2014 KC CFO Breakfast Series

Quarter 4: 2014 Accounting & Tax Update

October 30, 2014

PRESENTED BY: CBIZ & MAYER HOFFMAN MCCANN PC

Agenda

• Welcome

• Tax Panel

– Tangible Property Regulations

– State and Local Taxes

– Tax Minimizing Strategies

– IRS Statistics & Other Interesting Tax Facts

• Accounting Updates

• Questions and Closing

Don’t Try This At Home…

The information in this presentation is a brief

summary and may not include all the details

relevant to your situation.

Please contact your CBIZ MHM service provider to

further discuss the impact on your financial

statements.

Tangible Property Regulations

Jo An Ketchum, Tax Director

Today’s Agenda

1. Background and current developments

2. Opportunities under the Tangible Property

Regulations

3. Compliance with the Tangible Property Regulations

4. Nuances of the Tangible Property Regulations

5. Implementing the Tangible Property Regulations

BACKGROUND & CURRENT

DEVELOPMENTS

Background

• The IRS has long been interested in getting some clarity

in whether an expenditure related to tangible property

should be: – Capitalized: Fixed asset

– Deducted: Repair & maintenance or materials & supplies

• Tangible property includes real property (not just personal

property).

• Up until 2006, this area was driven by Court cases

• In 2006 and then in 2008, the IRS issued proposed

regulations which were highly criticized

Timeline of Regulations & Guidance

2011

2012

2013

2014

December 2011

Temporary regulations issued

March 2012

Implementation guidance issued (Rev. Procs. 2012-19, 2012-20)

November 2012

Implementation delayed to 2014 (optional adoption in 2012/2013 permitted)

September 2013

Final regs. issued re: acquisition, production, improvements & repairs

Proposed regs. issued re: dispositions

January 2014

Implementation guidance on final regulations issued (Rev. Proc. 2014-16)

February 2014

Implementation guidance on proposed regulations issued (Rev. Proc. 2014-17)

August 2014

Final disposition regulations and related implementation guidance

Final rules

must be

followed

beginning

with 2014

tax years

Why Are These New Rules Important

• Example actions required many taxpayers:

– Review and validate current capitalization policies.

• Critical for de minimis safe harbor

– Consider tax accounting method changes for 2014 along

with impact on taxable income.

– Consider annual tax return elections.

– Consider financial statement implications.

• Some book conformity required

• Effect on deferred taxes

– Evaluate materials and supplies accounting.

– Review prior year treatment of expenditures.

OPPORTUNITIES UNDER THE

TANGIBLE PROPERTY

REGULATIONS

Opportunities Under Tangible Prop. Regs.

Late Partial Disposition Election

Routine Maintenance Safe Harbor

De Minimis Safe Harbor

Previously Capitalized Repairs

Depreciation Review / Other

Beneficial Methods

Partial Disposition Election

• Under prior rules, if a taxpayer disposed of a portion of

an asset (e.g., a roof that had been replaced), it had to

continue to depreciate the old roof as well as the new

one.

• Under the proposed regulations, a taxpayer can elect to

dispose of a portion of an asset.

– Common examples: Roof, elevators, HVAC, engine of an

airplane.

– May need a Cost Segregation study to determine a cost

basis of disposed property, but regulations to provide

some simplified methods to reasonably calculate.

– Write-offs should generate an ordinary deduction.

Late Partial Disposition Election

• The partial disposition provision is an annual election,

i.e. generally only available in the year the asset is

partially disposed of.

• Taxpayers have a limited opportunity to file an automatic

accounting method change to make a late partial

disposition election for assets partially disposed of in

prior years.

Partial Dispositions – Examples

• Client acquired a building on 3/1/03, depreciable over 39 years

• Client spent $781,000 to replace some elevators in 2012/2013

Facts

• Client is making a late partial disposition election to write off

approx $460,000 of undepreciated basis allocable to the

original elevators

• Should result in nearly $200,000 tax benefit (Fed & State)

Results

Partial Dispositions – Examples

• Group of several restaurants

• Client had made numerous replacements over several years – HVACs, roofs, signage, ceilings, flooring, etc.

• 10 – 12 replacements per restaurant

Facts

• 20 late partial disposition accounting method changes

• Cumulative write-off approx. $500,000

• Tax savings approx. $200,000

Results

Partial Dispositions – Action Steps

• Review additions of real property (including land

improvements) for additions in current and prior

years.

• Determine if these additions were improvements or

replacements of already existing capitalized real

property or land improvements.

• If so, there may be a loss available under a partial

disposition election.

Routine Maintenance Safe Harbor

• Maintenance taxpayer expects to perform more than

once during asset’s ADS class life (or 10-year period

of a building).

• Expenditures to keep unit of property in its ordinarily

efficient operating condition. – Example: Replacing parts

• Such expenditures can be immediately deducted.

• Automatic accounting method change to write off

routine maintenance expenditures capitalized in

previous years.

Routine Maintenance Safe Harbor- EX.

• Client manufactured and transported water purification chemicals

• Containers used to store chemicals reconditioned 2 – 3 times during their class lives (new valves, liners, etc.)

Facts

• Automatic accounting method change to write off $1

million of previously capitalized costs

• $400,000 tax savings

Results

De Minimis Safe Harbor

• De minimis safe harbor – an annual tax return

election that permits a taxpayer to currently deduct

otherwise capital expenditures (including materials &

supplies) if the taxpayer: – (1) has an “accounting policy” (as of the beginning of the tax

year) that treats as an expense for book purposes (a) property

that costs no more than a specified dollar amount, or (b) property

with an economic useful life of 12 months or less and

– (2) elects to apply that policy for book purposes

• “Safe Harbor” avoids the issue in an IRS

examination; however taxpayers can continue to

use higher amounts but do not have protection of

the safe harbor

De Minimis Safe Harbor cont…

Taxpayer with AFS Taxpayer without AFS

Must have written capitalization

policy

Must have accounting procedures

(not required to be written)

Amount paid for property that does

not exceed $5,000 per invoice (or

per item as substantiated on the

invoice) is eligible

Amount paid for property that does

not exceed $500 per invoice (or per

item as substantiated on the

invoice) is eligible

• De minimis safe harbor – an annual tax return

election that permits a taxpayer to currently

deduct otherwise capital expenditures (including

materials & supplies) if the taxpayer:

De Minimis Safe Harbor cont..

• If book policy is less than $5,000/$500 ceiling then

the lower amount is the amount allowed for tax

– Ex. Taxpayer with AFS has $2,500 capitalization policy-

Taxpayer can rely on the de minimis safe harbor for

property up to $2,500

• If book policy is more than $5,000/$500 ceiling then

the $5,000/$500 amount is the amount allowed for

tax

– Ex. Taxpayer with AFS has $10,000 capitalization policy –

Taxpayer can rely on the de minimis safe harbor for

property up to $5,000

De Minimis Safe Harbor cont..

• The de minimis safe harbor is effective for tax years

beginning on or after 1/1/14.

– Since the de minimis safe harbor requires the policy to be

in existence at the beginning of the tax year, to utilize this

rule the policy needed to be prepared in 2013 for 2014 tax

years.

– Taxpayers without a policy on 1/1/14 should institute a

policy in preparation for 2015.

• No provision to apply safe harbor in earlier years

using an accounting method change.

De Minimis Safe Harbor cont..

• Gather an understanding of the accounting policy

and determine if it satisfies the de minimis safe

harbor regulation – May need to modify policy to fit the regulation

• Ensure the book treatment is consistent with the tax

treatment for items under the dollar ceiling.

• Attach the annual election to the timely-filed tax

return.

Deducting Previously Capitalized Repairs

• Under the new rules concerning improvements to tangible

property, taxpayers may have capitalized expenditures in

the past that can now be deducted as repairs

• An automatic accounting method change allows the

taxpayer to:

– Conform treatment of similar expenditures in the future to the new

definitions

– Write off prior year expenditures that had been capitalized but that

now qualify as repairs

Caution: Change goes both ways- could have to

capitalize expenditures previously deducted as repairs

Depreciation Review

• Depreciation calculations have become increasingly

complex over the last 10 years due to: – 50% or 100% bonus depreciation

– Expanded Sec. 179 expensing election

– 15 year recovery for certain real property improvements

• A review of tax depreciation records may discover

situations where assets have been under-depreciated. – Natural extension of engagement to review fixed asset

records for partial dispositions, previously capitalized

repairs.

– May be able to catch up depreciation via automatic

accounting method change.

NUANCES OF THE TANGIBLE

PROPERTY REGULATIONS

Improvement and Unit-of-Property

• Improvements to buildings

– Determine if an expenditure to a building improves

the building structure itself or a building system:

• HVAC,

• Plumbing systems

• Electrical systems

• Escalators

• Elevators

• Fire protection and alarm systems,

• Security systems,

• Gas distribution systems

Improvements & Unit-of-Property, cont.

• Improvements to personal property – Functional interdependence is the test – the placing in

service of one component is dependent upon the

placing in service of another component.

– For plant property there is a smaller level to consider;

need to measure the expenditure against each

component that performs a discreet & major function.

Improvements to Tangible Property

• Critical tax compliance area

• What is a Capitalized Improvement vs. a Deductible

Expense?

Capitalized

Improvement

Betterment

Restoration

Adapt to New

or Different

Use

Improvements, cont..

• Betterment: In general, an expenditure is a Betterment

and must be capitalized if it has a “material” impact on

the unit-of-property.

– Improves a material defect, is for a material addition, or a

material increase in capacity or quality.

• Restoration: In general, an expenditure is a Restoration

and needs to be capitalized if:

– It is for the replacement of a major component or returns the

unit-of-property to its ordinarily efficient operating condition after

its class life.

• Facts of Circumstances, no bright-line tests but many

examples in the Final Regulations.

Improvements, cont..

• Restoration examples in the regulations provide some

interesting results of expenditures that do not need to be

capitalized:

– Replacement of 30% (3 out of 10 units) of HVAC units does not

involve a significant portion of the major component (all HVAC

units) or a large portion of the physical structure of the unit (the

HVAC system).

– Replacement of 30% of the wiring in a building electrical system

is not a significant portion of the major component (all the wiring)

or a large portion of the physical structure of the unit (electrical

system).

– Replacement of 40% of the sinks (not the piping) in a building

does not involve a significant portion of the major component (all

the sinks) or a large portion of the physical structure of the unit

(the plumbing system).

Improvements, cont..

• Restoration examples continued

– Replacing 10% of the floors in a building does not involve

either a significant portion of the major component (all the

floors) or a large portion of the physical structure of the

building structure (the unit)

• On the other hand, replacing 40% of the floors in a building

does involve replacement of a significant portion of the major

component (all the floors)

– Replacement of 25% of the elevators in a building does

not involve a significant portion of a major component (as

each elevator does not perform a discrete and critical

function) or a large portion of the physical structure of the

unit (the elevator system)

Improvements – Actions Steps

• Significant expenditures from prior years should be

reviewed: – Previously deducted expenditures: look at all open tax

years.

– Capitalized items: look at any fixed assets currently on the

tax depreciation records.

• Taxpayers can apply these new rules to prior year

expenditures – An accounting method change may be allowed whereby

the taxpayer can currently write off that capitalized amount

from the prior year since under these new rules it could be

a deductible expense (and vice versa).

COMPLIANCE WITH THE

TANGIBLE PROPERTY

REGULATIONS

Other Compliance Issues

• Other situations may require accounting method

changes:

– To capitalize improvements that don’t qualify as

repairs (or qualify for safe harbors) under new rules

– To conform to definition of, and rules for, materials

and supplies:

• Deducting incidental supplies in year purchased

• Deducting non-incidental supplies in year consumed

• $200 threshold (may not be necessary if using de minimis

safe harbor)

– To conform to unit of property definition

Benefits of Filing Accounting Method

Changes under Current Guidance

• Automatic change

– No user fee

– Due with tax return vs. at end of tax year

• Audit protection for years prior to year of change.

• Waiver of scope limitations that typically apply to

taxpayers under exam or who have made similar

changes within last 5 years.

• Some positive & negative 481(a) adjustments don’t need

to be netted.

IMPLEMENTING THE

TANGIBLE PROPERTY

REGULATIONS

Strategic Tangible Property Analysis

• Comprehensive, multi-phase engagement to help

taxpayers comply with, and take advantage of, all

provisions of the tangible property regulations.

• Phases

– Assessment

– Detailed Analysis

– Implementation

Timeline of Implementation January 1

Capitalization policy must be in place to use de minimis safe harbor

March 15 / April 15

2013 tax return filing deadline for early adopters of method changes / elections

September 15

Extended 2013 tax return filing deadline for early adopters of method changes /

elections

January 1

Capitalization policy must be in place to use de minimis safe harbor

March 15 / April 15

2014 tax return filing deadline for final adoption of method changes

September 15

Extended 2014 tax return filing deadline for final adoption of method changes

2014

2015

Summary

• These rules may provide opportunities for tax

deductions.

– Requires analysis of various policies, procedures,

records…

– 2014 tax year is a must implementation year.

– Limited time to search for deductions for prior year

capitalized expenditures.

Summary Cont.

• Some of these rules will require filing if one or more

Forms 3115 (Application for Change in Accounting

Method) or attach annual elections to their tax

returns.

• Form 3115 is used to request an Automatic Change. – Original Form 3115 is filed as an attachment to the

income tax return and a copy sent to the IRS.

• Critical to take advantage of the automatic change

provisions now to avoid risk of IRS making changes.

The Time is NOW!

Expectation is that after the transition period

for making these changes (tax years

beginning 1/1/15) the IRS will begin heavy

examination activity in this area

Compliance is REQUIRED by the end of 2014

Some opportunities are for a LIMITED TIME only

State and Local Taxes

Michael Moore, Managing Director

State General Fund Balance

Kansas1 Missouri2

FYE 2009 66,492,000 1,258,241,000

FYE 2010 1,000 1,202,095,000

FYE 2011 227,911,000 1,415,751,000

FYE 2012 540,340,000 1,163,593,000

FYE 2013 764,786,000 1,446,419,000

FYE 2014 435,269,000 1,167,990,0003

1 Department of Administration accounting records with the Office of Chief Financial Officer,

Audit & Assurance, Finance Integrity Team.

2 Missouri Office of Administration, Division of Accounting, Fiscal Year Comprehensive Annual

Financial Reports (for each fiscal year noted).

3 Missouri Office of Administration, Division of Accounting, Financial Summary – All Funds –

June 30, 2014 (estimated).

State Revenues (net) v. Budget (billions)

Actual Budget Variance Percent

Kansas1

FYE 2013 $6,341,125 $6,250,414 $90,711 101.45%

FYE 2014 $5,653,197 $5,986,481 ($333,283) 94.43%

FYE 2015

(September)

$1,350,571 $1,374,040 ($23,469) 98.29%

Missouri2

FYE 2013 $8,082,688 $7,691,700 $390,988 105.08%

FYE 2014 $8,003,289 $8,310,500 ($307,211) 96.30%

FYE 2015

(September)

$2,026,897 NA Increase of

$80 M from

PY

4.1%

Increase

1 Kansas Division of the Budget, Comparison Report (for each fiscal year noted)

2 Missouri Office of Administration, Division of Accounting, Fiscal Year Comprehensive Annual

Financial Reports.

Population and Growth Projections

Kansas1 Missouri2

2000 2,688,824 5,596,687

2005 2,745,299 5,781,293

2010 2,853,118 5,979,344

2015 2,916,705 6,184,390

2020 3,003,691 6,389,850

2025 3,071,541 6,580,868

2030 3,137,345 6,746,762

1 U.S. Bureau of the Census, Statistical Abstract of the United States, various issues; Population

Division (2014); CEDBR, Wichita State University.

2 Missouri Office of Administration, Budget and Planning

Unfunded Pension Liability (in billions)

Kansas Missouri

Moody’s (2013) 1 $2.8 $6.5

State Budget Solutions (2013) $32.9 $72.7

Milliman Public Pension Funding

Study (2012)

$9.2 $9.3

Harvard Kennedy School (2012) $25.7 $61.6

1 Moody’s Investors Service, Median Report: Adjusted Pension Liability Medians for US States, June 27, 2013.

2 State Budget Solutions, Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers, September 3, 2013

3 Milliman, Inc., Milliman 2013 Public Pension Funding Study, 2013

4 Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government, Underfunded Public Pensions in the United

States; The Size of the Problem, the Obstacles to Reform and the Path Forward, 2012

Personal Income Tax Rates (2014)

Kansas Missouri

Married filed jointly ■ taxable income not

over $30,000: 2.7 %

■ taxable income over

$30,000: $810 plus

4.8% of excess over

$30,000

1½% on the first $1,000, plus

½% for every $1,000

increment up to $9,000.

Then 6% on Missouri taxable

income exceeding $9,000.

Residents, other ■ taxable income not

over $15,000: 2.7%

■ taxable income over

$15,000: $405 plus

4.8% of excess over

$15,000

Same for all individual

taxpayers.

Kansas Income Exclusion

Kansas now provides a subtraction modification for three categories of

income. By allowing these three categories of income to be subtracted

from federal adjusted gross income to calculate Kansas adjusted gross

income, this income is made exempt from Kansas income tax (and they

are cumulative, not exclusive.

Categories are:

(1) income that is net profit from a business (e.g. “flow-through”);

(2) income from certain entities or of certain types; and

(3) farm income.

Kansas Personal Income Tax Revenues

Actual1 Budget1 Variance

FYE 2012 $2,908,029,408 $2,955,000,000 ($46,970,592)

FYE 2013 $2,931,167,870 $2,862,181,000 $68,986,870

FYE 2014 $2,218,238,892 $2,525,000,000 ($306,761,108)

1st Qtr. 2015 $524,367,067 $578,000,000 ($53,632,936)

1 Kansas Division of the Budget, Consensus Revenue Estimates (for each fiscal period noted)

STATE INCOME

APPORTIONMENT

Nexus for State Income Tax

Nexus is the connection between the corporate activity and the taxing

state that allows the state to impose its taxes on an entity. Any one of

the following activities may establish nexus:

1) Owning or leasing property or employing capital or property in the

state;

2) Having employees in the state; or

3) Deriving income from sources in the state.

The Interstate Income Tax Act (P.L. 86-272) places restrictions on the

imposition of a state income tax (but not other taxes). It provides that

mere solicitation is not enough to establish nexus for corporate net

income tax purposes.

Sourcing Sales of Tangible Personal

Property (TPP)

Delivery Address

State Imposes No

Income Tax

Throwback Rule Implications

Many states provide that the sale of tangible personal

property that is shipped from an office, store, warehouse,

factory, or other place of storage within their jurisdiction is

“thrown back” to their state if the taxpayer is not taxable in

the state of the purchaser.

Sales to the United States government sometimes fall in

this category as well.

Joyce v. Finnigan Implications

Throwback of sales is also complicated by reporting requirements of

combined filing unitary states and the definitions of “taxpayer”. Joyce

counts throwbacks on a separate company basis. Finnigan counts

throwbacks on a combined reporting or unitary method.

The terms "Joyce" and "Finnigan" come from two court cases in

California, Appeal of Joyce, Inc., Cal. State Bd. of Equalization, Nov.

23, 1966, Dkt. No. 66-SBE-070 and Appeal of Finnigan, Cal. State Bd.

of Equalization, Aug. 25, 1988, Dkt. No. 88-SBE-022, on reh'g, Jan. 24,

1990.

As a perfect example of complexity, California initially followed the

Joyce rule, then later switched to the Finnigan rule, then back to Joyce,

and effective January 1, 2011, back to Finnigan.

Throwback Rule (TPP Sales)

Throwback Rule/

Finnigan

State Imposes No

Income Tax

Throwback Rule Not

Available

Throwback Rule/

Joyce

Sourcing Sales of Services

Market Based

State Imposes No

Sales/Use Tax

Cost of Performance

Industries with “Unique” Apportionment

• Airlines

• Construction Contractors

• Financial Institutions

• Insurance Companies

• Mutual Fund Service Providers

• Pipelines and Natural Gas

• Professional Sports

• Railroads

• Regulated Investment Companies

• Telecommunication Companies

• Trucking Companies

• TV and Radio Broadcasting

NATIONAL SALES TAX

ACTIVITY

Total State Spending by Fund Source1

1 State Expenditure Report, Examining Fiscal 2011-2013 State Spending, National Association of State Budget Officers

Sales Tax Revenue v. Retail Sales

Retail Sales Sales Tax Percent

1990 2,000,000 154,000 7.70%

2000 3,287,537 252,147 7.67%

2010 4,307,947 344,522 8.00%

2012 4,869,032 378,288 7.77%

2013 5,066,255 392,715 7.75%

This chart provides U.S. retail sales and total sales tax collections.

Amounts are in millions of dollars and were taken from the U.S.

Bureau of the Census’ on-line information portal.

If the 8.00% rate average for 2010 is considered with the 2012 and

2013 retail sales, the result is a decline in sales tax revenue of

$11,198,773,600 and $12,665,637,500 respectively.

Implications – Click Through Nexus

• A click-through nexus policy requires sales and use

tax be collected and remitted by out-of-state vendors

that compensate residents of that state for sales made

via links on their websites.

• Conclusions of nexus in this arena often ignore Due

Process, the Commerce Clause, various judiciary

rulings (state and federal) and sometimes the state’s

own statutes.

“Click Through” Nexus (With Caveats)

Nexus

State Imposes No

Sales/Use Tax

Nexus May Exist

Internet Tax Freedom Act (“ITFA”)

• Federal law passed in 1998 that prevents

federal, state and local governments from taxing

internet access (the service; not applicable for

sales occurring over the internet).

• Some states had already implemented sales/use

taxes on these types of transactions, and those

were grandfathered in.

• Current expiration is November 1, 2014…

Marketplace and Internet Tax Fairness

Act (“MFA”)

• Passed in Senate in 113th Congress on 5/6/13.

Authorizes states to require that all sellers not

qualifying for the small seller exception to collect

and remit sales and use taxes on remote sales.

– Small Seller Exception – gross annual receipts in the

U.S. in the preceding year less than $1,000,000.

No other taxes are considered for this compliance. Not

passed in the House.

Lame-Duck Session

• Senate Majority Leader harry Reid (D-Nev.) has

implied that he will do “whatever it takes to get that

done.”

• Supporters are trying to pair MFA and ITFA.

• Speaker John Boehner (R-Ohio) and House

Judiciary Committee Chairman Bob Goodlatte (R-

Va.) oppose MFA in its current form.

Tax Minimization Strategies

Kathy Rhodes, Tax Managing Director

Domestic Production Activities Deduction

(DPAD)

• Available to qualified taxpayers and limited to lesser

of 9% of taxable income or qualified production

activities income (QPAI) or 50% of W-2 wages

related to qualified production activities.

• Qualified Production Activities Income is equal to the

taxpayer’s domestic production gross receipts less

cost of goods sold and allocable other deductions.

DPAD

• Domestic Production Receipts (DPGR)

– Derived from sale, lease, rental, license of qualifying

production property that is manufactured, produced,

grown or extracted by the taxpayer in whole or

significant part within the U.S.

– Construction of real property in the U.S. by a taxpayer

engaged in the active conduct of a construction trade

or business.

– Engineering or architectural services performed in the

U.S. with respect to the construction of real property

in the U.S.

DPAD

• Qualifying production property (QPP) is any tangible

personal property, computer software or sound

recordings.

• Manufactured, produced, grown or extracted

(MPGE) includes: – Manufacturing, producing, growing, extracting, installing,

developing, improving and creating QPP.

– Making QPP out of scrap or salvage, as well as new raw

material.

– Cultivating soil, raising livestock, fishing and mining

minerals.

DPAD

• The “in significant part” requirement is met if the

MPGE is substantial in nature, including relative

value added by the taxpayer.

– Safe harbor – if the taxpayers U.S. conversion costs

(direct labor and overhead) are 20% or more of the

total cost of goods sold.

– Overhead includes costs required to be capitalized

under UNICAP (263A).

– Does not include R&D.

QPAI

• DPGR less COGS and allocable other costs.

• DPGR required to be calculated on an item-by-item

basis.

– Generally does not include receipts for the

performance of services, unless embedded services

and not charged for separately.

– All receipts can be DPGR if non-DPGR are less than

5% or total receipts.

QPAI

• DPGR excluded receipts:

– Sales to related parties.

– Retail food and beverages.

– Gross receipts from sale, lease or rental of land.

– Gross receipts from services, except for embedded

services.

Research & Development Credit

• Expired in 2013 – legislation pending to extend.

• Can claim on amended returns for prior open years.

• Is calculated separately for incremental credit and

credit for contract research payments.

• Component of general business credit so carries

back and forward.

R&D Credit

• Calculated based on in-house research expenses and

contract research expenses.

• In-house research expenses include wages for

employees involved in research, supplies used in

research, and payments for computer time used in

research.

• Contract research expenses are paid to an unrelated

party to perform research and count at 65% of the cost.

R&D Credit

• Qualified research expenditures

– Experimental or laboratory sense,

– For purpose of discovering information technical in

nature and to develop a new or improved business

component; and

– Substantially all of activities which constitute a

process of experimentation,

– Includes development of pilot model, process,

formula, invention or similar property.

R&D Credit

• Incremental credit – 20% of qualified research

expenditures (QRE) over a base amount.

– Base amount is fixed base % times average of last 4

years annual gross receipts.

– Fixed base % is based on 1984-1988 if in existence.

– Fixed base % starts at 3% for startups after 1994 and

is calculated in later years.

R&D Credit

• Alternative Simplified election – 14% of qualified

research expenditures exceeds 50% of the prior 3

year average qualified research expenditures.

• Annual election to claim smaller credit and no

reduction to R&D expense deduction.

• Tier 1 audit issue.

Other Federal Credits

• Small Employer Health Credit (Sec. 45R)

– Eligible small employers with less than 25 employees

and meeting certain wage limitations and phases out

for more than 10 employees.

– Employer makes non-elective contribution to qualified

health plan (must be exchange in 2014).

– Only available for 2 consecutive years after 2013.

– Credit is generally 50% (30% for tax-exempts) of

amount paid to qualified health plan.

Other Federal Credits (cont’d)

• Work Opportunity Credit – expired in 2013 but

legislation pending to reinstate.

• Qualified workers previously included veterans, ex-

felons, qualified SSI recipients, qualified needy

recipients, long-term out of work individuals and long-

term family assistance recipients.

• Consider continuing to qualify workers in classes that

qualify.

• Must be screened prior to starting work.

Other Federal Incentives

• Section 179D – Energy Efficient Commercial

Buildings Deduction expired in 2013, but legislation

pending. – A deduction is available for energy efficient

commercial building property that meets certain 50%

or more energy reduction standards.

– Applies to interior lighting systems; heating, cooling,

ventilation or hot water systems; or the building

envelope.

Other Federal Incentives (cont’d)

• Section 179D provides for a deduction up to $1.80

per square foot ($.60 per system if not all qualify as

energy saving).

• Deduction claimed by owner but must reduce

depreciable basis.

• However, can be claimed by designer of building on

certain government owned buildings.

• Subject to recapture rules.

• Can be claimed on amended returns.

Interest Charge Domestic International

Sales Corporation (IC-DISC)

• Tax savings opportunity for domestic sellers of U.S.

manufactured, grown or extracted property for

foreign destination sales.

• Sale must be ultimately to a foreign destination.

– Distributors qualify.

– Sales to distributors who can provide details on

ultimate destination qualify for the manufacturer.

IC-DISC

• IC-DISC must be a C corporation.

• Must make timely election.

• Must at all times meet certain requirements,

including:

– 95% of all sales are qualified export receipts

– 95% of all assets are qualified export assets

IC-DISC

• IC-DISC is not taxable and shareholders are taxable

on distributions of the IC-DISC which allows for a

potential 20% tax savings.

• If accumulated income not distributed, can be

interest charge or can disqualify the IC-DISC.

IC-DISC

• Savings achieved by manufacturer or distributor

paying commission to IC-DISC.

• IC-DISC does not pay tax and shareholder receives

taxable dividend distribution from IC-DISC.

• As a result, manufacturer/distributor gets a

deduction for commission at ordinary rates and

shareholder then has dividends taxed at dividend

rates – overall group saves up to 20%.

IC-DISC

• Example

Manufacturer Total Sales $35,000,000 Manufacturer Foreign Sales $6,000,000

Manufacturer COGS 10,000,000 COGS for Foreign Sales 1,800,000

Manufacturer Wholly US

Expenses 3,000,000

Allocable Foreign Other

Expenses 3,428,571

Manufacturer Other Expenses 20,000,000 Foreign Taxable Income $771,429

Manufacturer Taxable Income $2,000,000

Commission Options

4% of Foreign

Sales $240,000

50% of Combined Profit $385,714

Potential Tax Savings $77,143

Other International Considerations

• Companies expanding significantly and willing to

leave money off-shore can structure global

organization to lower overall global tax burden.

• Controlled foreign corporation planning.

– Certain income can be deemed repatriated

– Required reporting

• Other required foreign reporting considerations.

State Incentives

• Both states attempting to reduce or restructure state

tax incentives.

• Kansas significantly revamped state incentives over

last several years and have eliminated or

reduced applicability of some programs.

• Missouri has consolidated some of its popular

incentive programs into one new program to

compete.

State Incentives

• Promoting Employment Across Kansas (PEAK), provides for

potential retention of employee withholding by company if

certain requirements are met.

• High performance Incentive Program (HPIP) provides for

sales tax exemption and potential investment and

training credits to certain businesses significantly

expanding and paying greater than average wages to

employees.

• Employer health insurance contribution credit for certain

amounts paid on behalf of eligible employees for health

insurance in a small plan or contributions to HSA’s – C-

Corps only.

State Incentives (Kansas cont’d)

• PEAK

– New employees of a Kansas qualified company

• New employees include relocated employees from out

of state

• Must be Kansas employees not leaving the state (i.e.

transportation or delivery)

• Greater than 20 hours per week

– Qualified company makes available to full-time

employees adequate health insurance and pays at

least 50% of the premiums

State Incentives – Kansas (cont’d)

• HPIP – Employer must pay above average wages to its

employees.

– Make a significant investment in the training of

employees.

– Be either a manufacturer or able to document that

most of its sales are to Kansas manufacturers and/or

out-of-state businesses or government agencies.

– A headquarters or back-office operation of a national

or multi-national corporation can qualify.

State Incentives - Missouri

• Missouri Works Program – Must be applied for before publicly announced,

employees hired, or any site work is started.

– Allows for employer retention of employee’s

withholding for a period of years if creates new jobs: • 10 or more new jobs and 90% or more of average

wage.

• 2 or more new jobs, 90% or more of average wage and

adding $100,000 of investment.

• 2 or more new jobs in enterprise zone, 80% or more of

average wage and $100,000 of investment.

State Incentives – Missouri (cont’d)

• Missouri Works Training Program

– Train net new or existing employees (or both) over a

12 month period.

– Training topics should be job specific but can now

also include OSHA and customer service training.

– Capital investment should equate to 20% or more of

total request (e.g. $100k in investment for $20K

training grant request).

– Funding typically capped at $50,000 per project, with

average award of about $15,000 per project.

IRS Statistics &

Other Interesting Tax Facts

Jeff Stolper, Senior Associate

Number of Returns Filed

C or other Corp 2,248,000

S Corp 4,566,000

Partnership 3,683,000

Individual 145,996,000

Estate and Trust 3,192,000

Tax Exempt 1,463,000

How Were They Filed?

• Paper – 10,036,510

• Electronically – 151,114,490

Collections By Type of Tax

Business Income Taxes

Individual, Estate and Trust Income

Employment Taxes

Estate and Gift Taxes

Excise Taxes

Amount

$ 270,424,731,000

$ 1,250,130,812,000

$ 891,471,426,000

$ 18,782,819,000

$ 59,895,910,000

Examination Coverage

• Types of Exams

– Correspondence Audit

– Office Audit

– Field Audit

C Corp Returns

• Under $250,000 in assets – 0.8%

• $250,000 - $1,000,000 in assets – 1.3%

• $1,000,000 - $10,000,000 in assets – 1.5%

• Over $10,000,000 in assets – 15.8%

Nontaxable Returns

• Partnership Returns – 0.4%

• S Corp Returns – 0.4%

Individual Returns

• Less than $200,000 Total Income

– No Schedule C, E or F – 0.4%

– With Schedule C, E or F – 1.0%

• $200,000 - $1,000,000 of Total Income

– Non-Business Returns – 2.5%

– Business Returns – 3.2%

• Over $1,000,000 of Total Income – 10.8%

QUESTIONS

???

Accounting Update

Mark Winiarski, Senior Manager

Agenda

• Financial Reporting Changes for 2014

• Private Company Accounting

• Look to the Horizon – Accounting in the Next Year

FINANCIAL REPORTING

CHANGES FOR 2014

New Standards Everywhere

• For calendar year end private companies, there are:

– Eight standard effective for December 31, 2014

financial statements.

– 15 standards effective for periods after December 31,

2014, but that can be early adopted.

– An additional two standards effective for periods after

December 31, 2014.

The standard setters are probably not done yet…

Reclassifications from Accumulated

Other Comprehensive Income (AOCI)

• Private Companies will now be required to:

– Present parenthetically in the income statement or

disclose amounts that are reclassified in full from

AOCI to the income statement.

– Disclose information about items that are reclassified

to the balance sheet prior to affecting the income

statement, such as amortization of defined benefit

pension items.

Internal Controls:

COSO 20 Years in the Making…

The 1992 COSO framework is superseded as of

December 15, 2014.

Control Environment

Risk Assessment

Control Activities

Information &

Communication

Monitoring Activities

Update articulates principles of effective

internal control 1. Demonstrates commitment to integrity and ethical values

2. Exercises oversight responsibility

3. Establishes structure, authority and responsibility

4. Demonstrates commitment to competence

5. Enforces accountability

6. Specifies suitable objectives

7. Identifies and analyzes risk

8. Assesses fraud risk

9. Identifies and analyzes significant change

10. Selects and develops control activities

11. Selects and develops general controls over technology

12. Deploys through policies and procedures

13. Uses relevant information

14. Communicates internally

15. Communicates externally

16. Conducts ongoing and/or separate evaluations

17. Evaluates and communicates deficiencies

Update describes important characteristics

of principles, e.g.,

• Points of focus may not be suitable or relevant, and others may be

identified

• Points of focus may facilitate designing, implementing, and conducting

internal control

• There is no requirement to separately assess whether points of focus are in

place

Control Environment 1. The organization demonstrates a commitment to

integrity and ethical values.

Points of Focus:

• Sets the Tone at the Top

• Establishes Standards of Conduct

• Evaluates Adherence to Standards of Conduct

• Addresses Deviations in a Timely Manner

Update describes how various controls

effect principles, e.g.,

Control Environment

1. The organization demonstrates a commitment to integrity and

ethical values.

Component

Principle

Controls

embedded in

other

components

may effect this

principle

Human Resources

review employees’

confirmations to

assess whether

standards of conduct

are understood and

adhered to by staff

across the entity

Control Environment

Management obtains

and reviews data

and information

underlying potential

deviations captured

in whistleblower hot-

line to assess quality

of information

Information &

Communication

Internal Audit

separately evaluates

Control Environment,

considering

employee behaviors

and whistleblower

hotline results and

reports thereon

Monitoring Activities

• If 1992 Framework has been appropriately applied to each of

the five components of internal control, the transition should

not result in significant changes or incremental efforts.

• Mapping of principles to controls (using points of focus) may

reveal “gaps” in design.

• A fresh look may reveal opportunities to re-design or remove

controls to enhance effectiveness or efficiency.

• Points of Focus should assist in the mapping, evaluation and

controls identification process.

If you use COSO…

PRIVATE COMPANY

ACCOUNTING

Private Company Accounting Alternatives

within US GAAP

The Private Company Council (PCC) has two principal

responsibilities:

The PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.

The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

Without the Alternative

• Goodwill is indefinitely lived

• Three-step impairment test

performed annually at the

reporting unit level:

1. Optional qualitative

assessment

2. Fair value test of the

reporting unit

3. Measurement of

impairment loss

With the Alternative

• Elect to amortize goodwill

• 10 year period (or shorter)

• Amortize all goodwill

• Simplified impairment test

only if a triggering event

occurs

• Elect to perform the

impairment test at the

entity or reporting unit

level

ASU 2014-02 Accounting for Goodwill

• Must amortize all goodwill, including goodwill arising from an equity method investment.

• Must elect whether to perform an impairment test at the entity or reporting unit level.

• Must determine the amortization period.

• Evaluate whether an impairment test is required for the year of adoption.

• Additional disclosure.

Goodwill - Requirements and Elections

117

Goodwill - Implementation Challenges

Evaluating the impact of amortization on covenants and other contracts

Determining the amount of goodwill related to an equity method investment

Allocating the impairment loss when it occurs

Potential reversal of the election if your company no longer qualifies as a Private company as defined for accounting purposes.

U.S. GAAP Today

• Contemporaneous

documentation of the

hedge

• Required effectiveness

testing

• Fair value

With the Alternative

• Documentation of six

criteria before the end of

the reporting period

• Elect to record and

disclose the swap at

settlement value instead

of fair value

ASU 2014-03 Simplified Hedge Accounting

The standard may be adopted for interest rate swaps that meet the following criteria:

1. Debt (hedged cash flows) and swap use the same index and reset period.

2. “Plain-vanilla” swap, any floor or cap on the variable interest rate of the swap must be comparable to the same term in the debt.

3. Re-pricing and settlement match or differ by no more then a few days.

4. Fair value of the swap at inception is at or near zero.

5. Swap notional value is equal to or less then the principal of the related debt.

6. All interest payments occurring on the borrowing during the term of the swap are designated as hedged whether in total or in proportion to the amount being hedged.

Simplified Hedge Accounting - Requirements

120

Swaps - Implementation Challenges

121

Must meet very specific criteria to use this accounting alternative. Only allowed for certain plain-vanilla interest rate swaps

If entity plans on changing the instrument or major terms of the instrument in the future, should think about whether this alternative should be elected

The election may need to be reversed if an entity becomes a public entity

Variable Interest Entity and Common Control

Leasing Arrangements (ASO 2014 -01)

• The accounting alternative permits the following:

– A qualifying private company does not have to evaluate a

qualifying lessor entity for consolidation under the VIE model.

– The alternative is applied to all qualifying lessor entities.

– Applied retrospectively -> restate prior financial statements for

the effect of the election.

– Include enhanced disclosures.

Requirements:

– The lessor entity and the private company are under

common control,

– The private company has a lease arrangement with the

lessor entity,

– Substantially all the activity between the two entities is

related to the leasing activities between the two entities;

and

– If the private company explicitly guarantees or provides

collateral for obligations of the lessor entity, then the principal

amount of the obligation must be less then the value of the

asset at inception of the guarantee.

Variable Interest Entity and Common

Control Leasing Arrangements

123

VIE – Implementation Challenges

124

Evaluating the impact of the adoption on financial covenants, contracts and expectations of users of the financial statements.

Evaluating common control and whether the value of the collateral property is greater than the principal of a debt obligation of the lessor guaranteed by the reporting entity.

Computing the impact of other applicable US GAAP over multiple periods.

Business Combinations

• FASB is considering an accounting alternative that

will permit a private company to not recognize the

following intangible assets in a business

combination:

– Non-competition agreements

– Customer-related intangible assets that are not capable of

being sold or licensed independently from the other assets

of a business

• Mortgage servicing rights, commodity supply contracts and

core deposits would be recognized

AICPA Alternative

The American Institute of Certified Public Accountants (AICPA) is a professional

organization representing CPAs.

The AICPA has published its own Financial Reporting Framework (FRF) for Small to Medium-Sized Entities (SME).

FRF for SME is separate from US GAAP & PCC

FRF for SMEs

• Not GAAP – Special

Purpose Framework

• Complementary to efforts

by FAF’s PCC – AICPA

fully Supports the work of

the PCC, FAF and FASB

to address the private

company environment

Private Company Council

• GAAP

• Modify GAAP for private

companies

LOOK TO THE HORIZON –

ACCOUNTING IN THE NEXT

YEAR

Simplification

• Short term projects designed to reduce complexity in

accounting standards:

– Narrow in scope.

– Improve or maintain the usefulness of information.

– Reduce costs and complexity in financial

reporting.

If issued as final standards you may have the option

to early adopt for December 31, 2015

Simplification

Proposal (Project) Expected Impact

Simplifying Income Statement

Presentation by Eliminating the

Concept of Extraordinary Item.

Removes the need to evaluate

whether an event should be

classified as an extraordinary

item.

Simplifying the Subsequent

Measurement of Inventory.

Change Lower of Cost or

Market to be Lower of Cost

or Net Realizable Value.

Simplification

Proposal (Project) Expected Impact

Simplifying the Presentation

of Debt Issuance Cost

Include debt issuance cost as

a contra liability in debt

instead of an amortizable

asset

Simplifying the Measurement

Date for Plan Assets

For non-calendar period ends

(i.e. 12/25) permits the use of

the end of the month (i.e. 12/31)

for measurement of plan assets

Simplification

Proposal (Project) Expected Impact

Simplifying the Balance

Sheet Classification of Debt

Modify the rules based

approach to a principle based

on contract terms and

covenant compliance

Simplifying accounting for

Share-Based Payment

Narrow scope simplification

in the accounting for share

based compensation

Simplification

Proposal (Project) Expected Impact

Accounting for Income Taxes:

Intra-Entity Asset Transfers.

Eliminates the prohibition on

recognizing taxes for transfers

of assets between jurisdictions.

Accounting for Income

Taxes: Balance Sheet

Classification of Deferred

Taxes.

Eliminate the requirement to

classify deferred taxes and

current and non-current and

instead require presentation

as non-current.

New Revenue Recognition Guidance

(ASU 2014-09)

An entity should recognize revenue to depict the

transfer of promised goods, or services, to

customers in an amount that reflects the

consideration to which the entity expects to be

entitled, in exchange for those goods or services.

Five-Step Process

1 • Identify the contract(s) with a customer.

2 • Identify the performance obligations in the contract.

3 • Determine the transaction price.

4

• Allocate the transaction price to the performance obligations in the contract.

5

• Recognize revenue when (or as) the entity satisfied a performance obligation.

Revenue Recognition

Effective for Calendar Year Entities:

Public: December 31, 2017

(early adoption not permitted)

All others: December 31, 2018

(early adoption permitted up to the date of public

companies)

Why are we talking about this for next year?

Deciding how to transition

• Retrospective

– Restate the prior year financial statements presented

• Apply the new guidance to 2017 sales (and earlier if

contracts extend over multiple years)

• Have the 2017 sales audited

• Modified Retrospective

– Adjust beginning equity in the year of adoption

– Disclose what the revenues and expenses would have

been had you not adopted the standard (i.e. calculate and

audit revenues twice for 2018)

Revenue Recognition – Why 2015?

Start turning over those rocks now so there are no

surprises in on January 1, 2018.

If you start to talk about it in 2015, you can plan in

2016 and work on implementation in 2017

2015 • Learn about the new standard

2016 • Plan how you will adapt

2017 • Work on implementation

2018 • Implement!

What could be under those rocks?

• New patterns of revenue recognition

– New evaluations of variable consideration

– Identification of new performance obligations

• Discover changes that could be needed in:

– Accounting for expenses

– Terms of contracts

– Compensation arrangements

– Processes and Internal Controls

– Computer Systems

– Reporting/disclosure (disclosures, taxes, etc)

A Team Approach

• Establish a team to determine how it impacts your

business:

– C-Suite Champion

– Accounting

– Financing

– Sales

– Information Technology

– Legal

– Tax

Going Concern (ASU 2014-14)

• For annual periods ending after December 15, 2016

management must evaluate if conditions and

events, in aggregate, indicate it is probable that the

entity will be unable to meet its obligations as they

come due within one year after the date the financial

statements are issued (available to be issued)

Consolidation - Principle vs. Agent

• Expected to be issued soon.

• All entities will need to re-evaluate entities in which

they hold a variable interest upon adoption.

– Removes the deferral from the VIE model for investment

companies, but scopes out money market funds.

– Expected to expand the number of limited partnerships

that are considered VIEs.

– Narrows the circumstances when a decision maker

fee/service arrangement is a variable interest.

– Modifies the related party rules.

Leasing

• Final standard issued in 2015?

– Lessees will capitalize leased assets and liabilities on

virtually all leases

– Lessors may experience little change from current

practice

Additional Information

• Contact your CBIZ & MHM service provider

• Explore our thought leadership publications at

www.mhmcpa.com

• Attend our Fourth Quarter Accounting update

webinar on 12/11/14 & 12/16/14

QUESTIONS

???

PRESENTER INFORMATION

Jo An Ketchum Tax Director

913.234.1084

jrketchum@cbiz.com

Michael Moore Managing Director

913.234.1278

mmoore@cbiz.com

Jeff Stolper Senior Associate

913.234.1879

jstolper@cbiz.com

Kathy Rhodes Managing Director

913.234.1017

klrhodes@cbiz.com

Mark Winiarski Senior Manager

913.234.1656

mwiniarski@cbiz.com