Agenda

> Extenders/tax reform/legislative outlook > Repair and maintenance opportunities > Year-end tax planning strategies > Affordable Care Act update > State and local tax update

2

Extenders/tax reform/legislative outlook

“Lame duck” Congress: What will happen with extender provisions?

> Research and New Markets tax credits > 15 SL for qualified leasehold improvements > 50 percent bonus depreciation > Increased section 179 ($500,000) > Reduced BIG recognition period for S corporations > Numerous other provisions

4

House proposals

> House wants some business incentives made permanent > Look at others on a case-by-case basis > House passed on Dec. 3, 2014, a one-year “extension” – basically

retroactive to Jan. 1, 2014, and will further address next year

5

Senate proposals

> Senate wants two-year, across-the-board extension of the expiring provisions

> Work on tax reform during the two-year period > Appears the Senate will accept the House bill

6

White House position

> No permanent extension of business provisions without permanent extension of “middle-class” provisions

> Have not detailed middle-class provisions > Likely to include:

– Child care tax credit – Earned income and higher education credit – May seek to revive low income housing credit

7

What to expect?

> R&D credit made permanent > Either increased section 179 expensing or 50 percent bonus

depreciation made permanent > One- or two-year extension on most extenders > Child tax credit and earned income credit made permanent in

exchange for above > Any similarity between the above and actual legislation is

purely coincidental

8

Prospects for tax reform?

> Rate increases off the table > Close loopholes > Carried interests > Professional service firms to accrual method ($10 million of

gross receipts) > LIFO repeal > Repeal of IRC 199 > Restrict or eliminate IRC 1031, like-kind exchanges

9

Repair and maintenance opportunities

Repair and maintenance (R&M) opportunities

> De minimis safe harbor > Routine maintenance safe harbor for buildings > Method changes – “cap to repair” and “repair to cap” > Election to capitalize repair costs > Dispositions > “Late” partial disposition election

11

De minimis safe harbor

> Taxpayers may rely on this safe harbor to expense tangible property under a certain dollar threshold

> A written accounting procedure must be in place at the beginning of the taxable year: – For taxpayers with an applicable financial statement, the dollar

amount is not to exceed $5,000 per item – For taxpayers without an applicable financial statement, the dollar

amount is not to exceed $500 per item > The safe harbor is elected annually by including a statement on a

timely filed original federal return (including extensions) > The election may not be revoked and may not be made by filing

an application for change in accounting method

12

Routine maintenance safe harbor for buildings

> Recurring activities that a taxpayer expects to perform as a result of the taxpayer’s use of the building to keep the building structure or system in its ordinarily efficient operating condition

> The taxpayer must reasonably expect to perform the activities more than once during a 10-year period beginning at the time the building structure or building system is placed in service

> Amounts incurred for activities that do not meet the safe harbor are subject to analysis under the general rules for improvements

> Cannot start to use prospectively – must analyze overall repairs vs. capitalization method first!

13

Method changes – “cap to repair”

> This automatic method change covers potentially deductible R&M costs that are currently capitalized and being depreciated

> Key questions – Did you file a “cap to repair” 3115 in a prior year?

o If yes, is the method consistent with the final regs? – What is the magnitude of the capitalized R&M costs? – Do you want/need deductions in 2014?

14

Method changes – “repair to cap”

> This automatic method change covers expenditures that must be capitalized under the final regs, but were deducted in prior years

> Key questions – What kind of items have been deducted as R&M expenses over the

past 3 to 5 years? – Did you treat an entire building as the “unit of property” for purposes

of the cap vs. repair analysis?

15

> Taxpayers may elect to treat amounts paid during the taxable year for R&M as amounts paid to improve tangible property, if the costs are incurred in the taxpayer’s trade or business and if the costs are treated as capital expenditures on the taxpayer’s books

> The election applies to all amounts paid for R&M on tangible property in that taxable year

> This annual, irrevocable election is made by attaching a statement to a timely filed original federal tax return (including extensions) for the taxable year in which the taxpayer pays these amounts

Election to capitalize repair costs

18

Dispositions

> Taxpayers may take a loss on the disposition of a structural component of a building, or a portion of a structural component of a building, recognized in the tax year of the disposition

> Also, taxpayers may forgo a loss on the disposition of a structural component of a building or a portion of a structural component of a building

> The partial disposition election is made by claiming the gain or loss on a timely filed original tax return for the year in which the portion of an asset is disposed

19

Late partial disposition election

> The late partial disposition election will be treated as an automatic change in method of accounting for a limited period of time

> The change must be made for any taxable year beginning on or after Jan. 2, 2012, and beginning before Jan. 1, 2015

> In other words, 2014 is the last opportunity to go back and immediately deduct the remaining cost of “ghost assets”

20

Year-end tax planning strategies

Effective use of tax brackets and rates

> Timing of income and deductions: – Accelerate deductions into years where your tax bracket may

be higher, and – Defer income into years where your tax bracket is lower – Consider deferring deductions affected by the alternative

minimum tax (AMT) if you are currently subject to AMT, but may not be next year

> Consider selling capital gain property on an installment basis: – If taxable income is below $400,000 (single) or $450,000

(married filing jointly), then capital gains rates will be 15 percent

– If taxable income is above that, capital gains rates go up to 20 percent

22

Effective use of losses

> Net operating losses (NOLs) can either be carried back to offset income from prior years or forward to offset future income – If taxable income in prior years was low, or income was taxed at

more favorable rates, it may be beneficial to elect to use the NOLs in future years instead

– If you expect an NOL in the current year that you would like to carry back, try to file your return as soon as possible; corporations can try filing for a “quick refund”

> Capital losses are most beneficial when they can be used to offset capital gains – Stocks with large unrealized losses can be sold and used to offset

stock with large capital gains

23

Effective use of losses (cont.)

> A few useful items to consider when you expect losses from a pass-through entity: – Losses can only be used to the extent of basis – An S corporation owner can increase basis with a properly

documented shareholder loan > Passive activity losses are limited to passive income

– If you expect passive losses, see if you can increase your involvement in the activity enough to be considered materially participating

– Material participation may allow you to deduct losses

24

Charitable donations of property

> If you have appreciated property, consider donating it to a charitable organization rather than selling it – You will generally receive the deduction based on the fair

market value of the property – But since the property was donated, you won’t have to pay

taxes on the appreciated value

25

Accelerating business deductions

> If you expect higher taxable income, consider trying to accelerate any business deductions – Some expiring tax provisions may be extended, like bonus

depreciation, so you could consider accelerating fixed asset purchases

26

Affordable Care Act update

Reimbursement arrangements

> Employer reimbursement of premiums – Employee purchased individual health coverage – Updated guidance from the Department of Labor, Department of

Health and Human Services, Department of the Treasury – No longer permitted on pre-tax or post-tax basis

28

Reimbursement arrangements

Example #1 > Facts

– S corporation with one shareholder – Health insurance policy in company name; covers only the shareholder – There are other employees in the entity

> Questions – Is the employer subject to the penalty? – Will a group policy “cure” the issue? – How are reimbursed premiums handled for tax purposes?

29

Reimbursement arrangements

Example #2 > Facts

– University has union workers; new contract negotiations underway – Health premiums paid by university and subtracted from wages on

pre-tax basis – Union wants to insure workers on union plan but deduct payment

made to union to cover health insurance on pre-tax basis > Question

– Is payment of union dues a pre-tax payment?

30

Reporting ACA compliance

> New required forms: – Form 1095-B, Health Coverage – Form 1095-C, Employer Provided Health Insurance Offer and

Coverage – Form 1094-B, Transmittal of Health Coverage Information Returns – Form 1094-C, Transmittal of Employer-Provided Health Insurance

and Coverage Information Returns – Form 8941, Credit for Small Employer Health Insurance Premiums

32

Reporting ACA compliance

> Form 1094-B, Transmittal of Health Coverage Information Returns – Report total Forms 1095-B filed

> Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Return – Report total Forms 1095-C filed – Filed by applicable large employers (ALEs) – Contains four parts:

1. ALE member information 2. Certifications of eligibility 3. Monthly information 4. Aggregated ALE group members

34

Employer reporting requirements

> Deadlines: – Returns due Feb. 28 (March 31 if filed electronically)

o First return due Monday, March 1, 2016 – Employee statements due Jan. 31

o First statements due Monday, Feb. 1, 2016 – Electronic furnishing rules similar to W-2

35

Reporting ACA compliance

> Potential issues – Electronic reporting to employees – Data collection

o Union-covered employees o Social Security numbers

36

IRS enforcement

> Full coverage box – line 61 of Form 1040 > Form 8965, Health Coverage Exemptions > The “H” notices

– CP 15H, Shared Responsibility Payment Civil Penalties Notice – CP 21H/22H, Shared Responsibility Payment Adjustment Notice

37

State and local tax update

Key topics

> State and local tax arena in 2014 > Income and franchise taxes > Pass-through entities > Sales and use taxes > Other state and local tax developments

39

The state and local tax arena in 2014

> FY 2015 state fiscal conditions have improved with the economic rebound but caution flags are popping up

> Total general fund revenue is expected to rise by $23.6 billion to $749.2 billion, a 3.25 percent increase

> Adjusted for inflation, total state revenue is still projected to be below the 2008 level

> Fifteen states are considering or have enacted tax cuts estimated at $2.5 billion, e.g., New York

> State budget reserves are falling and are expected to be more than $18 billion below the FY 2013 level, a decline of nearly 25 percent

40

> The quest for new tax revenues continues in some states with proposed increases in states like Illinois

> The battle between businesses and state and local tax officials over nexus is still intense

> US-foreign tax minimization (base erosion and profit sharing (BEPS)) by multinational companies has caught attention of state revenue agencies

> Federal legislation to allow states to collect sales tax on Internet sales (Marketplace Fairness Act (MFA)) stalled again

> Pass-through entities: increasingly popular but facing complex state tax requirements

> State revenue agencies pouring more money into anti-fraud and enforcement efforts

The state and local tax arena in 2014

41

Income and franchise taxes

> States continue to pursue aggressive nexus and apportionment policies

> Recent study indicates that 39 states have adopted an economic presence test for income/franchise tax purposes, i.e., physical presence is unnecessary to impose tax

> Bright-line or factor presence tests – California, Colorado, Connecticut, and others

> Mandatory combined reporting is spreading – New York, Rhode Island

42

Income and franchise taxes

> Anti-BEPS at state level? – Multistate Tax Commission hearings on transfer pricing – New Jersey proposal targets companies that have executed

an “inversion” – Companies fight improper use of transfer pricing

(Chainbridge appeals) > Apportionment: Multistate Tax Compact (MTC) three-factor

refund claims and litigation – Taxpayer win in Michigan (IBM decision) but the state attempts to

claw back the benefits with retroactive MTC repeal > Software providers and cloud computing – sales factor issues

(Illinois Department of Revenue rules SaaS is a service, not prewritten software)

43

Income and franchise taxes

> Services and intangibles: Continued movement to market sourcing for sales factor from cost of performance – Market sourcing looks to where customers receive the benefit of

the service vs. where work is done – Nineteen states have adopted market sourcing – MTC endorsement of market sourcing with three-factor,

double-weighted sales apportionment – Market sourcing guidelines are vague and difficult to apply in

practice; audit experience is limited o Massachusetts issued new rules for market sourcing o Customer headquarters, billing address, vendor work site?

44

Pass-through entities

> Pass-through entities: S corporations, limited liability companies, limited liability partnerships, and limited partnerships

> Nexus: ownership creates nexus in most states > Pass-through entity-level taxes: Illinois, New Hampshire,

Tennessee, Texas, Washington DC, and other states > Allocation and apportionment: factor flow-through? > Composite returns: elective or mandatory?

– Illinois eliminated composite return in 2014 > Withholding requirements in more than 30 states

– Stiff penalties for noncompliance even when nonresident owners file state individual income tax returns

45

Sales and use taxes

> States continue to focus on Internet, catalog, and other “remote” sellers. – Estimated potential sales tax revenue: $25 billion to $35 billion? – State attack turned away again as MFA remains in House Judiciary

Committee as Congress ends session > Click-through nexus:

– Sixteen states have adopted in some form; New Jersey is the latest – Illinois reenacted statute to tax remote sellers after losing a state

supreme court decision > Out-of-state seller notification requirements: Colorado case before

the US Supreme Court (DMA v. Brohl)

46

> Issues and concerns over current proposals to tax remote sellers: – “Hodgepodge” of nexus rules is not addressed or limited,

e.g., affiliate, click-through, agency – Continued lack of uniformity among states and localities in

taxability of goods and services – Compliance costs imposed on businesses will be high, even with safe

harbor for small sellers – Software is not a panacea – Tax increase for consumers? – What about uniformity for other taxes, e.g., income and franchise taxes?

47

Sales and use taxes

Sales and use taxes

> Cloud computing – Continuing uncertainty as to the sales and use tax status of

cloud computing – Michigan courts hold that cloud computing for electronic information

access is a nontaxable service, not prewritten software – Taxable canned software in some states, e.g., New York – Taxable telecommunications service in others, e.g., South Carolina – Are all forms of “cloud” services treated the same, e.g., SaaS, IaaS,

and PaaS?

48

Other state tax developments

> Taxation and regulation of e-cigarettes > Qui tam (whistleblower) tax actions > State tax agencies beefing up efforts to combat identity theft,

false refund claims, and other underreporting – Investing in “big data” and technology to mine deeper into

data from IRS, e.g., 1099s, other states, and own electronic data sources

> Unclaimed property – growing awareness on part of state that it is potentially a major revenue source – Noncompliance can lead to material exposure – Unlimited “look-back” period with interest and penalties – Use of “bounty hunters” by state to audit and identify nonfilers – Aggressive reporting rules, e.g., Delaware

49

SALT planning for 2014 year-end

> Nexus review and planning > Examine international activities for potential state tax issues > ASC 740/FAS 109 and ASC 450 issues and opportunities,

e.g., voluntary disclosure agreements, due diligence > Analyze apportionment and combined reporting positions

(MTC refund claims?) > Sales tax: planning for MFA, click-through, or affiliate nexus > Consumer use tax compliance: procedures review > PTE withholding changes or waivers > Personal income tax and planning for change of residence

50

The content in this presentation is a resource for Baker Tilly Virchow Krause, LLP clients and prospective clients. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Disclosure