Technology

Emerging technology companies face unique tax challenges — and opportunities. From developing proprietary software and artificial intelligence platforms to expanding across borders, tech companies often incur significant upfront costs but may not generate taxable income until much later. Strategic tax planning can substantially improve cash flow, extend runway, and enhance the long-term value of the company.

At Vanguard Legal PLLC, we advise technology startups, growth-stage companies, and venture-backed enterprises on how to structure and manage their tax affairs efficiently while remaining compliant with U.S. and international tax rules. Below are key tax considerations and planning opportunities every emerging tech company should understand.

The R&D credit is one of the most valuable incentives available to innovative companies in the United States. It rewards businesses that invest in developing or improving products, software, or processes through technological experimentation.

How to Qualify

To claim the credit, your company must demonstrate that its activities meet the IRS’s four-part test:

1. Permitted Purpose: The activity must aim to develop or improve a product, process, software, formula, or technique.

2. Technological in Nature: The research must rely on hard sciences such as computer science, engineering, or chemistry.

3. Elimination of Uncertainty: The project must seek to eliminate uncertainty regarding capability, methodology, or design.

4. Process of Experimentation: The company must engage in a systematic process of testing and evaluation.

Eligible expenses include wages for employees performing qualified research, supplies used in development, and certain contract research costs. Startups can also apply up to $500,000 of R&D credits per year against payroll taxes, which can significantly enhance cash flow in early years.

Best Practices

Maintain contemporaneous documentation — such as project notes, technical reports, and time-tracking data — to support the credit if audited. Partnering with both your tax advisor and technical team early in the process is critical to maximize your eligible claim.

For companies organized as C corporations, the Qualified Small Business Stock (QSBS) exclusion under Internal Revenue Code §1202 can provide extraordinary tax savings.

The Benefit

If a company qualifies as a “qualified small business” at the time of issuance, shareholders may exclude up to 100% of the gain from the sale of their stock — up to $10 million per shareholder (or 10 times the basis in the stock, whichever is greater).

How to Qualify

To qualify for QSBS treatment:

• The stock must be originally issued by a domestic C corporation.

• The company’s gross assets must not exceed $50 million at the time of issuance.

• The business must be engaged in an active trade or business (not primarily investment or real estate).

• The shareholder must hold the stock for at least five years before selling.

Many technology startups can qualify, but it is critical to structure the entity properly at formation and maintain detailed corporate and capitalization records. QSBS planning should be integrated with early-stage investment and equity grant strategies.

As tech companies grow internationally, intellectual property (IP) becomes their most valuable asset — and the focus of tax scrutiny. Transfer pricing rules govern how related entities within a multinational group set prices for cross-border transfers of goods, services, or IP.

Key Principles

• Transactions between related entities must be conducted at arm’s length — meaning consistent with what independent parties would charge.

• Companies must maintain contemporaneous documentation supporting the pricing methodology, especially for IP licensing or cost-sharing arrangements.

• Improperly priced transactions can trigger tax adjustments, penalties, and double taxation across jurisdictions.

Early tax structuring is crucial. Decisions about where IP is developed, owned, and exploited have long-term implications for effective tax rates, cash repatriation, and compliance risk.

U.S. companies with foreign subsidiaries must consider the interaction of GILTI and FDII — two key international tax regimes affecting global tech enterprises.

GILTI

Global Intangible Low-Taxed Income (GILTI) requires U.S. shareholders of controlled foreign corporations (CFCs) to include certain foreign income in their current U.S. taxable income — even if not distributed.

• GILTI is designed to prevent profit shifting to low-tax jurisdictions.

• C corporations may benefit from a 50% deduction (IRC §250) and a foreign tax credit for up to 80% of foreign taxes paid.

FDII

Foreign-Derived Intangible Income (FDII) incentivizes U.S. corporations to earn income from exports of goods, services, or IP to foreign customers.

• Qualifying income may receive a 37.5% deduction, resulting in a lower effective tax rate.

• FDII planning can be integrated with transfer pricing strategies to optimize the global tax position of U.S.-based tech companies.

Tax rules for technology companies are complex but full of opportunity for those who plan strategically. From R&D incentives to cross-border structuring, the right tax planning can materially improve a company’s valuation and post-tax returns.

Vanguard Legal PLLC serves as your corporate counsel for emerging and expanding technology businesses, offering integrated legal and tax structuring guidance to help your company innovate, grow, and thrive — in Texas and beyond.