rules are pushing large multinational enterprises to restructure and rethink location strategies to navigate the 15% global minimum tax more effectively.

AI and digital tools are revolutionizing supply chain operations, enabling you to make faster decisions and drive your efficiency while meeting ESG reporting requirements.

An increasing number of multinational enterprises are planning major business model overhauls in response to Pillar Two’s growing influence on tax, operational, and geographical strategies.

If you act early to integrate Pillar Two considerations into your strategic planning, you could avoid unforeseen costs and position your business for long-term success in what will continue to be a complex global landscape.

Throughout the last few years, the global business landscape has been rocked by a series of unprecedented disruptions affecting supply chains and operating models. From natural disasters like the Fukushima earthquake to geopolitical tensions and the COVID-19 pandemic, businesses like yours have no doubt been forced to reevaluate and adapt strategies to maintain efficiency and meet evolving customer expectations. 

It is likely that these disruptions have prompted you to diversify your sourcing, move your manufacturing closer to markets, and adopt a more regionalized supply chain model with an increased reliance on artificial intelligence (AI) and digital tools for more rapid supply chain decision-making and environmental, social, and governance (ESG) reporting.

While Pillar Two considerations were not the primary driver of these types of transformations, they have started to influence corporate strategies — including business model revisions, supply chain alterations, and legal entity restructuring as companies assess the tax implications and integrate them into business cases.

How You Can Respond to the Disruption

In response to these supply chain challenges, businesses have taken to adopting other strategies to stay nimble. Here are some things you can do:

Diversify your supply sources: Companies are moving their sourcing and manufacturing closer to their markets to increase supply chain diversity and provide greater market responsiveness.

Reduce your dependence on China: There has already been a noticeable shift away from the country as the primary manufacturing base.

Look at nearshoring and onshoring: This can bring your manufacturing closer to end markets and decrease your transportation costs.

Consider digitalization: Using AI and digital technologies can accelerate your decision-making, as well as enhance supply chain efficiencies.

Transform your supply chain: Companies are revising their supply chains to mitigate tariffs, optimize green credits, and meet ESG reporting requirements.

The Role Pillar Two Plays in Your Business

The Pillar Two model rules, also referred to as the Global Anti-Base Erosion (GloBE) rules, were released on December 20, 2021, and are part of the Organisation for Economic Co-operation and Development‘s (OECD’s) two-pillar solution to address the tax challenges of the digitalization of the economy that was agreed to by 137 jurisdictions and endorsed by the G20 finance ministers in October 2021. They were designed to ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on the income arising in each jurisdiction where they operate.

The OECD’s global minimum tax rules apply to MNEs with revenue of at least EUR 750 million and are not self-implementing. Each jurisdiction must enact them into their domestic legislation. Some jurisdictions have already issued legislation to enact the global minimum tax, but others are still enacting legislation. You can track the status of this implementation here.

You are most likely navigating a complex landscape of challenges that include the green transition, digital transformation, geopolitical tensions, talent shortages, and supply chain disruptions. The Pillar Two tax reforms intersect with these issues, meaning you need to take a comprehensive approach to guard your strategies and operations across your people, processes, and technology. You can respond to these disruptions in a myriad of ways, from adjusting your supply chains to overhauling your recruitment strategies to even making fundamental shifts in your business models.

You’ve probably seen firsthand how the rise of digitization has driven more commerce online, fostering new platforms and subscription-based models. In that same vein, the increasing emphasis on sustainability and ESG factors is prompting organizations to reevaluate their core objectives and metrics of success. From this angle, Pillar Two is emerging as a significant consideration factor in your transformation.

While it is not quite a catalyst yet, it is gaining influence around operational restructuring and relocation, with an increasing percentage of MNEs planning major structural changes due to Pillar Two. Because of this new tax landscape, you will have to reassess the optimal locations for their people, functions, assets, and risks, as you may no longer see a strong business case to centralize in one location to obtain very low tax rates via incentives.

Pillar Two is becoming more prominent as a cost factor due to its potential to increase costs and impact strategic plans. MNEs anticipate a significant rise in effective tax rates due to it, which can add to the already existing cost pressures. If you fail to incorporate Pillar Two considerations into your strategic planning, you’ll likely be impacted by unforeseen costs and erode your profitability. That is why it is key to take early action on implementation — you’ll be setting yourself up for a competitive advantage.

How MGO Can Help

The supply chain landscape and operating model disruption are complex and will continue to evolve. MGO can help you take an integrated approach to adapt to these changes. Our experienced team will consider the location of your people, functions, assets, and risks to diversify your supply sources, leverage digital technologies, and adapt your overall strategies in response to the environmental, social, and regulatory changes.

As the shift towards decentralized, regional hub models continue to gain traction, we can assist you in moving away from the traditional centralized models to enhance your flexibility and resilience. Let us tackle the additional layer of complexity Pillar Two adds as we reassess your operations and strategies holistically. As you move forward, your success will hinge on your ability to adapt and innovate in the face of these disruptions, and we can help set you up for long-term success and sustainability.

To learn how we can help you address supply chain challenges and Pillar Two tax implications, reach our to our International Tax team today.

Managing Personal Property Taxes: A Guide for Vineyards and Wineries

Key Takeaways:

Vineyards and wineries must report all fixed asset changes, including obsolete or abandoned property, for accurate tax assessments.

Properly classifying assets as either personal property or real estate impacts tax obligations.

Investing in fixed asset management software can help you track and report assets to minimize your vineyard or winery’s personal property tax liability.

Vineyards and wineries are unique in their operations — combining agriculture, manufacturing, and hospitality. This complexity brings specific challenges in managing personal property taxes.

Common Personal Property Tax Challenges for Vineyards and Wineries

Let’s look at a few specific aspects of vineyards and wineries that make personal property tax compliance unique:

Obsolescence and Abandonment

Continued taxation of obsolete or abandoned property is one of the most common issues for vineyards and wineries. It’s not unusual to see old tractors, farm equipment, or other machinery sitting unused on vineyard land — sometimes for decades.

Although these assets are no longer functional and are not being depreciated on the books, they continue to appear on the personal property tax rolls and are subject to tax. Vineyard owners must take action to remove obsolete items from both their property and property tax renditions (personal property returns).

Asset Classification

Another challenge in managing personal property taxes for vineyards and wineries is correctly identifying and classifying the property type. The classification determines whether the asset is considered depreciable or real property, as each has different tax implications.

For example, mobile equipment — such as tractors used in the field and carts for transporting grapes to the processing center — is classified as personal property and assessed immediately upon being placed in service. On the other hand, in California, vines planted in the ground are not assessed until three years after the season of planting in vineyard form, giving them time to become productive.

Storing wine or grape juice in large vats adds another layer of complexity. Whether these vats are classified as real estate or personal property depends on whether they are affixed to the ground or movable.

In a tasting room, there may be tables, racks, and stools, all of which are depreciable property. However, if the room has a built-in bar, it is considered part of the building, having a much longer depreciable life.

It takes a deep understanding of the multitude of tax rules and the various types of property used in vineyard and winery operations to optimize the company’s tax position.

Technology

Modern wineries might also have high-tech equipment, such as computers and specialized machinery, that should be listed separately on tax renditions. These assets often have shorter depreciation lives, and accurate tracking helps avoid overpaying taxes.

Exemptions

The wine industry benefits from many specialized tax rules and exemptions.

For example, changes to the California property tax rules in 2017 allowed vineyards to write off certain planting costs, such as fertilizer, stakes, and wires, rather than capitalizing and depreciating them. Additionally, some counties offer exemptions for startup vineyards, which can provide significant tax savings.

If you (or your tax advisor) aren’t familiar with these exemptions, they are easy to overlook.

Multiple Entities or Locations

It’s not uncommon for larger operations to have separate entities for growing grapes and producing wines. An operator might also owe tax to multiple jurisdictions because the property is located in different towns and counties. Staying on top of property tax obligations for various entities and locations can be confusing and time-consuming.

Resources for Personal Property Tax Compliance

Your annual business property tax affidavit — California form BOE-571-L or BOE-571-A, operation dependent) — is typically due to the county on January 1. Once submitted, the county uses the property tax affidavit to calculate the business property tax liability.

Many companies remember to add new property purchased during the year and remove sold property but neglect to report obsolete and abandoned property. It’s the property owner’s responsibility to document and report obsolete items to prevent unnecessary tax payments. Neglecting this aspect of property tax reporting leads to overpaying taxes and issues during audits.

Investing in fixed asset software can help ensure accuracy. These tools help track acquisitions, disposals, and other changes in the asset base, making certain you report up-to-date and accurate information to the county.

Given the specialized nature of personal property tax issues in the wine industry, you can benefit from working with a firm that has experience and expertise in this area. This knowledge can be invaluable for understanding the various personal property tax exemptions available to vineyards and wineries.

How MGO Can Help

MGO offers comprehensive tax services — including income taxes, property taxes, and sales and use taxes — tailored to the unique needs of vineyards and wineries.

Reach out to our Vineyards and Wineries team for help reconciling your internal records with the county’s asset lists to identify and correct discrepancies. We can also recommend fixed asset software to help you maintain accurate records going forward. Then, you can focus on what you do best: producing exceptional wines.

8 Strategies to Reduce Your Manufacturing Property Tax Burdens

Key Takeaways:

Regularly assess property values to find and appeal over-assessments, reducing manufacturing tax burdens.

Leverage tax incentives and exemptions for manufacturing to lower property tax liabilities.

Maintain accurate asset records and consult manufacturing tax professionals for effective tax management.

While manufacturing and distribution companies face many challenges, one significant area of concern is property taxes. These taxes can be a substantial expense, affecting overall profitability. If you are looking to improve the financial performance of your manufacturing company, implementing effective strategies to manage and reduce property tax burdens could be beneficial.

Here are eight key strategies to help your manufacturing business lower its property tax liabilities:

1. Conduct Regular Property Assessments

One of the most effective ways to manage property taxes is through regular reviews of your property tax statements. Your company should conduct detailed evaluations of the property values listed on its county property tax statements to make certain you are not being over-assessed on abandoned, sold, or underused properties. Assess whether your fixed assets software is robust enough to capture depreciable assets purchased, sold, abandoned, and fully depreciated but still in use. Are depreciable asset classes appropriately identified?

Engage with professional appraisers who specialize in industrial properties to get correct valuations. This process can find discrepancies and provide a basis for appealing inflated assessments. Schedule regular property reviews annually or biannually, depending on the additions and deletions to your business’s depreciation schedule. Periodically reassess your business real estate values based on the volatility of property values in your area.

It is also beneficial to understand the real property assessment methodology used by local authorities, as this can help in finding any systematic overvaluations or errors. Is it at market value, a percentage of fair market value, comparable properties values, or highest and best use?

2. Appeal Unfair Assessments

Be diligent in preparing your business property declaration. It will be the basis for your business assessment notice. If it appears inaccurate, filing a timely appeal can lead to significant tax savings — not only for the current year but, more importantly, for future years as well. Each district has its own separate procedures for real and personal property appeals, typically requiring substantial evidence to support claims of overvaluation. Compiling comprehensive documentation — including recent appraisals, comparable property values, and evidence of any property issues — can strengthen your case for a reduction.

The appeal process can be complex, often involving strict deadlines and specific forms. Consulting with an attorney or tax advisor with experience in property tax appeals can help you navigate this process. Keeping a detailed timeline and records of all communications with tax authorities can also be beneficial during the appeal.

3. Leverage Tax Incentives and Exemptions

Many state and local governments offer tax incentives, sales tax exemptions, and property tax abatements for certain industries and property types. Examples of such incentives include enterprise zone credits — which provide tax benefits for businesses working in economically distressed areas — and investment tax credits for the purchase of new machinery, equipment, and parts.

Additionally, some authorities offer pollution control exemptions for equipment that reduces environmental impact. Researching and applying for these and other tax credits and incentives can lead to significant tax savings.

4. Keep Accurate Asset Records

Accurate and up-to-date asset records are crucial for effective property tax management. Document all machinery, equipment, and property improvements — noting purchase dates, costs, and any depreciation. These fixed asset records must be tied to the annual property tax filing declaration statements before assessment notices are issued. Correct and accurate declarations prevent over-assessments and can help you avoid appeals.

Adopting a comprehensive asset management system and utilizing an appropriate software package can simplify this process. These systems can check the lifecycle of each asset — including maintenance and upgrades — which can influence its value. Regular audits of these records can confirm that they are accurate and up to date, preventing discrepancies that could result in higher tax assessments.

5. Improve Property Use and Zoning

Reviewing and refining the use of your property can also lead to tax savings. Sometimes, reconfiguring the layout or usage of space can qualify for lower tax rates. Additionally, understanding zoning regulations and looking for rezoning where beneficial can result in lower tax obligations. Consulting with zoning professionals and local authorities can provide insights into potential savings.

For instance, converting unused or underutilized space into areas that qualify for lower tax rates — such as storage or non-commercial use — can reduce tax liabilities. Additionally, exploring opportunities for mixed-use zoning, which can offer tax benefits, might be worth considering.

6. Engage with Local Tax Authorities

Building a relationship with local tax authorities can be helpful. Regular communication and collaboration can lead to a better understanding of the tax landscape and potential changes that could affect assessments. Being proactive and transparent with local authorities can also help you negotiate favorable terms or resolve disputes amicably.

Attending local tax board meetings and staying informed about upcoming changes in tax regulations can give you a competitive edge. Providing a direct line of communication with key officials can facilitate smoother negotiations and quicker resolutions of any issues that may arise.

7. Invest in Tax-Effective Property Improvements

When planning property improvements, consider the tax implications. Investing in enhancements that qualify for tax credits or abatements can offset some of the costs. Additionally, improvements that increase energy efficiency and/or lighting use or sustainability may be eligible for specific incentives, further reducing your tax burden.

For example, installing solar panels or energy-efficient HVAC systems can qualify for green energy tax credits. Improvements that align with local or federal sustainability goals can also attract added incentives, making the first investment more cost-effective over time.

8. Work with Tax Professionals

Navigating the complexities of property taxes requires specialized knowledge. Working with tax professionals who understand the manufacturing sector can provide you with valuable guidance and support. Experienced tax advisors can assist you with assessments, appeals, incentive applications, and strategic planning — helping your company enhance its tax savings.

Tax professionals can also provide you with insights into industry-specific tax breaks and guide you through compliance with all relevant regulations. Regular professional consultations can help you anticipate, prepare for, and swiftly adapt to changes in tax laws, helping you sustain tax efficiency.

Reduce Your Property Tax Liabilities to Improve Your Financial Performance

Lowering real estate and depreciable property tax burdens in the manufacturing sector requires a proactive and strategic approach. Your company may be able to significantly reduce its tax liabilities by regularly reviewing property declarations, appealing aggressive valuations, and utilizing available incentives while maintaining updated records and optimizing property use. Additionally, engaging with local authorities, investing wisely in property improvements, and collaborating with tax professionals could further enhance your savings.

Implementing these strategies can not only improve your financial performance but also provide you a competitive edge in the market.

How MGO Can Help

Don’t let property taxes unnecessarily burden your manufacturing business. With extensive experience working with manufacturing and distribution companies, our tax professionals can help you get the most from your tax savings. Reach out to our team today to start optimizing your property tax management and improving your company’s financial performance.

Understanding U.S. Taxes for Your Foreign Business

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Follow U.S. tax requirements by understanding federal, state, and local obligations.

Adjust your business strategy for the U.S. market by accounting for sales tax variations.

Utilize tax treaties to minimize tax burdens and navigate international tax rules effectively.

Navigating the U.S. tax system is a critical aspect of doing business in the United States. Unlike other countries with a single national tax system, the U.S. has a multi-layered structure that includes federal, state, and local taxes. Each layer has its own set of regulations and compliance requirements, which can be varied and complex.

For foreign businesses, this system can be challenging — especially if you are accustomed to a more centralized tax framework. In the U.S., tax obligations can arise not only from physical presence but also from sales or services delivered into a state, requiring your business to report to multiple agencies. It is important to recognize these distinctions for both compliance and tax strategy.

Federal Tax Obligations

What creates a taxable presence for federal income taxes is uniform across the country. Your business must file annual income tax returns with the Internal Revenue Service (IRS), detailing your income, expenses, and tax liabilities. Federal taxes include corporate income taxes, certain payroll taxes, and other specific levies.

While federal taxes are uniform across the country, they may be overridden by an enforceable income tax treaty (more on those below). The uniformity of federal taxation is also, unfortunately, not consistent for state taxation.

State and Local Tax Considerations

State and local taxes vary significantly across the U.S. Individual states can impose income taxes, sales taxes, property taxes, and other business-related taxes on your company. The complexity is further compounded by the fact that different authorities may have unique regulations about what triggers tax obligations — such as physical presence, sales volume, or the delivery of services.

The triggers at the state level do not necessarily coincide with the federal triggers. This can be both an opportunity for tax planning for your company and a potential pitfall if you are not careful.

Value-Added Tax Versus Sales Tax

Unlike the value-added tax (VAT) systems in many other countries, the U.S. sales tax system varies widely from state to state. While businesses in places like Europe often deal with a single national VAT system, the U.S. requires navigation through state and local sales tax regulations — each with its own rates and rules, creating a complex compliance landscape.

While VAT is a tax applied at each stage of the supply chain based on the added value, U.S. sales tax is typically collected only at the ultimate point of sale to the end consumer. This distinction can influence pricing strategies, cash flow management, and overall tax planning for your business.

Impact of Income Tax Treaties

Tax treaties between the U.S. and other countries can influence how your foreign business is taxed. These treaties often provide benefits such as reduced tax rates, exemptions from certain taxes, or simplified compliance requirements. However, they require careful navigation for proper application. The presence of a tax treaty between the U.S. and your home country can affect how you should structure your business operations when entering the U.S. market.

Tax treaties aim to avoid double taxation and ease international trade. They typically cover aspects like income tax on royalties, dividends, interest payments, as well as defining what constitutes a taxable presence. Understanding these treaties is essential for improving tax liabilities and staying compliant with regulations in both the U.S. and your home country.

Navigating U.S. Taxes for Your Foreign Business

Successfully managing U.S. taxes requires a comprehensive understanding of federal, state, and local tax obligations, the nuances of sales tax versus VAT, and the strategic use of income tax treaties. To optimize your tax position and minimize compliance risks, you should prioritize thorough planning and seek professional advice.

How MGO Can Help

MGO’s International Tax team can help you navigate these complexities and develop effective strategies for your U.S. operations. Our experienced team can assist you with tax planning, compliance, treaty analysis, and structuring your business for optimal tax efficiency. For more detailed insights and help, reach out to our team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. In this series, we will delve into specific aspects of this process, pro

IRS Releases Dual Consolidated Loss Proposed Regulations

Key Takeaways:

The Treasury and IRS released new proposed regulations affecting how dual consolidated losses (DCLs) are calculated and their interaction with the Pillar Two global tax regime.

A new set of rules for disregarded payment losses (DPLs) has been introduced — these apply to disregarded payments deductible in foreign countries, but not included in U.S. taxable income.

The proposed regulations expand the definition of a separate unit and address how foreign tax rules (under Pillar Two) may trigger foreign use restrictions on DCLs.

The Department of the Treasury and the IRS on August 6 released proposed regulations on the dual consolidated loss (DCL) rules and their interaction with the Pillar Two global taxing regime. The proposed regulations also make several changes to how DCLs are calculated and introduce a new disregarded payment loss rule.

DCL Rules

The DCL rules apply to ordinary losses of a dual resident corporation (DRC) or a separate unit. A DRC is either (1) a domestic corporation that is subject to an income tax of a foreign country on its worldwide income or taxed as a resident under the law of that country; or (2) a foreign insurance company that elects to be taxed as a domestic corporation under Internal Revenue Code Section 953(d) and is a member of an affiliated group, even if not subject to tax in the foreign country. A separate unit for purposes of the DCL rules is a foreign branch or hybrid entity that is owned by a domestic corporation. S corporations are not subject to the DCL rules, and domestic corporations will be treated as indirectly owning a separate unit that is owned by a partnership or grantor trust.

Under Section 1503(d), a DCL of a DRC or separate unit generally cannot be used to offset U.S. taxable income of a domestic affiliate (no “domestic use”). This means that the DCL may be used only for U.S. federal income tax purposes against the income of the DRC or separate unit that incurred the DCL.

Some exceptions apply to the domestic use prohibition; for example, a U.S. taxpayer may file a domestic use election and agreement (DUE) certifying that there has not been and will not be any foreign use of the DCL. Foreign use is defined making a portion of the DCL available under a foreign country’s income tax laws to reduce the income of another entity (one that is classified as a foreign corporation for U.S. income tax purposes).

DCLs and Interaction with Pillar Two

The proposed regulations address the coordination between foreign use under the DCL rules and Pillar Two, including expanding the definition of a separate unit to include certain hybrid entities subject to an income inclusion regime (IIR) and foreign branches subject to a qualified domestic minimum top-up tax (QDMTT) or an IIR. More specifically, the proposed rules provide that an income tax for purposes of the DCL rules may include a tax that is a minimum tax computed based on financial accounting principles, such as an IIR or QDMTT. Subject to an exception under the duplicate loss arrangement rules when a double deduction is denied, foreign use could occur if a deduction or loss included in a DCL were used to calculate net GloBE income for an IIR or QDMTT or, alternatively, used to qualify for the transitional CbCR safe harbor. The result of a foreign use would be that no DUE would be permitted to be made to allow for the DCL to be used in the U.S. The proposed rules provide no guidance on the undertaxed profit rules (UTPR).

The proposed regulations also address the concept of “mirror legislation.” The mirror legislation rule under the current DCL rules essentially provides that if the foreign country has its own DCL-type rule that “mirrors” the U.S. rule and that foreign country’s DCL-type rule applies to the loss at issue, then for purposes of the U.S. DCL rules, a foreign use of the DCL will be deemed to occur. The proposed regulations clarify that foreign law, including the GloBE rules, that deny deductions due to the duplicate loss arrangement rules, does not constitute mirror legislation as long as the taxpayer is allowed a choice between domestic or foreign use.

To address legacy DCLs, the proposed regulations provide a transition rule that, subject to an anti-abuse rule, extends the relief given in Notice 2023-80 by treating DCLs incurred in tax years beginning before August 6, 2024, as legacy DCLs and allowing the DCL rules to apply without regard to Pillar Two taxes.

Inclusions Due to Stock Ownership

Under the current DCL rules, U.S. inclusions arising from a separate unit’s ownership in a foreign corporation (such as Subpart F or GILTI) are treated as income and attributable to that separate unit for purposes of determining the income or DCL of that separate unit. This rule also applies to other types of income, such as dividends (including section 1248) and gains from the sale of stock. Under the DCL proposed regulations, with limited exceptions, these types of income (as well as any deductions or losses, such as section 245A dividends received deductions (DRD), attributable to these income items) would be excluded for purposes of calculating a DRC’s or separate unit’s income or DCL.

New Disregarded Payment Loss Rules

The proposed regulations introduce a new set of disregarded payment loss (DPL) rules, which operate independently of the DCL rules. To address certain deduction/non-inclusion outcomes, the DPL rules would apply to some disregarded payments (interest, royalties, and structured payments) that are deductible in a foreign country but are not included in U.S. taxable income because the payments are disregarded.

The DPL rules would require a consenting domestic owner of a disregarded payment entity to include in U.S. taxable income the amount of the DPL of the disregarded payment entity, subject to certain calculation requirements, if one of the following triggering events occur within 60 months: (1) a foreign use of the disregarded payment loss; or (2) failure to comply with certification requirements during the 60-month certification period. A disregarded payment entity is generally a disregarded entity, DRC, or foreign branch.

Since no express statutory authority exists for the new DPL rules, under the proposed regulations, Treasury would implement the DPL rules in coordination with the entity classification election rules under Treas. Reg. §301.7701-3(c), which means that when a specified eligible entity either elects to be disregarded for U.S. tax purposes or defaults to a disregarded entity under the general rules of Treas. Reg. §301.7701-3(b), the domestic owner would be deemed to consent to the new DPL rules. A specified eligible entity is an eligible entity (whether foreign or domestic) that is a foreign tax resident or is owned by a domestic corporation that has a foreign branch. This deemed consent rule would also apply in a situation where a domestic corporation directly or indirectly acquires an interest in a preexisting disregarded entity, as well as a domestic corporation that owns an interest in a disregarded entity by reason of a conversion from a partnership.

The DPL consent rules would apply to new entity classification elections filed on or after the date the proposed DCL rules are finalized and existing entities starting 12 months after the date the proposed regulations are finalized, which would allow taxpayers to restructure their operations before the DPL rules enter into effect.

Intercompany Transactions

The Section 1502 consolidated return regulations provide rules for taking into account certain items of income, gain, deduction, and loss of members from intercompany transactions, essentially treating consolidated group members as separate entities for some purposes and single entities for other purposes. The purpose of the regulations is to provide rules to clearly reflect the taxable income (and tax liability) of the group as a whole by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income (or consolidated tax liability).

The proposed regulations modify the existing regulations and generally shift application of the regulations to separate-entity treatment. More specifically, if a member of a consolidated group is a DRC or a U.S. member that owns a separate unit, the proposed regulations state that despite Section 1503(d) requiring certain treatment of the member’s tax items, the counterparty consolidated group member’s income or gain on the intercompany transaction will not be deferred. For example, if one member has intercompany loan interest expense that the DCL rules prevent from being deducted, the counterparty member’s interest income would still be included in income.

Additionally, under the proposed regulations, the Section 1503(d) member has special status in applying the DCL rules, which means that if a Section 1503(d) member’s intercompany (or corresponding) loss would otherwise be taken into account in the current year, and if the DCL rules apply to limit the use of that loss (preventing it from being currently deductible), the intercompany transaction regulations would not redetermine that loss as not being subject to the limitation under Section 1503(d). A Section 1503(d) member is an affiliated DRC or an affiliated domestic owner acting through a separate unit.

Books and Records

Under Treas. Reg. Section 1.1503(d)-5, a separate unit’s income or DCL calculation is based generally on items reflected on the separate unit’s books and records as adjusted to conform to U.S. federal income tax principles. As a result, certain transactions, such as transactions between the separate unit and its U.S. owner, are disregarded for purposes of calculating a separate unit’s income or DCL. The proposed regulations clarify that items that are not (and will not be) on the books and records of the separate unit are not included in the separate unit’s income or DCL calculation. This clarification was provided, according to the Treasury, to address positions taxpayers have taken that allocate income on the books and records of the U.S. owner to the separate unit, although those items are not on the books and records of the separate unit.

Applicability

The proposed regulations would generally apply to tax years ending on or after August 6, 2024, except for the intercompany transaction regulations, which would apply to tax years for which the original U.S. income tax return is due without extensions after the date the final DCL regulations are published in the Federal Register. This means that if the final regulations are published by April 15, 2025, they would apply to calendar year 2024. Deemed consent under the DPL rules would apply to tax years ending on or after August 6, 2025.

Once the proposed regulations are finalized, taxpayers can choose to apply them retroactively to open tax years, subject to some consistency requirements.

Insights

The DCL proposed regulations are lengthy and complex and include significant changes that taxpayers should consider now, since many of the changes will apply retroactively to calendar year 2024 once the proposed regulations are finalized.

Taxpayers affected by the proposed regulations should consider the impact these rules may have on their DRCs or separate units, especially since the transitional Pillar Two relief is expected to end soon for many calendar-year and fiscal-year taxpayers.

Taxpayers may need to make adjustments to their DCL calculations going forward to take into account the new rules regarding removing items from the DCL calculation that are not on the separate unit’s books and records and U.S. inclusions, among others. The removal of these items could have a significant effect by unintentionally creating a DCL or increasing the amount of any existing DCL, among other possible upshots.

How MGO Can Help

If the Treasury and the IRS finalize these proposed regulations and you have a multinational company, you may lose the ability to take a U.S. deduction for losses incurred by foreign hybrid entities and foreign branches. If you are affected by the interaction of Pillar Two and the new proposed DCL rules, MGO’s team of experienced international tax advisors can discuss the potential of restructuring to minimize any negative tax consequences. We can also mockup OECD Pillar Two modeling and assist with planning for the overall minimization of your worldwide taxation with income or direct taxes. Our compliance services can help you with your foreign compliance calendars too. Trust us as we dive into the details and limit your global tax rate and overall exposure.

Case Study: Understanding the Impact of Cross Segregation Studies

Tax Partner Michael Silvio shares how MGO helped a client save upwards of $1.6M in taxes, along with an additional $2.2M in depreciable assets. By conducting a thorough cost segregation study and reducing the property’s land value from 40% to 15%, the MGO team went beyond the standard approach, assessing the land vs. building value and using insights from the county assessor. Michael explains how MGO’s attention to detail sets them apart from other firms in delivering substantial tax savings.

‘We took the time to really assess the need and then also go a little further and not just do the cost segregation study, but look at the land versus building value, go out to the county assessor website, see what the value is and see if there are any ways we could reduce it. And that’s where I think we add more value than other companies that do cost segregation studies.’

New Jersey Enacts Corporate Transit Fee

Key Takeaways:

New Jersey enacted a corporate transit fee entailing a 2.5% tax on corporate business taxpayers that have New Jersey allocated taxable income of more than $10 million.

The tax is effective for privilege periods beginning on and after January 1, 2024, through December 31, 2028. Because of the June 28, 2024, enaction date, you should evaluate the impact on your effective tax rates for ASC 740 purposes.

Those taxpayers who were subject to the former CBT surtax should not assume that they will be subject to the transit fee, given both the allocated taxable income floor of $10 million and the definition of “taxpayer” that the transit fee has.

On June 28, New Jersey enacted a corporate transit fee, a 2.5% tax on some corporation business tax (CBT) payers that have New Jersey allocated taxable net income in excess of $10 million.[1] The fee is effective for privilege periods beginning on and after January 1, 2024, through December 31, 2028.

All revenue collected from the corporate transit fee will be deposited into the general fund. Beginning in state fiscal year 2026, the revenue will be appropriated annually to support New Jersey Transit’s operating expenses and pay for matching funds required to receive federal funding for eligible New Jersey Transit capital projects.

The Former CBT Surtax

For tax years beginning on or after January 1, 2018, through December 31, 2023, New Jersey assessed a 2.5% surtax on “each taxpayer, except a public utility, that has allocated taxable income in excess of $1 million.”[2]

The former CBT surtax defined the term “taxpayer” to include any business entity subject to tax as provided in the Corporation Business Tax Act.[3] It defined allocated taxable net income as “allocated entire net income for privilege periods ending before July 31, 2019, or taxable net income as defined in [the Corporation Business Tax Act] for privilege periods ending on and after July 31, 2019.”

Regarding applicable payments and credits against the former CBT surtax, no credits were allowed against the surtax liability computed under the relevant statutory section except for credits for installment payments, estimated payments made with a request for an extension of time for filing a return, or overpayments from prior privilege periods.

The Transit Fee

As noted above, the new legislation has retroactive applicability to tax years beginning on or after January 1, 2024.

Unlike the former CBT surtax, the transit fee has an explicit exclusion for S corporations. It defines the term “taxpayer” as “any business entity or combined group that is subject to tax, as provided in the Corporation Business Tax [Act], except not including any S corporation or public utility.”

The allocated taxable income floor to be subject to the transit fee is higher than that under the former CBT surtax: The fee applies to taxpayers with allocated taxable income in excess of $10 million in New Jersey. However, it applies to all income, not just that over $10 million.

The transit fee defines the term “allocated taxable net income” as taxable net income, which is the entire net income allocated to New Jersey, less applicable New Jersey net operating losses.

Like the former CBT surtax, the transit fee is applied in addition to the New Jersey CBT rate of 9%.

No credits are allowed against the corporate transit fee liability computed except for credits for installment payments, estimated payments made with a request for an extension of time for filing a return, or overpayments from prior privilege periods.

Applicability of the Transit Fee to CBT Combined Groups

A transit fee taxpayer is defined to include a combined group, which is generally a group of companies that have common ownership and are engaged in a unitary business. Combined groups are to be treated as a single taxpayer.[4]

The New Jersey Division of Taxation has provided additional guidance on the transit fee’s applicability to combined groups.[5] Despite the exclusion of those groups from the definition of taxpayer, the allocated net taxable income of public utilities and S corporations in a combined group is included when determining if that group is subject to the transit fee.

Insights

Given the June 28, 2024, enaction date, taxpayers should evaluate the impact on their effective tax rates for ASC 740 purposes.
Taxpayers that were subject to the former CBT surtax cannot assume they will be subject to the transit fee, given both the allocated taxable income floor of $10 million and the transit fee’s definition of taxpayer.
Despite the exclusions for public utilities and S corporations, combined groups that have such members must be cautious because the allocated income of those entities is taken into consideration when determining transit fee applicability.
The statute excludes only public utilities and S corporations from the definition of taxpayer, so the transit fee may apply to entities such as real estate investment trusts, regulated investment companies, and investment companies.

How MGO Can Help

New Jersey’s new corporate transit fee could very well shape an already complex tax environment — but MGO is poised to support your business in navigating these challenges. Our experience in tax planning and compliance, coupled with a deep understanding of state tax regulations, enables us to provide tailored solutions after evaluating the impact of the transit fee on your effective tax rates for ASC 740 purposes that align with your organization’s strategic objectives.

Reach out to our team today to learn how we can help you optimize your tax strategy and comply with the new corporate transit fee in New Jersey.

[1] 2024 N.J.A. 4704.

[2] N.J. Rev. Stat. §54:10A-5.41(a)(1).

[3] Id. at §54:10A-5.41(b)(1).

[4] 2024 N.J.A. 4704(a); N.J. Rev. Stat. §54:10A-4(z).

[5] New Jersey Division of Taxation, “Corporate Transit Fee” (July 3, 2024).

Case Study: How MGO Helped a Startup Manufacturer Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has offered companies a financial incentive to invest in innovation. Once limited to those passing a stringent discovery test, the credit has expanded to include a broader spectrum of businesses, thanks to the more inclusive four-part test.

This shift provides companies investing in innovation a critical opportunity to reduce their tax burden and support cash flow. However, recent legislation has changed how businesses deduct research and experimentation (R&E) expenses.

Before 2022, companies could deduct R&E expenses in the year paid or amortize them over 60 months. However, legislation passed in 2017 that didn’t go into effect until 2022 mandates that companies must amortize R&E expenditures over 60 months rather than immediately deducting them.

This has been financially devastating to many companies. Due to this change, many can’t afford to pay their tax liabilities and some are even struggling to survive.

In this environment, it’s essential for companies investing in research and development to optimize the R&D credit.

The Challenge:

A startup company focused on developing autonomous driving mechanics faced a significant challenge due to the high costs of R&D. With total investments exceeding $700,000 and annual revenue of just $5,000, they were not yet profitable and, therefore, had no income tax liability to offset.

Despite this, the innovative spirit of the company necessitated substantial investment in R&D, which was not supported by immediate tax deductions per the new regulations.

Approach:

MGO, with its deep understanding of tax regulations and R&D credits, stepped in to navigate the complex landscape of R&D incentives.

The solution leveraged the payroll tax offset, allowing the startup to apply R&D tax credits against their payroll tax liability. Prior to the 2023 tax year, claims were limited to the $250,000. Starting from the 2023 tax year, these claims can be maximized even further.

The payroll tax offset provision, available to startups with less than $5 million in gross receipts and less than five years of operation, proved vital for this early-stage company.

This strategy was crucial for the company, given its high payroll expenses and lack of taxable income.

Value to Client:

Through the strategic application of the R&D credit, MGO secured a $150,000 benefit for the company, effectively reducing its payroll tax expenses.

Using the R&D credit to offset payroll taxes provided the much-needed liquidity to support ongoing innovation efforts, demonstrating the transformative power of R&D incentives for startups.

MGO’s knowledge and experience enabled this autonomous driving startup to fully utilize R&D tax credits despite having limited revenue. By applying the credit to payroll taxes, the company could sustain its innovation journey in a challenging economic landscape.

Your Trusted R&D Tax Credit Advisor

At MGO, our professionals bring more than 30 years of R&D tax experience to help you document, file, and defend your R&D tax credit claim.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. We welcome the opportunity to provide a complimentary R&D tax credit eligibility analysis to determine whether this valuable tax incentive can fuel your business’s investment in innovation and growth.

Case Study: How MGO Helped a Product Development Company Maximize the R&D Credit

Background:

Since the 1980s, the Research and Development (R&D) credit has been providing businesses with incentives to innovate.

An essential component of qualifying for the R&D tax credit is incurring research and experimental (R&E) expenses.

Until recently, businesses were able to deduct these expenses in the year paid or make an election to amortize them over 60 months. However, a provision in the Tax Cuts and Jobs Act of 2017 changed how businesses deduct R&E expenditures.

Starting in 2022, businesses must capitalize and amortize these expenses over 60 months rather than immediately deducting them. This change has been financially devastating for companies investing in innovation.

Challenge:

A product development company focused on the nutrition and fitness markets faced significant expenses associated with developing innovative workout products and ingestible pre- and post-workout recovery supplements.

With an annual revenue of $122 million, the company made considerable investments in R&D — totaling $2 million to $4 million over the last several years.

Since the company could not deduct those expenses in the year they were incurred, it needed to recoup some of the costs to sustain its research initiatives.

Approach:

MGO brought its extensive tax experience to the table to help this product development company navigate the complexities of the R&D credit.

We verified the company’s R&D activities aligned with the four-part test to qualify for the credit and all projects were rigorously documented with records directly linking them to the four-part criteria.

Value to Client:

Through careful evaluation and strategic planning, MGO helped the client secure a substantial net federal and state R&D credit benefit of $250,000 for a single tax year. The company used these credits to offset its federal and state tax burden.

This demonstrates the significant impact that R&D credits can have on a company’s financial health. The $250,000 credit enabled the client to reinvest in its innovative product pipeline, maintain a competitive advantage, and continue developing groundbreaking nutrition and fitness products.

Your Trusted R&D Tax Credit Advisor

MGO’s tax professionals have more than 30 years of experience helping you document, file, and defend tax credit claims.

Contact MGO today to discover how we can help you maximize R&D tax credits to support your growth and innovation journey. Our team is ready to guide you through the complexities of tax incentives and deliver tailored solutions that fuel innovation and business growth.

Are You Ready to Optimize Your Tax Efficiency for Rescheduling?

Key Takeaways:

Cannabis companies face critical tax decisions following the notice of proposed rulemaking to reschedule cannabis.
Areas of consideration include reviewing open and estimated tax years, as well as assessing your current structure and its costs/benefits moving forward
Companies should also prepare for potential M&A opportunities and explore tax credits and incentives that could become available in a post-rescheduling world.

The federal government’s proposal to move cannabis from Schedule I to Schedule III carries significant tax implications beyond the (non-)application of 280E. It’s essential for your business to navigate this new landscape and make informed decisions to optimize your tax position.

Here are four key areas to consider:

1. Reviewing Open and Estimated Tax Years

Now is the time to review prior year tax returns, considering recent court cases and other factors to determine if protective claims or amended returns are warranted and could be beneficial. Evaluating how recent events should impact your 2024 quarterly estimated tax payments and future tax strategies is crucial.

2. Structuring for Post-280E Tax Efficiency

Legal and operating structures designed for a 280E environment may no longer be optimal post-rescheduling. Assess the costs and benefits of maintaining your current structure and explore tax-efficient alternatives to avoid phantom income and simplify transactions between related companies.

3. Navigating M&A Tax Considerations

With merger and acquisition (M&A) activity expected to accelerate, it is crucial to optimize your company’s tax structure for potential transactions. Whether you’re an acquirer or a target, understanding the tax due diligence process and making informed decisions in light of the rescheduling announcement is essential.

4. Leveraging Tax Credits and Incentives

Post-rescheduling, cannabis companies can finally take advantage of federal, state, and local tax credits and incentives previously unavailable. Identifying and qualifying for credits related to research and development, employees, clean energy, and more will be beneficial for your business.

How MGO Can Help You

MGO’s dedicated Cannabis practice has the experience and knowledge to help you navigate the complex tax implications and opportunities of rescheduling. Reach out to our team today.