In Brief:
- Updated payroll tax rules in Nassau and Suffolk counties will alter compliance requirements and cash flow for employers.
- The permanent QBI deduction and new industry tax credits offer savings for independent contractors and family-owned businesses.
- Manufacturing, technology and R&D-driven firms may benefit from accelerated deductions and expanded tax credits.
- Changes to QSBS rules and market-based income sourcing create both opportunities and compliance challenges for multistate businesses.
Business owners across Long Island can attest to the importance of working with trusted CPAs who can offer valuable tax guidance and help navigate concerns about inflation, interest rates and economic uncertainty. But to stay on top of tax codes that can change and grow more complex every year, tax professionals advise businesses to maintain that relationship by working closely with their accountants, making sure that compliance challenges are met with diligence and exploring new opportunities to realize savings.
Updated payroll tax rules will necessitate a compliance review for many companies, with positive outcomes for some. “Payroll tax changes in Nassau and Suffolk will reshape labor costs for larger employers, while smaller corporations get operating leverage from the $5,000 threshold, freeing up cash that was tied up in quarterly payments,” explains Aaron Balken, senior manager, state and local tax, asset management, and New York tax controversy lead, KPMG US in New
York City.
According to Balken, the impact of the new rules will be felt across many of our area’s largest employers, but it may also produce tangible benefits for some smaller firms. “The payroll tax changes will affect healthcare systems, schools, construction firms, logistics operations and local governments,” he says. “Smaller businesses in hospitality, retail and professional services will see different quarterly payment requirements that can help cash flow.”
Along with certain tax provisions, such as the qualified business income (QBI) deduction now becoming permanent, the offering of new tax credits can also be a boost for some sectors. “The permanent federal QBI deduction is particularly relevant for Long Island given the concentration of independent contractors, solo practitioners and family-owned businesses,” says Balken. “Looking ahead, there’s real opportunity in the new industry credits for film and semiconductor as those are growing sectors in the state and these credits can make a difference.”
There are several ways Long Island businesses can take advantage of recent regulatory changes, and experts have identified specific examples of new cost-cutting opportunities that have become available.
“Manufacturing facilities get a huge break,” says Craig Fine, partner and Long Island market leader, Forvis Mazars LLP in Woodbury. “If you build or significantly improve a property used for manufacturing, you may be able to deduct the entire cost in the first year instead of over 39 years. This means major cash flow savings for big projects.”
Several companies, particularly in the technology sector, may begin to realize significant benefits thanks to certain tax code revisions. “Research and development (R&D) expenses are back to being deductible,” Fine says. “Also, [owners can] consider claiming R&D tax credits for wages and other related expenses.”
Thresholds on interest expense deduction have risen, presenting another opportunity for saving. “Businesses that were limited in deducting interest can now deduct more each year, and may even use some previously disallowed amounts,” notes Fine.
Changes in federal regulation regarding taxes on qualified small business stock (QSBS), which include a reduced holding period for QSBS tax benefits (from five to three years, with phased-in exclusion), an expanded asset threshold for eligible corporations (from $50 million to $75 million), and a higher maximum gain exclusion (from $10 million to $15 million), could have a widespread effect across qualifying C corporations, explains Michael Lawrence, tax managing director at CBIZ in New York City.
“The expanded QSBS eligibility especially benefits start-ups, tech companies and growth-oriented C corporations on Long Island, making it easier for investors and founders to qualify for tax-free gains on stock sales,” Lawrence says.
However, he warns that several businesses that operate in multiple states will now need to consider new market-based income sourcing rules under which corporate income is apportioned based on where the customer receives the benefit of the service or product, rather than where the business performs the work. “A Long Island law firm serving out-of-state clients will now source that income to the client’s location instead of New York,” says Lawrence. “Similarly, software companies providing cloud services to out-of-state clients will have income attributed to those states; if clients are in multiple states, apportioning income becomes more complex.”
In some cases, Lawrence says, companies that do business in other states may find savings with the help of their accountant. “We analyze where revenue, property and payroll are located to ensure income is correctly apportioned and taxes are paid to the appropriate states,” he says. “We have helped clients secure substantial refunds when revenue was previously incorrectly sourced to New York.”
Through careful analysis with a CPA, businesses can gain a better understanding of how to capitalize on tax code changes involving expenses, bonus depreciation, and interest deduction. “We are assisting many in R&D studies which document the deduction and credit as required by IRS as well as cost segregation studies which help clients accelerate depreciation on new or existing buildings to support these additional deductions,” Fine says.
As always, proactive collaboration with tax professionals can help businesses of all types develop an optimized tax strategy that adheres to new rules.
“We review revenue sourcing, model apportionment impacts, evaluate credit eligibility and update [companies’] compliance systems,” says Balken. “It’s about understanding opportunities while proactively maintaining full compliance with the regulatory changes.”
