The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this

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2 The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.

3 Agenda Tax planning opportunities available for remainder of 2014 and into 2015: For you and your family For business owners and their businesses Tangible Property Regulations 3

4 Introduction - Education 4

5 Introduction - Work 5

6 Introduction - Personal 6

7 Introduction - Interests 7

8 Introduction The 2014 tax landscape might sound relatively familiar: We ve seen very little legislative changes; many rules that expired in 2013 have not been renewed How and when will Congress address tax-extenders after the November elections or later in 2015? Key question: with the above uncertainties, how should you approach year-end tax planning? Understand how your taxes will be affected in either scenario and be prepared to pursue your preferred strategy if the opportunity arises 8

9 Other Considerations Mid-term elections Republicans control both chambers how will this affect pending/expired tax legislation? Lots of other priorities and distractions other than taxes: 2012 Fiscal Cliff Obamacare rollout/heathcare IRS/VA scandals Unemployment/job/wage growth/immigration reform International Russia, ISIS, Iraq, Syria, Corporate Inversions Ebola State level issues marijuana, minimum wages, medical leave, education funding, etc. And the list goes on 9

10 30 Years of Corporate Inversions # of Inversions Grand Total Country Antigua 1 1 Australia 1 1 Bermuda Canada 4 4 Cayman Islands Denmark 1 1 Ireland Israel 1 1 Netherlands Panama 1 1 Switzerland 3 3 United Kingdom 5 5 Unknown Grand Total SOURCE: Source: Ways and Means Committee Democrats. 10

11 2012 Fiscal Cliff & Sequestration Deficit Reduction ($ billions) Bush Era Tax Cuts 221 Payroll Tax Cut 95 Debt Ceiling Deal AMT/Other Unemployment Benefits Expiration Affordable Care Act Medicare Payment Rates Source: Congressional Budget Office 11

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13 TAX PLANNING FOR YOU AND YOUR FAMILY 13

14 Personal Income Tax For most taxpayers, ordinary income tax rates will remain the same 2014 FEDERAL INCOME TAX BRACKETS Single Married Filing Jointly Married Filing Separately Head of Household Marginal Rate Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950 10% $9,075 $36,900 $18,150 $73,800 $9,075 $36,900 $12,950 $49,400 15% $36,900 $89,350 $73,800 $148,850 $36,900 $74,425 $49,400 $127,550 25% $89,350 $186,350 $148,850 $226,850 $74,425 $113,425 $127,550 $206,600 28% $186,350 $405,100 $226,850 $405,100 $113,425 $202,550 $206,600 $405,100 33% $405,100 $406,750 $405,100 $457,600 $202,550 $228,800 $405,100 $432,200 35% $406,750 and above $457,600 and above $228,800 and above $432,200 and above 39.6% 14

15 Personal Income Tax 2014 TOP FEDERAL TAX RATES 2014 Ordinary earned income 39.6%* Net investment income and passive income** 43.4% Long-term capital gains 23.8%*** Qualified dividends 23.8%*** Estate and gift tax 40% *Medicare surcharge of 0.9 percent will also apply to earned income (wages and income from selfemployment) where earned income is over $200,000 (single filers) or $250,000 (joint filers) **Includes interest, dividends, royalties, net rental income, and other passive income ***Includes 3.8 percent surtax on net investment income and certain items of passive income with adjusted gross income over $200,000 (single filers) or $250,000 (joint filers). 15

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18 Net Investment Income Tax & Additional Medicare Tax You may be subject to both the 3.8% NIIT and the 0.9% additional Medicare tax, but not on the same type of income Be sure to: Evaluate your tax liability for NIIT and additional Medicare tax Adjust withholding or estimated tax payments to cover any increase As we head into the second year of these taxes, taxpayers and CPAs alike have a better understanding of associated planning opportunities see tactics on following slides 18

19 Net Investment Income Tax What is included in net investment income? Interest Dividends Capital gains Rents Royalty income Nontrade or business income Any other passive income (where taxpayer does not materially participate in the business) 19

20 Net Investment Income Tax What is excluded from net investment income? Wages Self-employment income Active trade or business income Retirement plan distributions Alimony Social Security benefits Interest from tax-free bonds Alaska Permanent Fund dividends Unemployment compensation Gains excluded from gross income for regular income tax purposes 20

21 Net Investment Income Tax Rebalance investment portfolio to include: Municipal bond investments Growth-oriented stocks that pay out lower dividends Investments such as in real estate, energy and natural resources that produce income sheltered by depreciation or depletion Use like-kind exchanges with rental or business real estate to defer triggering taxable gains 21

22 Net Investment Income Tax Sell qualified assets on the installment method to spread out gains Pay attention to how activities are classified active or passive and grouped with other activities Look into ways you can materially participate in a trade or business to reduce NIIT exposure: group certain activities, increase time devoted to a certain activity, or restructure entities Consider gifting income-producing assets to children: you won t avoid the kiddie tax but your child may avoid paying tax on up to $200,000 of net investment income 22

23 Net Investment Income Tax For trustees: Confirm whether net investment income left in trust is subject to NIIT If so, consider distributing income to beneficiaries with MAGI below the threshold Recent court case provides some additional guidance 23

24 Net Investment Income Tax For business owners: If you have self-employment income on individual tax return, consider incorporating and electing S corp tax status: You ll need to take salary for value of your services, but pass-through income from active trade or S corp isn t considered net investment income Owners using single-member LLC can elect to be taxed as an S corp and receive similar tax treatment 24

25 Example: Calculating NIIT & Additional Medicare Tax A single filer has $300,000 in wages, $100,000 in net investment income, and $400,000 in MAGI. To calculate NIIT and additional Medicare tax: 3.8% Net Investment Income Tax $3,800 MAGI: $400,000 Less: $200,000 (single filer threshold) = $200,000 NIIT = lesser of $200,000 or the $100,000 of net investment income 0.9% Additional Medicare Tax $100,000 x 3.8% = $3,800 $900 Wages: $300,000 Less: $200,000 (single filer threshold) = $100,000 x 0.9% = $900 Additional tax owed $4,700 25

26 Capital Gains, cont d Review unrealized loss positions within investment accounts and consider realizing the losses Consult with your investment advisor for tax-loss harvesting strategies and to incorporate tax-efficient investments If you plan to make charitable donations: consider donating appreciated capital gain assets that have been held for more than one year, rather than cash You could receive a charitable deduction for the FMV, avoiding capital gains tax and the NIIT you d otherwise incur 26

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28 Deductions Consider accelerating or deferring expenditures to take full advantage of deductions Bunch medical expenses into tax years when they ll exceed 10 percent of AGI Consider paying 4th quarter estimated state income tax and real property tax in December 2014 or January

29 Others Until 2016, the Residential Energy Efficient Property Credit is available Electric-drive vehicles: Federal and state incentives are available for the purchase of electric and plug-in hybrid vehicles Qualified small business stock gain exclusion: if you sell any qualified small business stock, you can exclude some of the gain if you held the stock for more than five years: 50% if acquired after Dec. 13, 2013 or before Feb. 18, 2009, 75% if acquired after Feb. 17, 2009 or before Sept. 28, 2010, or 100% if acquired after Sept. 27, 2010 and before Jan. 1,

30 Estate & Gift Planning In 2014, estates have a federal exemption of $5.34 million per spouse and a top tax rate of 40%, including full step-up basis for most estate assets 2014 ESTATE & GIFT TAX RATES & EXEMPTIONS Gift tax rate 40% Estate tax rate 40% Portability is the ability to use a deceased spouse s unused estate tax exemption Don t overlook state inheritance tax: some states have their own estate tax, and state exemption amounts can be lower than the federal amounts Estate tax and lifetime gift exemption Generation-skipping tax exemption Portability of estate tax exemptions between spouses? *indexed for inflation $5.34 million* $5.34 million* Yes 30

31 Estate & Gift Planning Lifetime Gifts The basics: $14,000 annual exclusion per recipient in 2014 $5,340,000 lifetime exemption in addition to annual exclusion ($5.43M in 2015) 40% gift tax rate for gifts exceeding $5,340,000 Maximize your $14,000 annual exclusion by giving assets that are aligned with your cash flow requirements Your spouse can also gift $14,000 Consider state inheritance tax rules as part of your estate and gift planning process 31

32 Estate & Gift Planning Low Interest & Valuation Opportunities AFRs remain at generally historic lows; it may be possible to refinance loans between family members or business and reduce interest payments The combination of $5.34 million gift tax exemption with historically low AFRs creates significant opportunity to transfer large amounts of wealth through trusts in particular If you are holding assets that might rebound in value, consider making a lifetime gift or lifetime sale to your beneficiaries 32

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34 Charitable Giving Consider giving a charity appreciated capital gain property you ve held for more than one year you ll get the FMV deduction and avoid paying tax (including NIIT) on the gain Investment assets that have declined in value should be sold first and the cash then donated to charity you ll get the benefit of the capital loss in addition to the charitable deduction Determine whether larger charitable contributions should be made in 2014 or 2015 for greater benefit Incorporate your charitable contribution planning with your longterm estate plan, taking into account tax- and cash flow-efficient ways to structure your gifts Tax-free distributions from IRAs expired in

35 Retirement Planning Taxes can be a key factor in retirement planning; some of the decisions you make are one-time choices that can be costly to change later on, so it pays to plan in advance: Certain plans, such as 401(k) and Keogh plans, must be in place by year-end, although contributions can be made later Any taxpayer can convert a traditional IRA to a Roth IRA, regardless of income; certain qualified plans may allow inside the plan conversion 35

36 Retirement Planning On Jan. 1, 2015, new rules take effect: once-a-year limit on IRA rollovers that are not direct custodian-to-custodian transfers apply to your IRAs in aggregate (not separately) To roll over multiple IRAs, you have until the end of 2014 If a child has earned income: consider strategies to contribute to a traditional or Roth IRA; where practical, consider employing children in the business to generate earned income earnings could be contributed or funds gifted into the IRA account 36

37 International Considerations Different filing deadlines from traditional income tax filings Unique tax considerations arise for US citizens living outside the US, for US taxpayers with noncitizen spouses, and other situations For US citizens living abroad and filing annual US income tax returns: the foreign tax credit does not offset the net investment income As of 2013, any US person owning a foreign mutual fund must file Form 8621 annually; with planning, you may be able to reduce the US tax associated with your foreign mutual funds 37

38 Health Care Reform for Individuals Individual shared responsibility provision: You and your family must have health care coverage, have an exemption from coverage, or make a penalty payment when you file your 2014 tax return If you forego coverage, the 2014 penalty is the greater of $95 or 1% of household income; in 2015 the penalty increases to the greater of $325 or 2% of income 38

39 TAX PLANNING FOR BUSINESSES & BUSINESS OWNERS

40 Health Care Reform for Employers Reporting requirements: Employer reporting requirements are effective for calendar year 2015 and optional for 2014 An annual return must be filed reporting whether you offered health insurance to your employees and if so, what was offered If you provide self-insured coverage, you must file an annual return reporting certain information for each employee covered 40

41 Foreign Account Tax Compliance Act Consult with your Moss Adams advisor to assess whether you and your business are compliant with FATCA rules or need to take additional steps. US companies have new vendor documentation standards for backup withholding and all payments to non-us persons We recommend you review your vendor files, require foreign vendors and account holders to provide the applicable new versions of Form W-8, and develop an approach to implement the FATCA rules In some situations, an individual taxpayer is considered to be a US withholding agent. Employment income, self-employment income, rental activities and interest on debt obligations that arise through foreign business or trade requires these individuals comply with the same vendor documentation and reporting. 41

42 Business Credits Consider your planning opportunities in the following areas: Credit for small employer s employee health insurance expenses Employer-provided child care credit Research and development credit 42

43 Flow-through Entity Ownership Planning Decisions regarding choice of business entity (S Corp, C Corp, LLC, etc.) have a major impact on your company s taxes as well as the personal taxes of your shareholders or partners. Entity basis Review records for adequate tax basis and at-risk basis to claim losses generated by flow-through entities If you anticipate losses in 2014, talk to your Moss Adams advisor before year end to utilize these losses appropriately Buy-sell agreements Review agreements, funding structures, and insurance policies to ensure they re aligned, current and relevant 43

44 Flow-through Entity Ownership Planning C to S Corporation election: Consider switching to S Corp status to avoid federal and state double taxation of annual income and recognized gains at future sale or liquidation Certain kinds of business income and gains made through an S Corp can escape the NIIT, including gains from the sale of S Corp stock by an owner who is a material participant S Corps afford greater flexibility when planning your exit strategy 44

45 Washington State Updates Sales/use tax exemption for machinery and equipment High tech B&O credit for R&D spending and high tech sales/use tax deferral/waiver: Advanced computing, advanced materials, biotech, electronic device technology, and environmental technology B&O credit expires 1/1/15 Sales/use tax deferral/waiver expires 1/1/15 applications should be received by 11/1/14 (ASAP) for timely processing Biotech & medical device manufacturing sales/use tax deferral/waiver expires 1/1/17 45

46 Washington State Updates Semiconductor materials manufacturing Reduced B&O tax rate expires 1/1/18 Sales/use tax exemption for purchases of semiconductor gases & chemicals expires 1/1/18 Aerospace Reduced B&O tax rate B&O credit for preproduction development expenditures (1.5% of qualifying expenditures) Sales/use tax exemption for computer hardware/software/peripherals B&O credit for property/leasehold taxes paid Certain energy and green incentives several have expired or are expiring in

47 Final Tangible Property Regulations (TPR) Presented by: Jason Thompson

48 Timeline for TPR Dec 2011 Nov 2012 Sept 2013 Jan Return Due Date (Sept 15, 2015*) IRS Announces Project & Issues Proposed Regs IRS Issues Temp Regs (effective for 1/1/12) IRS Defers Effective Date IRS Issues Final & Re- Proposed Regulations Effective Date IRS Issues Method Change Procedures & Final Disposition Regulations Final Date for Full Compliance Regulations are Generally Effective for Tax Years Beginning on or after January 1, 2014 * For calendar year taxpayers

49 High Points of the Final Regulations Final regulations are generally taxpayer favorable and much easier to apply than prior version De minimis expensing follow book Partial disposition election tax benefit Several elections will allow taxpayers to follow book treatment for certain items Must be made on timely filed original tax return Elections will need to be considered each year once made (or missed), generally no changes Taxpayers likely still required to file at least one method change

50 Scope of Final Regulations ACQUISITION OF TANGIBLE PROPERTY De minimis safe harbor IMPROVEMENT OF TANGIBLE PROPERTY Unit of property DISPOSITION OF TANGIBLE PROPERTY Partial disposition election Material & supply (M&S) Repair vs. improvement Capitalized acquisition costs Capitalization election for repairs Routine maintenance non-building & building Small taxpayer safe harbor election

51 De Minimis Safe Harbor Taxpayers may expense under the de minimis safe harbor if: TAXPAYERS WITH AN AFS Taxpayer has written capitalization policy in place at BOY expensing amounts paid for Property below a dollar threshold, or Property with a useful life less than 12 months Taxpayer expenses in its AFS per that policy Invoice (or item, if substantiated by invoice) cost does not exceed $5,000 Taxpayer files election statement with timely filed original tax return TAXPAYERS WITHOUT AN AFS Taxpayer has accounting procedures in place at BOY expensing amounts paid for Property below a dollar threshold, or Property with a useful life less than 12 months Taxpayer expenses in its books and records per that policy Invoice (or item, if substantiated by invoice) cost does not exceed $500 Taxpayer files election statement with timely filed original tax return

52 Materials and Supplies: Defined Tangible property used or consumed in the taxpayer s business that is not inventory and that is: 1) A component acquired to maintain, repair, or improve a unit of tangible property that is not acquired as part of any single unit of property; 2) Fuel, lubricants, water, and similar items that are reasonably expected to be consumed within 12 months after use begins; 3) A unit of property that has an economic life of 12 months or less after use begins; Useful life on AFS or from facts and circumstances 4) A unit of property that has an acquisition cost of $200 or less; or 5) Identified in published guidance as a material and supply.

53 Acquisition Costs to Capitalize General rule: Taxpayer must capitalize amounts paid to acquire or produce a unit of real or personal property. Costs required to be capitalized: 1) Invoice price 2) Facilitative transaction costs Amts paid to pursue or investigate transaction 11 inherently facilitative costs 3) Work performed prior to placing property in service 4) Defending or perfecting title to real or personal property Real property exception: whether and which test Employee comp and overhead deductible

54 Repair Expense vs. Capital Improvements: Overview UNIT OF PROPERTY FOR MEASUREMENT Building property Plant property Network assets Functional interdependence IMPROVEMENT STANDARDS Betterment Adaptation Restoration SAFE HARBORS AND ELECTIONS Routine maintenance Small taxpayer Election to capitalize

55 What is the Unit of Property? Buildings Building & structural components are the UOP Improvement standards applied at building structure or building system level Plant Property Functionally interdependent machinery used to perform an industrial process Separate UOP for equipment performing discrete and major function Network Assets Based on facts and circumstances Separate guidance being provided through IIR process Leased Property UOP cannot exceed leased portion (lessee) Building and building systems subject to lease Other Property Functional interdependence test

56 Improvement Standards Application to Buildings Building structure Consists of the building and its structural components other than building systems. This includes: walls, floors, partitions, ceilings, windows, doors, etc. Note: The entire building remains the UOP for disposition purposes this segregation only relates to the application of the improvement standards Building systems 1. HVAC system 2. Plumbing system 3. Electrical system 4. All escalators 5. All elevators 6. Fire protection and alarm systems 7. Security systems 8. Gas distribution systems 9. Other structural components identified in guidance

57 Improvement standards BETTERMENTS Ameliorate a material condition or defect that existed prior to taxpayer s acquisition Result in a material addition or material increase in capacity to the UOP Reasonably expected to materially increase productivity, efficiency, strength, quality, or output of the UOP ADAPTATION Adaptation to a new or different use if the adaption is not consistent with the taxpayer s ordinary use of the UOP at the time it was originally placed in service RESTORATION Loss claimed on replaced component (other than casualty) Adjusted basis was accounted for in claiming gain/loss Basis adjustment taken following casualty loss Return to operating condition after state of disrepair Returned to like new condition Replacement of major component or substantial structural part

58 Routine Maintenance Safe Harbor Routine maintenance may be deducted Applies to building and non-building property Reasonable expectation when property placed in service to keep it in ordinarily efficient operating condition Must be expected to be performed more than once during: Non-building property: the class life (ADS recovery period) Building property: 10-year period when building placed in service Not available if also betterment or restoration (1 st four tests) Routine maintenance includes inspection, cleaning, testing, or replacing parts with comparable, readily available parts Routine Consider recurring nature, industry practice, manufacturer s recommendations, and taxpayer s experience Reasonable expectation Documentation recommended to support expectations

59 Small Taxpayer safe Harbor Taxpayers with avg. gross receipts of $10M may deduct maintenance on eligible building property up to lesser of: $10K or 2% of building s cost basis Eligible building cost basis $1M Apply limits to each building Annual election statement required

60 Partial Disposition Election Taxpayers may elect to recognize a loss on the disposition of a portion of an asset (e.g., a roof) Value basis of replaced asset using a reasonable method (options provided in regulations) Elect by doing no statement required Partial disposition treatment required for casualty loss, Sec. 1031/1033 transactions, step in the shoes transactions, or sales of the partial asset

61 Integration of Improvement and Disposition Rules Book Has Capital Improvement Does Tax Have Capital Improvement? No Yes Consider if Partial Disposition Loss May be Claimed on Replaced Asset Deduct as Repair Cost Tax may be able to currently recover at least some portion of the amount capitalized for books

62 Transition Rules 2014: Mandatory application of final rules Method change guidance generally provides for a one-year implementation period Some have modified adjustments, meaning no computations required for 2014 LB&I directive deferring exams on repair and improvement issues ends (applied to pre-2014 tax years)

63 Implementation Considerations Compliance mandatory for 2014 Consider your overall goals Simplest implementation, minimizing number of book/tax differences even if forgoing current deductions (action still required) Utilize available favorable provisions to defer taxes

64 Implementation Considerations Evaluate your current capitalization policies and accounting practices and procedures De minimis capitalization and any written policy requirement Repair vs. improvement determinations Acquisition or production-related costs Review existing capitalized improvements Evaluate effectiveness of current accounting practices and related systems

65 Key Takeaways Final regulations offer some administrative simplifications, taxpayers can follow book in many areas Improvement examples are more illustrative, but no definitive bright lines Benefits available, with a little extra work Many new elections to consider each year, potential traps for the unwary Culmination of a 10-year project by IRS issues likely to be reviewed on exam

66 Questions? Phil Knudson, CPA (425) Jason Thompson, CPA (425) Tax planning offered by Moss Adams LLP. Investment advisory and personal financial planning offered by Moss Adams Wealth Advisors LLC. Insurance management and consulting offered by Moss Adams Securities & Insurance LLC. 66