In 2022, the significant changes to Section 174 went into effect. Enacted in 1954 as part of the Internal Revenue Code (IRC), Section 174 was created to eliminate uncertainty in tax accounting treatment of research and experimental development (R&E, or more popularly, R&D) expenditures and to simply encourage research and developmental experimentation as to way to grow innovation.

Section 174 allows businesses to either deduct or amortize certain R&D costs. Deductions can be made in the year in which they are paid or incurred, or they can be amortized over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures. Below are five things to know now about the updates to Section 174.

1. Which entities are subjected to Section 174 capitalization?

In short, Section 174 applies to any taxpaying entity that incurs qualifying R&D costs independent of specific industry or business size. Specifically, there are several types of businesses that are impacted, including:

• • • Corporations — Regardless of size, once corporations have incurred qualifying research and development costs;
    • Small businesses including startups — Regardless of current profitability status, small businesses and startups that are heavily invested in R&D may capitalize or amortize their research expenses;
    • Sole proprietorships, partnerships, and LLCs — Also, these entities can take advantage of Section 174 if they have qualifying R&D expenses; and
    • Past-through entities including S-corporations — These too can utilize Section 174 for eligible cost associated with R&D, and the R&D credits can be passed through partners, individual shareholders, or members.

2. What qualifies? What are the kinds of costs subject to Section 174 capitalization?

There are several categories of expenses that can be subject to Section 174 capitalization, including:

• • • Salaries and wages — The salaries and wages of employees who conducting or directly supervising or supporting research activities can be capitalized;
    • Supplies and materials — The cost associated with supplies used in the research process can be capitalized, including anything from lab equipment to the software required for the research;
    • Patent costs — The cost associated with obtaining patents for a product or process developed through research activities can be capitalized;
    • Overhead expenses — There are certain indirect expenses that can be allocated to research activities, including utilities for a research lab or depreciation on research equipment; and
    • Contract research expenses — If a third party is used to conduct the research on a company’s behalf, the cost can be capitalized.

3. What kinds of items are excluded from Section 174 deductions?

Not all R&D expenses can be deducted under Section 174. For example, costs for land or depreciable properties are not deductible. Additionally, costs associated with research conducted after the beginning of commercial production, marketing research, quality control, and funded research (such as research funded by any grant, contract, or otherwise by another person or governmental entity) are generally excluded.

4. What is considered R&D as defined by Section 174?

For tax purposes, the following four-part test from the Internal Revenue Service must be met in order to qualify for R&D credit:

• • • Business purpose — The research must be intended to benefit a business component, which can be any product, process, computer software, technique, formula, or invention that is to be held for sale, lease, license, or use by the company in a trade or business of the company.
    • Technological in nature — The business component’s development must be based on a hard science, such as engineering, physics, chemistry, the life or biological sciences, engineering, or computer sciences.
    • Elimination of uncertainty — The activity must be intended to discover information that would eliminate uncertainty about the development or improve of a product or process.
    • Process of experimentation — The business must evaluate multiple design alternatives or have employed a systematic trial-and-error approach to overcome the technological uncertainty.

5. Which states have conformity to Section 174?

Companies will have to check with the individual state in which they are filling in to determine if that particular state has conformed. States either conform to the IRC Section on a rolling basis or a static basic. A state that conforms on a rolling basis means it will automatically adopt any changes to the federal tax code as those changes occur. Some states that conform on a rolling basis include Illinois, New Jersey, New York, and Pennsylvania.

States that conform on a static basis adopt the federal tax code as of a specific date and do not automatically incorporate subsequent changes. Some static states include Florida, Georgia, Virginia, and North Carolina. There are some states that have selective conformity (this means they adopt selective portions of the IRC), including Arkansas, Colorado, and Oregon.

It is worthwhile to note that levels of conformity can vary by state and may be subject to specific adjustments, additions, or exceptions based on the individual state’s tax laws.

The need to manage ever-changing corporate tax policies has created uncertainties for many tax department leaders, who fear they may not be able to fully anticipate all of the possible audit risk and exposure that their companies may face.

Tax jurisdictions around the globe are continually revising and upgrading the ways in which tax data can be collected and requiring tax departments to provide even greater transparency into their business’s operations. In the United States, for example, the Internal Revenue Service will receive $80 billion over the next 10 years, as a part of the Inflation Reduction Act of 2022, with more than half of that money being dedicated to tax enforcement, such as examinations, collections, criminal investigations, legal & litigation support, and digital asset monitoring.

Worldwide, the Organisation for Economic Co-operation and Development (OECD) rules around BEPS 2.0 (Base Erosion and Profit-shifting) included the move to a global minimum tax has created even more concerns, requiring tax departments to button-up how they function.

As tax department leaders seek to better manage how they’ll approach department operations, especially around compliance work, it may be necessary to make a review and assessment of what the tax team currently has at its disposal. Key questions in this assessment should include: How does the department gather data? How many people it takes to get specific tasks done, specifically compliance work? What are the current technologies the department uses, as well as others it can access from other parts of the business? And what are the other ways the tax department serves the overall company? As an advisor, or by providing data analytics to guide business decisions?

Changing the tradition of working in-house

Historically, corporate tax departments have primarily kept all or most of their work in-house, using an operational model that had as much work done within the department as possible. According to a 2019 Deloitte survey, more than 80% of respondents were “operating some type of centralized global tax delivery model” meaning most of their work was being done “in-house”.

As times changed and the volume and complexities of tax regulations grew apace, resource-challenged tax departments were moved to look for ways to improve the efficiency of the way they worked. The same Deloitte report noted that about 30% of respondents said they moved some work to a third-party vendor. Today the percentage of tax work that is being done by a third party is significantly higher, especially for tax compliance work. And while many departments benefited by having some or all of their compliance work done outside of the organization, there were concerns about the quality of the work being done and the potential risk to the business of having work done off-premises.

Risks and concerns related to outsourcing varies, of course, depending on where the work is being done. If its on-shore outsourcing (work that is being done outside of the organization by a third party in the same country) or off-shoring outsourcing (work being done out of country by a third party), many of the same risks and concerns are often cited by tax departments. These concerns include:

• • • • the quality of work;
      • the knowledge and skills levels of the outsourced workers;
      • loss of control over the quality of work or the processes used; and
      • change-over or loss of experience at the third-party firm. (For example, if a need arises to review past work for a current tax prep or audit, the tax department may not be able to access the people that originally did the tax prep.)

Despite the risks and concerns with outsourcing, a multitude of benefits outweighs them, including that outsourcing allows for:

• • • • tax department employees from tedious compliance tasks;
      • departments with limited staff can get compliance work done; and
      • department can do more strategic tax work including tax planning.

This is further underscored by a recent KPMG survey of more than 300 chief tax officers at large public and private U.S. companies that showed that more than 80% plan to use outsourcing or other managed services models in the coming three years. The survey also included the use of co-sourcing, which — although not a new concept — many departments are finding in most cases a better fit for how they work.

In a co-sourcing arrangement, tax departments can choose to have a third-party work together with the in-house team on specific projects. This allows the department to be involved every step of the way as the work is being done, alleviating concerns about potential errors, and creating more transparency into the third party’s work. A secondary benefit is that co-sourcing allows the internal tax team to work on different kinds of projects, which can help reduce burnout that comes from doing repetitive work.

Corporate tax department operational models must continue to evolve to accommodate continuously expanding global tax regulations. Many tax departments have long worked in a reactive way, with some leaders admitting that it’s a challenge to get all the work done from one tax season to the next. Clearly, this way of working isn’t sustainable, and it is one of the leading reasons for tax professionals burning out and quitting — in some cases, not just their current job but the entire accounting profession as well. In addition, many tax department leaders are being asked to provide more analytics and insights to their parent business, placing them in a business advisory role, according to the Thomson Reuters Institute’s 2022 State of the Corporate Tax Department survey.

In order to do address all these challenges, corporate tax departments will need to have the resources and bandwidth to ensure that their team members are free to step up into these new roles. That means, having an operational model within the department that allows this to happen is paramount.

Through taxes, governments can finance public initiatives and subsidize private investment in green industries and other initiatives, incentivizing a shift in private capital towards activities that will further the transition to net zero emission goals. Such investments will help prevent us from breaching our planetary boundaries and mitigate physical risks such as extreme weather, droughts, floods, and wildfires.

Tax credit investments

Investment tax credits at the federal level incentivize business investment. They let businesses deduct a certain percentage of investment costs from their taxes. In the context of green energy, tax credit investments return financial capital to companies to deploy directly into investments such as renewable energy, which boosts the investor’s ESG credentials and helps align the business with a low-carbon economy. Tax credit investments, which is a method used by corporations to provide funding for a project in exchange for the right to claim the available tax credit, enable corporations to use their access to capital to pursue their own path towards a sustainable economy in accordance with their risk/return assessments.

An increasingly popular option as part of an organization’s ESG strategy, tax credit investment has been and is set to become even more popular with the ambitious climate and energy policies of the Inflation Reduction Act (IRA), most of which relate to its more than 24 available tax credits. The IRA, which imposes a 15% corporate minimum tax, will drive $380 billion of investment into renewable energy and sustainable technologies, opening up new areas for tax credit investments such as electric vehicle charging infrastructure, bio-gas, green hydrogen, battery storage, and nuclear energy.

One significant change the IRA made to the clean energy tax credits is to make them refundable and transferable. Transferable tax credits allow companies to sell their tax credits to other entities for cash Refundable credits allow cash payment for tax credits if the amount owed is below zero.

Many U.S. companies need RECs in order to make progress towards their publicly stated goals, such as the country’s commitment to be net zero by 2050.

The Financial Accounting Standards Board, however, is now developing new guidance to clarify and smooth the process, and the Internal Revenue Service will be publishing guidance on the transferability of investment tax credits by mid-2023. Under the new rules, corporations can offset up to 75% of their federal income tax liability and roll this back three years, effectively gaining a rebate of taxes already paid to reinvest in ESG-positive opportunities.

Finally, renewable energy credits (RECs) are “tradeable, market-based instruments that represent the legal property rights to the ‘renewableness’ — or all non-power attributes — of renewable electricity generation,” according to the US Environmental Protection Agency (EPA). In effect, RECs assign ownership for the renewable aspects of the energy creation to the owner, allowing consumers to offset some of their carbon footprint.

Many U.S. companies need RECs in order to make progress towards their publicly stated goals, such as the country’s commitment to be net zero by 2050. Such credits provide a market and revenue stream for renewable energy-producing organizations. These opportunities enable companies to align themselves with a sustainable, green, low-carbon economy, which in turn, will likely lower companies’ transition and liability risks and their cost of capital.

There are also upsides as investors, lenders, and consumers recognize companies’ ESG-credentials. These opportunities for ESG-aligned investment will have notable social impacts around investments in infrastructure, human capital, and research & development. Job creation is a key outcome of investment in renewable energy, contributing to a just transition away from fossil fuels.

Under the IRA, a two-tiered system for renewable energy investment tax credits provides a base credit equal to 20% of the maximum credit and a bonus credit equal to an additional 80% of the maximum credit, but only if certain prevailing wage and apprenticeship requirements are satisfied in connection with the relevant project.

In addition, there are three adder credits that can be stacked on top of underlying credits for: i) meeting specific, domestic content requirements; ii) placing projects in the IRA’s defined energy communities; or iii) undertaking certain low-income solar activities.

While bringing more manufacturing jobs to the U.S. will strengthen employment overall, specifically selecting rural communities for large solar investments, for example, will provide an economic boom to those areas and enrich them through tax equity. There are further social benefits to community solar investments, which will have the ability to sell more than 50% of electricity generated to low-income families at discounted rates.

On the horizon

ESG alignment is the future of corporate investment, and companies should take advantage of the numerous investment opportunities that are emerging in the green transition.

In order to understand how companies can improve their status as social and environmental citizens and mitigate ESG-related risks, accurate measuring and reporting is needed as the first step. And tax credit investments are a direct, straight-forward way to turn this knowledge into a business upside.

In a time of economic and stock market uncertainty, tax credit investments offer a clear opportunity to grow and strengthen a company’s business strategy, while aligning it with the green transition.

This article was written for the Thomson Reuters Institute blog site by Foss & Co. For more information, contact ir@fossandco.com.

The Wayfair ruling opened the door for states to later receive record amounts of sales tax during and after the pandemic as people shopped mostly online. Wayfair created an economic nexus in virtually every state and local tax (SALT) jurisdiction.

Given the current state of the internet of things (IoT) — the connectivity of almost every aspect of our lives — means that there is almost no industry that isn’t impacted by IoT. And this has created income opportunities for SALT jurisdictions, which, after Wayfair, were able to determine what items are taxable, going beyond a physical product like a hammer or a pair of pants and extending it software and code, as well as to services including communication and technology.

In some cases, the taxability of these transactions isn’t as straight forward as one would assume, consider free trials, what is the value of the goods or services there that have been exchanged? Because in many ways tax regulations have not caught up to modern-day goods and services, allowing SALT jurisdictions to get creative in how they apply the antiquated tax laws to businesses inside or outside their state.

The challenge to calculating taxes on items like digital automated services, computer service, information or communications services, is when they are treated like traditional goods. The Multistate Tax Commission is continuously working to determine what is considered a digital good, as well as how such digital goods are to be categorized. Add to this, the digital advertising tax, which currently holds that the digital advertising gross revenues tax of between 2.5% and 10% is imposed on entities that have global annual gross revenues of at least $100 million and deriving gross revenues from digital advertising in Maryland of at least $1 million. Although this tax requirement has only been rolled out and contested in Maryland, more than 10 other states are considering similar legislation, such as Massachusetts, which has various used approaches to taxing digital advertising including a gross receipts tax and an excise tax. The state is making a further a study of how best to tax such activity.

The challenge of time & resources

Not surprisingly, time and resources are the biggest challenges for many tax preparers. For corporate tax departments navigating the changes in tax regulations — especially around understanding how the classification of digital items are taxed — it’s more important than ever to ensure their data management is compliant. Tax departments need a strategy to organize data because failure to do so could provide risks, including subjecting the business to potential audits. The strategy requires consideration of technology that the company currently may have or may acquire and looking at the following three factors: data, workflow, and end-to-end automation. Assessing a tax department’s current technology stack and having an understanding of what technologies and corresponding processes are in place is necessary in order to get into compliance from the start. Firms should consider the following three factors in this technology and process assessment:

1. Data management — Knowing what technology is used in accordance with which process in step-by-step way is critical. Making sure such processes are streamlined, and that whichever software or application used can connect to multiple sources in order to gather and format the data to where it is then most easily usable.

2. Workflow — Having the right technology will also be determined by the people and their talent level. Indeed, having the best technology will only be as good as the people that are using it. Right-skilling your teams is foundational and allows for the team to create project pipelines that can be measured against key performance indicators (KPIs) which can in turn help provide a clear picture of the tax department’s value to the overall business. This overall picture can be leveraged to influence the company’s future spending on tax technology and other department needs.

3. End-to-end automation — Most tax departments have stated that there still is a relatively large amount of manual work that takes place. Manual works causes some of the highest inefficiencies within the department, including using more time and having a larger potential for mistakes being made. The most ideal situation is to have technology that provides end-to-end automation, limiting the amount of manual work needed. Using technology such robotic processing automation (RPA) to execute structured, repeatable, and logic-based tasks that mimic the actions taken by existing human staff, will free up staff to perform more analytical and strategic work that provides additional value to the team and business.

The general consensus is that the tax landscape will not become less complex and that SALT governments will continue to look for creative ways to generate more revenue. In fact, the state-level enactment changes to Section 174 that took effect last year further adds to the work and complexity that a corporate tax department will need to navigate.

In fact, tax department leaders would be smart to form a strategic plan — along with the necessary technology — that will allow them to gather and manage their company data while finding a way to analyze the data faster and more accurately.

To find out how corporate tax leaders view these myriad challenges, KPMG surveyed 300 Chief Tax Officers (CTOs) from large U.S. companies with revenue of $2 billion or more and published the findings in its fourth annual 2023 Chief Tax Officer Outlook report.

The talent shift

Last year, CTOs surveyed rated talent as the top threat to organizational growth from a tax perspective, particularly reporting struggles with identifying and hiring talent with both tax and technology skills. This year, however, talent was rated last in a list of 10 risk factors that companies are facing over the next three years.

These results reflect both the turbulence of the times we live in and the degree to which tax leaders have absorbed the lessons of the pandemic and are re-thinking their priorities going forward, says Greg Engel, Vice Chair -Tax at KPMG. “Last year, talent was a big concern, but most of the people leaving the profession have cycled out, and we’ve adapted to a ‘new normal,'” Engel explains. “The question to focus on now is, how do we develop and train our people, and provide them with a satisfying career path?”

Tax managers have also learned how to fill skills gaps through outsourcing, Engel says. Indeed, 83% of the report’s respondents say they plan to use outsourcing, co-sourcing, or managed services within the next three years. The viability of a hybrid workforce also eases the talent burden, adds Engel, because it provides employees with greater flexibility.

A new threat to growth: ESG

While environmental, social, and governance (ESG) issues were at the bottom of the list of corporate risks last year, this year ESG concerns were ranked the number one threat to organizational growth over the next few years, ahead of regulatory changes, geopolitical fallout, supply-chain management, and global economic uncertainty.

The rise of ESG as a perceived threat to growth is a direct result of the extra reporting and responsibility that ESG initiatives require from corporate tax departments, Engel says. Everyone from the boardroom on down wants to be viewed as a “good corporate citizen,” he notes, and progress on ESG initiatives has become an important benchmark of responsible corporate behavior.

“As momentum has moved business forward on ESG, tax has a role in all of it, so it’s become a large reporting effort,” Engel explains. “On the G side, with reporting mandates on the horizon, we’ll begin to see more companies start to pay more attention to transparency and consider investing in tools or third-party providers that can help them tell their total tax story.”

The S and E sides heap extra responsibilities on tax departments as well, especially when it comes to navigating new environmental taxes and accessing government funding opportunities for ESG initiatives. If tax is a game of sticks and carrots, Engel says, tax departments are tasked with minimizing the sticks of ESG (e.g., new taxes on plastics or carbon), maximizing the carrots (e.g., tax incentives, grants, energy credits), and shaping the narrative about how the company is meeting its commitment to sustainable tax behavior.

According to KPMG’s report, attitudes about the tax department’s proper role have shifted so dramatically that a majority of CTOs (56%) now say it is more important to “be seen as a good corporate citizen” than it is to minimize the company’s tax burden. Transparency too has become such a hot-button topic that almost half (49%) of the companies surveyed said they are fully transparent and share significantly more tax detail than required.

Regulations & geopolitical factors

Changes in tax laws and regulations represent the number two threat to corporate growth cited in KPMG’s report. At both the domestic and international level, planned tax reforms and increased scrutiny from tax authorities promise to complicate compliance and add to the burden tax departments already feel, the report observes.

Meanwhile, 60% of CTOs expect that changing U.S. regulations will increase corporate taxation over the next two years. Almost as many (58%) also say new legislation included in the Inflation Reduction Act (IRA), including a minimum tax on corporations, will have a significant impact on their tax and compliance costs.

Unpredictability is the biggest headache, Engel says. “Companies and CTOs like consistency and predictability, and they don’t have any right now,” he says. “This is why as politicians debate tax policy changes, it’s critically important that companies model and plan for various scenarios.”

Furthermore, uncertainties about how operations and supply chains will be impacted by global inflation, trade tensions between the U.S. and China, and the ongoing Russian war in Ukraine are also top concerns for CTOs, especially those who work for large multinationals.

According to the report, CTOs say helping their companies understand the tax implications of international events — such as supply-chain disruptions, regional disputes, trade restrictions, currency controls, etc. — is becoming an increasingly important part of their job. “As supply-chain issues spur organizations to diversify from historically low-cost countries like China and India, CTOs are helping set up tax-efficient structures where the business wants to be,” the report states. “This includes helping supply-chain functions evaluate tax costs and risks associated with new supplier sourcing and potential operational moves.”

A seat at the table

Though many of these risk factors cited in the report add to the work burden and responsibilities that corporate tax departments must shoulder, Engel says they also offer tax leaders an opportunity to demonstrate the strategic and operational value of the tax function to the overall enterprise.

“Successful CTOs might already have a seat at the table, but it’s up to the CTO to bring strategic thinking to the table and that while it may have been harder to find tax at the top of the agenda in the past, it is less difficult to make that case today,” Engel adds.

“From ESG and regulatory changes to supply chain and geopolitical issues, and everything else in between — there is so much going on now that you really do have to have a strategic tax voice at the table,” he says. “CTOs just need to be prepared when they get the call.”

Therefore, it’s no surprise that in this recent released survey of tax officers from KPMG these concerns have not abated. Indeed, close to 50% of chief tax officers report that they continue to struggle to find talent and more than 60% believe the changes to U.S. and international regulations (for example, around BEPS and Pillar 2) will significantly impact taxes.

Thinking about data

Before there can be any discussion about technology and how to use to it to solve for the challenges mentioned, it is necessary to first understand the data situation. The corporate tax department is one of the few departments within the company that gathers massive amounts of data from across the organization. How tax departments go about acquiring this information is a challenge, but most would say the bulk of their time is spent gathering data.

Succinctly put, tax data problem can be “defined as the inability to identify, collect, and leverage data to efficiently and effectively support compliance planning and opportunity management within the tax function,” according to a recent KPMG webinar.

The typical tax department is challenged in numerous ways, such as how it:

• • • keeps up with regulatory changes and provide information faster to regulatory bodies;
    • gathers data;
    • determines the quality of the data; and
    • assesses the limitations of current technologies.

To solve for these challenges, corporate tax departments can look to build an ecosystem to manage their data. Doing so creates a repeatable, clear way of processing the data needed for their various uses. A data ecosystem is a platform that combines data from numerous sources and builds value through the use of processed data. The use of the term data ecosystem is often used and understood in technical terms, and it most often sits with the IT department; however, tax departments can create a less technical but highly efficient ecosystem. (Of course, this is not to say tax departments don’t need to work with the IT department. They do.)

What are the necessary pieces for an ecosystem?

In the general terms there are four central components to a data ecosystem: data sources, data extraction, data storage, and data analytics. These terms can be specified for use in a corporate tax department in the following ways.

Data sources — Tax departments can catalogue the list of information that is needed for compliance work, strategic business decisions, and advising the company. Next, they will determine where each of the information resides and whether the data is structured or unstructured. Structured data is data that is in a standardized format, has a well-defined structure, complies to a data model, follows a persistent order, and is easily accessed by humans. While unstructured data is datasets (typical large collections of files) that aren’t stored in a structured database format, and most likely needs to be human-generated.

Data extraction — After determining where the various data resides and the format in which the data exists, there will need to be plan for how and when to access this information. Based on the timeliness of the information needed, priorities should be set accordingly. Included in this step should be considerations on how the data will be managed. For example, if the data is unstructured and therefore needs to be downloaded, departments would need to determine the best format needed for where it is to be uploaded and how it is to be used. If the data is structured, (i.e., if it is in an ERP or CRM) then, the department needs to identify how best to move the data into a format that can be analyzed by the tax team.

Data storage — The decision of how and where to store the collected data is the next step in establishing a data ecosystem. Ideally, this is an opportunity to create and use a system that is duplicable, especially when information is gathered from certain departments with frequency.

Data analysis — The tax team is now ready to have the data analyzed so they can do their job. However, this maybe a place where upskilling is required. The ability to quickly access information, make sense of it, and then provide an output can be key to working better and smarter, but it may require specialized training or hiring.

By creating an ecosystem for data, tax department leaders can now sit with their IT colleagues for a robust discussion on which technologies are needed to enhance how the corporate tax department works. The data ecosystems provides the IT team with a clear map, including what the pain points are for the tax group, and what technology or personnel investment is needed to allow the tax department to function at its best level.

More recently, momentum for more tax transparency — which essentially defines whether or not an organization is paying its fair share in taxes (whatever that means) to the communities in which it does business — has accelerated as an important part of tax policy considerations. In part, this push for more transparency has been driven by the increased priority of sustainability among stakeholders.

One aspect of these key tax policy tactics is the use of reward or punishments to drive preferred outcomes. However, as governments require more disclosure around environmental, social, and governance (ESG) issues, the stakes in using the carrot-or-stick approach get higher, as government regulators demand more information. While what to disclose becomes easier with regulation, the potential for blowback and negative reputational issues for companies increases, again because of the expanded potential for misinterpretation of tax data.

Given these risks, companies are spending more time assessing their communications strategies around tax transparency. Brett Weaver, partner and ESG Leader in Tax at KPMG, says that the narrative around disclosure of tax information is something he spends more time helping their clients think through.

Using rewards & punishments to measure progress

Up to this point, tax credits have been a predominant mechanism to spur investment in emerging industries in the corporate tax space, primarily within the U.S. Indeed, the Inflation Reduction Act (IRA) is the most recent example of incentivizing tax policy by using reward mechanisms. Weaver describes it as the most fascinating modern industrial engineering policy of its time because of the Act’s use of “layering” incentives.

The IRA’s baseline investment tax credit is set at 6%, but for companies that agree to pay a prevailing wage and invest in apprenticeship programs, the tax credit can be as high as 30% for the construction of a solar power plant, for example. Also, if raw materials are domestically sourced and equipment is made in the U.S., the tax credit opportunities are even more attractive.

Yet, outside of the U.S., penalties are more common, and Weaver predicts that will continue as a primary practice both in the U.S and in other countries. One of the emerging areas of utilizing penalties is so-called “dirty supply chain taxes,” such as an increased levy on the use of plastics for packaging. California is leading the way in this area, and Weaver says he sees other states likely to follow suit.

Complicating tax communication with sustainability

Tax transparency remains a conundrum for companies and their stakeholders in understanding what it means for their business and how to navigate the complexity of messaging. Weaver says he advises his clients to craft a communications strategy using both qualitative and quantitative components. Going exclusively with a qualitative or a quantitative approach is insufficient and carries too much exposure, he adds.

“Stakeholders are skeptical on stories because there is an assumption that the story is there to make the company look good,” he explains. “This is where the data plays a key role in backing the story up.” Likewise, the intent of the message by just using data, without the story, can be misunderstood.

To help organizations get started in their journey, Weaver uses the global standard for public reporting on tax from the Global Reporting Initiative (GRI) to outline basic standards because GRI requires disclosure of the company’s tax risk management policy, the red-line around tax that the company will not cross, the controls that are in place around how tax decisions are made, and the mechanism to ensure there is transparent reporting to the board and the C-Suite.

The GRI standard and others like it are just the starting point for analyzing the right mix of sharing quantitative and qualitative information in the tax story, however. For example, Weaver also advises focusing on the story first and weaving the data into the narrative. Key ingredients to incorporate in this communication include:

• • • stating what the organization is doing around sustainability and why;
    • outlining how the company is putting capital, both human and monetary, behind the initiatives for the benefit of the planet and the local communities in which the company operates;
    • building trust in the fundamental belief that partnering with governments to make progress in mutually beneficial investments is necessary (indeed, governments typically cannot accomplish these planet- and people-related transcendent goals without private sector capital);
    • summarizing the impact of these investments on the company’s stakeholders to include how the tax revenue that the company pays benefits the local communities in which it operates; and
    • then, reporting the effective tax rate as the results of the company’s investments, partnerships, and joint funding.

It is critical for companies to put context around the tax data through a well-crafted narrative that explains the strategy in laymen’s terms on what the company is accomplishing and then link the tax strategy from there. Only then can the company ensure it is effectively communicating its tax strategy and mitigating the risk of tax data misinterpretation.

The policies vary by company, of course, Disney is requiring employees be back in the office at least four days per week; while other companies are mandating a set number of days but allowing employees to choose which days they come to the office.

This all begs the question, why? Many studies and surveys have reported that productivity did not decline during an extended period of remote working, but rather went up. And employees were grateful for the ability to have more control over their schedule and work location, allowing them to craft a better work/life balance for themselves.

Leaders requiring a return-to-office mandate cite the need to reconnect teams, foster greater collaboration, and create equity for those who cannot work from home. Many of these concerns have been voiced by leaders of tax & accounting firms as well.

Accountants return to the office

So, are tax & accounting firm leaders implementing similar policies? To answer that, let’s look at a recently published report, The 2022 ConvergenceCoaching, LLC® Anytime, Anywhere Work (ATAWW) Survey. This comprehensive report examined the adoption of flexible work practices in 216 accounting firms across the country and reported significant increases in adoption and expansion of access to remote and flex work programs.

Of the 216 accounting firms that participated in the 2022 ATAWW Survey, 97% allowed their talent to choose where they work, while 94% offer flexibility in when people are working. The report notes that with more firms leaning into outsourcing, offshoring, and fractional staffing resources, it is increasingly important to learn to work asynchronously across multiple time zones. The survey also shows that surveyed firms are leveraging gig-based workers (30%), domestic outsourcing teams (30%), and overseas offshoring providers (35%).

With an increasingly tight talent pipeline, the report illustrates that leaders need to get innovative on staffing their teams. In fact, the 2022 ATAWW Survey found that “81% [of survey respondents] hired at least one remote team member they had not employed before,” which essentially means that firms are hiring new staff in their remote geography. It’s remarkable to note that this result was up from 38% in 2020.

Tax & accounting firm leaders are also eliminating outdated mandates to work Saturdays during peak seasons. In fact, 73% of responding firms now make Saturday hours optional, giving their talent the ability to choose when they will complete the extra workload required during busy seasons, the survey found.

Outside of peak periods, firms are implementing creative ways to give their talent a collective break. Almost half (47%) of survey respondents close their office on Fridays, while another 11% remain open and rotate which employees can take the day off. And just 1% of the respondents said they provide Fridays off all year round.

With the discussion of the four-day work week increasing — for example, Maryland has a proposed bill to encourage employers to offer a four-day work week — many firms are offering these kinds of benefits to be more attractive to talent.

Extending more benefits

Unlimited paid time off (PTO) is another benefit that is being discussed across the tax & accounting industry. “Unlimited PTO programs emphasize a culture of flexibility built on personal responsibility and mutual trust,” the survey notes, adding that accounting firms that offer this benefit rose from 11% in 2018 to nearly one-fifth of participants (19%) in 2022.

In fact, these benefits are being extended to all levels of client-facing staff as well as administrative and operations personnel. This level of flexibility “works for partners to administration — it works for everyone,” says Renee Moelders, ATAWW Survey co-author and Partner at ConvergenceCoaching. The 2022 ATAWW Survey found that 83% of participants offer these flex options to some or all of their operations and administrative talent as well. With cloud access, paperless documents, and revised workflows, it makes sense that all team members would be offered the option to work remotely or in a hybrid fashion.

Based on the ATAWW Survey data, it’s clear that there is a growing commitment in tax & accounting firms to extend more flexibility to their talent. And those firms embracing more flexibility will have a competitive edge in hiring and retaining top talent, while those holding onto more traditional models of work are at risk of facing greater staffing challenges going forward, warns Moelders.

Of course, there are still many challenges around greater flexibility that tax & accounting firm leaders still have to address, such as how they will ensure team collaboration, how they will train and teach remote team members, and how can they keep a remote team on track.

The answers to these challenges will take innovation and intentionality to implement and execute, but it can be done. When the pandemic hit, tax & accounting firm leaders were forced to find new solutions to keep their practices running while ensuring safety for team members and clients. Now, it is time to reignite that creativity and look at remote and flex work as a long-term solution.

Firm leaders shouldn’t let the headlines about return-to-office mandates lull them into thinking their talent will willingly accept such policies. Tax & accounting practices are well-equipped technologically to offer firm talent these flexible options, and leaders need to expand their thinking on flex and remote work so they can make their firm a destination workplace that will attract top talent.

Whatever the ESG concerns that emerge, both say, they are among an already full plate of work for corporate tax teams in 2023.

Readiness to take on ESG responsibilities

The extent to which corporate tax functions will be prepared to take on upcoming regulatory requirements around ESG will be a key factor in 2023. At the same time, tax leaders don’t seem too worried. The infrastructure upon which most tax teams can lean are the processes and governance already in place to meet current financial disclosure requirements, explains Sturgis. Indeed, corporate tax functions have solid protocols and procedures in place to comply with existing regulations, and they already have experience with calculating how much the company contributes to local economies in which the company operates.

Sturgis offers these essential actions that can help determine if the current process framework is adequate to absorb ESG requirements:

• • • Make sure tax leaders are able to articulate how the tax function is reducing risk.
    • Evaluate how the tax function is grasping the company’s current tax liabilities, which includes income tax, payroll tax, personal property tax, and value-added tax. In addition, a detailed understanding of those liabilities from state, local, federal, and international perspectives also is important.
    • Assess the tax compliance process and conduct a gap analysis against best-in-class practices.
    • Review processes to understand how new tax laws are being identified and evaluated.
    • Analyze how adding technology to processes might help reduce that risk.

Evaluation of IRA tax incentive opportunities

The full implementation of the IRA could reduce the domestic greenhouse gas footprint in the U.S. by as much as 40%, given that there is more than $300 billion of climate-related and clean energy investment incentives from solar wind energy storage, hydrogen, carbon sequestration, clean aviation fuel, and charging stations for electric vehicles, says Hall. Because of the expansive incentives related to the IRA, any corporate tax function can be a vital and valuable contributor to a company’s ESG strategy execution around climate and the environment in 2023.

What is interesting about the IRA is its supercharge tax credits, which actually have been on the books for years. In addition, the law also offers extensive opportunities to enhance social initiatives — the “S” in ESG — which include: i) a low-income area provision that allows a company to leverage additional incentives if a company’s energy project is in a low-income community that is below or near the poverty line; and ii) an “energy community” special rule that encourages investment in communities that have historically been negatively impact by fossil fuel industries, while at the same time, are in need of economic revitalization.

ESG-infused cross-border tax regulations

In addition to the issues on the horizon around tax in the U.S., there are tax concerns related to ESG in other jurisdictions. Two notable ones, according to Sturgis and Hall, are the potential for a carbon border tax and IRA-like legislation in other countries. Indeed, they could increase the difficulty of the work by corporate tax teams, if passed.

For example, the implications of the European Union (EU) enacting a carbon border tax could be significant, notes Sturgis. The EU is already taxing carbon, but the carbon-based border tax complicates the incentives to keep the production of goods sourced and manufactured within national borders because these goods would be at a price disadvantage. Also, more jurisdictions passing their own IRA-type legislation to incentivize domestic investments would also have an impact. “A headwind on the IRA legislation in the U.S. is that our friends over in Europe were not too happy about it,” Hall says.

ESG here to stay in 2023

Political and financial headwinds are likely to slow progress around ESG in 2023. Sturgis and Hall point to the divided U.S. Congress and the high cost of capital that are likely to both slow companies’ efforts to take advantage of IRA incentives.

However, both anticipate progress over the long term because of ongoing rulemaking and the staying power of the importance of ESG among the public, investors, employees, consumers, and other stakeholders. As a result, corporate tax teams as well as their outside tax & accounting firms are likely to stay busy in 2023.

“Whenever [ESG] rules come out, they need to be implemented via controls and audited,” Hall states. “As accountants and CPAs, that is where we can help.”

A tax department operating efficiently can go beyond providing compliance work and instead make the shift to being a proactive business unit that provides the company with tax and business guidance to mitigate risk and improve profitability. However, leaders and department heads must first understand where their department stands before thinking or wishing to become proactive.

For example, how does a corporate tax department leader know whether the department is proactive or reactive?

Being proactive — creating or controlling a situation by causing something to happen, rather than simply responding to situations after they have happened — means that the department should be organized in such a way that even though all external factors cannot be controlled, the mechanism in place can help plan for the unknown or the out-of-left-field happenstance.

The nature of the types of work done by the corporate tax department and how that work gets done is under almost constant change — the recent local, national, and international regulatory changes is just the latest example. The use of technology also has collapsed borders, allowing individuals and companies alike to traverse with ease. Like the individual, many companies can stretch into parts of the world that would have been only accessible by a few large corporations in the past.

Yet, along with this ease of crossing borders, there is a complexity in navigating it, especially for doing business. Companies can grow by reaching customers across the globe, but the cost of doing business brings challenges, such as having to work within the legal and financial systems in which the customer is located.

Corporate tax department leaders must not only navigate the tax laws of a nation, state, and local government but now increasingly must deal with multi-nation rules, especially if their companies have customers around the globe.

Some corporate tax departments might find it hard to believe that they are not proactive simply because part of the nature of this department is to predict their company’s tax liability and ensure it remains tax compliant while paying the necessary amounts of tax.

Of course, there are some telltale signs that a tax department is not operating efficiently and therefore isn’t proactive. Taking a look at these four areas can help department leaders make a proper assessment.

1. Process management

Departments that use a systematic approach to ensure adequate and efficient business processes are in place are engaging in proper process management to better align business processes with strategic goals. For corporate tax departments, there may be different ways in which data is collected, reports filed, analysis provided, and feedback given back to the business that all may seem to work. However, if they rely primarily on manual work and are multi-stepped (to the point that it takes weeks and months to complete), it may be worth asking some questions of the department’s process management.

Indeed, does process management even exist within the department? Can it be articulated clearly, shown to work repeatedly, and stand on its own? Does it only work for the individuals that helped create it, or can someone new step in and have it work the same way? If the answer to these questions is no, proper process management isn’t in place.

2. Data management

How does the department gather data? Does it feel like a version of the Hunger Games that requires seeking, finding, negotiating, and trying not to step on a land mind? Is this a manual process, collecting various spreadsheets from around the business and then entering the information into the department’s management systems? Or, can the tax department software be integrated to extract data from other part of the business? Is it seamless? Manually processing data significantly increases the chances of error, makes it challenging to verify data sources, potentially creates a tax risk, and is time-consuming.

And yet, even when technology is employed, it’s only as good as its users. Leaders should assess whether current technologies are efficient or actually are creating more work or processes for the department. Often staff — whether incorrectly trained or simply preferring to use their own methods — utilize just certain parts of a software program and rely on manual labor to do other tasks.

In these cases, workers time is not being used efficiently. Further, not having proper data management systems in place also causes bottlenecks in the work flow of department as employees wait for pieces of data in order to move forward. These inefficiencies can create a potential opportunity for risk, such as missing or incorrect data that leads to erroneous results.

3. Compliance & reporting

How long does this process take? Quite often, reporting is the final step in the process and as such, can be significantly impacted by how well or how poorly the previous process were conducted. Again, if there are many manual steps here, it will likely result in wasted time and resources while increasing the chance of risky mistakes.

4. Analysis

Corporate tax departments have always been an advisory to the business by the very nature of their role in providing tax planning. However, this role has increased as departments are now expected to provide insights into tax implications related to deal-making, mergers, business divestitures, and environmental, social & governance (ESG) initiatives to name a few. For departments that aren’t functioning optimally, leaders will find that they cannot provide useful or beneficial advice to the larger businesses because departments themselves lack the bandwidth and resources needed.

Tax departments and their leaders should strive to manage processes and data efficiently and effectively. By utilizing automation and having a clear mindset about the role of the tax department within the organization, a leader can improve the department’s work process, relieve the stress on overworked employees, and provide invaluable information to the business to make it more profitable.

Indeed, this kind of transformation within corporate tax departments has happened, led by leaders who have recognized and adjusted to the new realities of the business and taken advantage of improved technology and process management techniques.