tax-strategy

Files (4)

• README.md
• SKILL.md
• evals.json
• r-and-d-credits.md · references/

SKILL.md (first lines)

## Key principles

1. **Plan proactively, not reactively** - Tax strategy executed before a
   transaction or year-end is worth 10x more than cleanup after the fact.
   Entity elections, R&D credit documentation, and transfer pricing policies
   must be in place before the relevant period ends - they cannot be backdated.

2. **Document everything** - The IRS and most tax authorities shift the burden
   of proof to the taxpayer. No documentation means no deduction or credit.
   R&D activities, business purpose for expenses, and intercompany agreements
   must be contemporaneously recorded, not reconstructed during an audit.

3. **R&D credits are systematically underutilized** - Fewer than 30% of
   eligible companies claim the federal R&D credit. Most qualifying activities
   are ordinary engineering work - debugging, prototyping, iterating on
   algorithms, designing new features - not just lab research. The credit can
   offset payroll taxes for early-stage companies.

4. **Nexus determines obligation** - You owe sales tax or VAT only where you
   have nexus (a sufficient connection to that jurisdiction). Physical presence
   used to be the only trigger; economic nexus rules (typically $100K in sales
   or 200 transactions per state) now apply in every US state. Map your nexus
   before collection obligations snowball into back-tax liability.

5. **Transfer pricing must be arm's length** - When related entities transact
   (parent charges subsidiary for IP, services, or goods), the price must be
   what unrelated parties would agree to. Failure to document arm's-length
   pricing is one of the most common triggers for international tax audits and
   can result in double taxation.

---

## Core concepts

**Corporate income tax** is levied on a corporation's net taxable income.
The US federal corporate rate is 21% (post-2017 Tax Cuts and Jobs Act). State
rates vary from 0% (Wyoming, South Dakota) to over 11% (New Jersey). Taxable
income differs from book income due to depreciation methods, timing of
deduction recognition, and credits that directly reduce tax liability (not
just taxable income).

**Nexus and permanent establishment (PE)** are the thresholds that create a
tax collection or income tax obligation. For US sales tax: physical nexus
(office, employee, warehouse) or economic nexus (revenue or transaction
thresholds). For international income tax: a permanent establishment typically
arises when a company has a fixed place of business or a dependent agent in a
foreign country - triggering that country's corporate income tax.

**R&D credit qualification** under IRC Section 41 requires four-part test:
(1) qualified purpose - developing a new or improved business component;
(2) technological in nature - relies on hard sciences, engineering, or computer
science; (3) elimination of uncertainty - attempts to eliminate technical
uncertainty; (4) process of experimentation - evaluates alternatives through
modeling, simulation, testing, or trial and error. Qualifying expenditures
include wages, contract research (65% of amounts paid to US contractors), and
supplies consumed in research.

**Transfer pricing methods** are the IRS/OECD-approved approaches for pricing
intercompany transactions: Comparable Uncontrolled Price (CUP) - compare to
identical third-party transactions; Cost Plus - cost of production plus arm's
length markup; Resale Price - resale price minus appropriate gross margin;
Comparable Profits Method (CPM) / Transactional Net Margin Method (TNMM) -
compare operating margin to comparable companies; Profit Split - allocate
combined profit based on relative contribution. Most mid-market companies use
CPM/TNMM because comparable third-party transactions are hard to find.

---

## Common tasks

### Identify R&D credit opportunities

**Qualification criteria checklist:**

| Test | Question to ask | Examples that qualify |
|---|---|---|
| Qualified purpose | Are you developing or improving a product, process, software, or formula? | New feature, performance optimization, new algorithm |
| Technological in nature | Does the work rely on engineering, computer science, or physical sciences? | Backend architecture, ML model design, circuit design |
| Elimination of uncertainty | Is there technical uncertainty about how to achieve the result? | "We don't know if this approach will scale to 10M requests" |
| Process of experimentation | Are you testing alternatives, iterating, or running experiments? | A/B testing architecture choices, profiling and tuning |

**Qualifying expenditures:**
- **Wages** - W-2 wages for employees whose time is spent on qualified research. Track time by project. Even partial time qualifies (e.g., 40% of a developer's time on a qualifying project = 40% of their wages).
- **Contract research** - 65% of amounts paid to US-based third-party contractors performing qualified research on your behalf.
- **Supplies** - Materials and supplies consumed in the research process (not capital equipment, which is depreciated separately).

**Startup benefit:** Companies with less than $5M in gross receipts and fewer than 5 years of revenue can apply up to $500K/year of R&D credits against employer payroll taxes (FICA) - even with no income tax liability. This is often the most valuable tax benefit available to early-stage tech companies.

**Documentation to maintain contemporaneously:**
- Project descriptions explaining the technical uncertainty and experimentation
- Time logs or percentage estimates tied to individual employees and projects
- Payroll records cross-referenced to project time
- Meeting notes, design docs, code commits, and test records as evidence of experimentation

> Load `references/r-and-d-credits.md` for full qualification examples, the
> four-part test applied to common software development activities, and credit
> calculation walkthrough.

---

### Plan for sales tax and VAT compliance

**US sales tax nexus checklist:**

Physical nexus triggers (any one creates nexus):
- [ ] Office, store, or warehouse in the state
- [ ] Employee, contractor, or sales rep working in the state
- [ ] Inventory stored in a fulfillment center (including Amazon FBA) in the state
- [ ] Attending trade shows or conducting in-person sales activities

Economic nexus triggers (post-South Dakota v. Wayfair, 2018):
- [ ] More than $100,000 in sales to that state in the current or prior year
- [ ] More than 200 separate transactions to that state in the current or prior year
- Note: Alaska, Montana, New Hampshire, Oregon, Delaware have no state sales tax

**Action steps once nexus is determined:**
1. Register for a sales tax permit in the state before collecting (collecting without registration is a separate violation)
2. Determine taxability - software-as-a-service is taxable in some states, exempt in others; consult a tax advisor for your product category
3. Configure your billing system to collect and remit by state (Stripe Tax, Avalara, TaxJar)

From mkurman/zorai, MIT.

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