When we spoke with Alex Song, who was then-VP of Finance and Capital Markets at Ramp, he recommended a book called The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success. “The main thesis is that your job as a CEO or a management team is capital allocation and thinking through how to efficiently allocate capital,” he explained. “Ultimately, that’s the role that finance plays: as a startup, you are constantly making a series of short-term and long-term bets.”
Throughout the conversation, Alex continually stressed the value of making finance a strategic part of your business. But in order to be strategic, you need to be able to understand and track your own internal financial situation. As he explained: good reporting is table stakes for a growing business. “And I don’t mean just accounting. Accounting is essential, but you also need good business intelligence, good internal reporting, and good metrics,” he said. “If you can’t collect and measure good data, you can’t make good decisions.”
One of the largest (and least discussed) advantages of AI in tax and accounting is the ability to have a real-time view of your business’s financial situation. By integrating payroll and project-management software into a machine-learning LLM, Neo.Tax can give a company a real-time view of their R&D tax situation. What was once was the province of quarterly guestimations can now be understood with a level of detail never before possible at scale.
Perhaps nowhere is that advantage more clearly demonstrated than when it comes to FIN 48.
What is FIN 48?
In 2006, the Financial Accounting Standards Board (FASB) released the FIN 48 guidance, stating that all income tax benefits had to be weighed based on a More Likely Than Not (MLTN) standard of actually accruing at the end of the tax year. In 2008, that GAAP standard expanded from publicly traded companies to all companies.
MLTN Measurement is a three-step process:
- Determine possible outcomes of each position,
- Determine the likelihood of such outcome, and
- Determine the outcome that is most favorable with a cumulative likelihood of more than 50%.
The standard is hard to reach without insight into each R&D project. Many companies rely on last year’s filing and hope they’re close enough. But underestimating your income tax position risks painful interest payments or audits.
Put more simply, FIN 48 means that companies have to stash away enough money to cover the maximum amount of income tax they’re likely to pay. In practice, that means that companies with less clarity into their tax situation often overestimate their income tax positions, keeping a sizable percentage of their operating budget out of play during the tax year.
How Neo.Tax’s AI Solution Changes FIN 48?
But what if a company could have real-time insights into their R&D process at a project-by-project level?
That’s what Neo.Tax has unlocked with our AI-empowered solution.
By integrating with project management and payroll systems, our machine-learning LLM can sort engineering’s work into projects and weigh expenses against the IRS’s 4-Part Test in real-time throughout the year.
FIN 48 created a situation where companies needed to provide a level of detail in their accounting that was hard to manage. MLTN tests had to be applied to any tax benefit, and then, in cases where there is a relatively large chance that the benefit will not be accepted (let’s say 30-40%), they’d need to interview relevant engineers to further bolster their claim.
It became a time-consuming process, where effort-expenditure by the finance and engineering sides had to be weighed against the strategic advantage of maximizing credits and the amount of capital that could be used throughout a tax year.
This is why AI is a gamechanger. Having real-time reporting in the hands of your company’s finance team is a massive strategic advantage.
As Alex Song explained: “Accounting is essential, but you also need good business intelligence, good internal reporting, and good metrics. If you can’t collect and measure good data, you can’t make good decisions.”
Neo.Tax has created a business intelligence tool that can arm companies to make the most valuable decisions throughout the entire fiscal year.