Executive Breakfast Briefing Accounting & Taxes in the New Year January 18, 2017 in San Jose & January 26, 2017 in Pleasanton

Transcription

1 Executive Breakfast Briefing Accounting & Taxes in the New Year January 18, 2017 in San Jose & January 26, 2017 in Pleasanton Presented in San Jose by: Justin Scripps, Katie Owen, Donna Holm Presented in Pleasanton by: Jacqueline Pruscha, Keith West and Jarret Warner Sensiba San Filippo LLP 1

2 Learning Objectives Accounting Standards Updates Prior year Updates what are they and how are they relevant this year? Current year updates what are they and when will they be effective? Tax Updates Reminders Due Date Changes R&D Credits Domestic Production Activities Deduction Business Tax Extenders Bonus Depreciation Change to Partnership Audit Rules Washington Agenda Sensiba San Filippo LLP 2

3 Significant Accounting Standards Updates Sensiba San Filippo LLP 3

4 Prior Year Updates Galore! ASUs issued in that will be effective for 2016 or later Effective for calendar year-end 2016: Identifiable Intangible Assets ( ) Going Concern ( ) Extraordinary Items ( ) Debt Issuance Cost Presentation ( and ) Internal-Use Software ( ) Effective for calendar year-end 2017: Inventory Measurement ( ) Business Combinations ( ) Effective for calendar year-end 2018: Deferred Income Taxes ( ) Sensiba San Filippo LLP 4

5 Business Combinations: Identifiable Intangible Assets (ASU ) Allows a private company to no longer recognize the following separate from goodwill: Customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business Non-competition agreements. If this alternative is elected, the entity must also adopt the private company alternative to amortize goodwill as described in ASU (generally straight line over 10 years). The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative. Effective for transactions occurring in fiscal years beginning after December 15, 2015, and all periods thereafter Sensiba San Filippo LLP 5

6 Going Concern (ASU ) Evaluation period: one year from the issuance date of the financial statements (compared to balance sheet date now) Substantial doubt: relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due Updated disclosures when going concern identified: Principal conditions or events that raise substantial doubt (before consideration of management s plans) Management s evaluation of the significance of those conditions or events in relation to the organization s ability to meet its obligations Management s plans that are intended to mitigate (or have alleviated) the conditions or events that raise substantial doubt. Effective for annual periods ending after December 15, 2016; early adoption allowed Sensiba San Filippo LLP 6

7 Income Statement: Extraordinary and Unusual Items (ASU ) Eliminates the concept of extraordinary items from GAAP. Effective for fiscal years beginning after December 15, 2015; early adoption allowed. Sensiba San Filippo LLP 7

8 Debt Issuance Cost Presentation (ASU and ) Part of the simplification initiative and conformity with International Financial Reporting Standards (IFRS) : Simplifies presentation of debt issuance costs as a direct deduction from the carrying amount of that debt, consistent with debt discounts : Due to the absence of authoritative guidance related to line-ofcredit in ASU , ASU Measurement of Debt Issuance costs associated with Lines-of-Credit arrangements states SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the LOC. Effective for fiscal years beginning after December 15, 2015; early adoption allowed for financial statements not previously issued. Sensiba San Filippo LLP 8

9 Intangibles-Goodwill and Other-Internal-Use Software (ASU ) Adds guidance which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (guidance to determine whether the cloud computing arrangement includes a software license or should be considered a service contract). Arrangements that include a software license must meet both of the following criteria: The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty It is feasible for the customer to either run the software on its own hardware of contract with another party unrelated to the vendor to host the software For private companies, effective for annual periods beginning after December 15, 2015; early adoption allowed. Sensiba San Filippo LLP 9

10 Inventory Measurement (ASU ) Part of the simplification initiative and to more closely align with IFRS. Measure inventory at the lower of cost and net realizable value (NRV). Reference to market had too much subjectivity and did not provide enough consistency between companies. FASB defines NRV as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Only applies to entities using FIFO or average cost. Does not apply to inventory measured under LIFO or Retail Inventory Method. For private companies, effective for fiscal years beginning after December 15, Changes are to be applied prospectively, with early application allowed for beginning of period balances. Sensiba San Filippo LLP 10

11 Business Combinations (ASU ) Acquirers must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. Acquirers must also record, in the same period s financial statements, the effect on the earnings of changes in depreciation, amortization or other income effects, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date (i.e. not a prior period adjustment). This amount must be presented separately on the face of the income statement, or disclosed in the notes. These amendments should be applied prospectively to adjustments to provisional amounts that are identified after the effective date of this update. For private companies, effective for fiscal years beginning after December 15, Sensiba San Filippo LLP 11

12 Deferred Income Taxes (ASU ) Part of the simplification initiative and to more closely align with IFRS. Requires all deferred tax liabilities and assets to be classified as noncurrent on the balance sheet for all entities that present a classified balance sheet. For private companies, effective for fiscal years beginning after December 15, Sensiba San Filippo LLP 12

13 Current Year Updates Galore! 20 updates issued in 2016 Topics not covered here: Intangibles Goodwill and Other; Business Combinations; Consolidations; Derivatives and Hedging: Effective Date and Transition Guidance (ASU ) Liabilities Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored- Value Products (ASU ) Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (ASU ) Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments (ASU ) Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of Accounting Standards Updates and Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (ASU ) Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities (ASU ) Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (ASU ) Technical Corrections and Improvements (ASU ) Sensiba San Filippo LLP 13

14 Investments Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (ASU ) Current GAAP When an investment qualifies for the equity method as a result of an increase in the level of ownership or degree of influence the equity method must be retroactively applied to the financial statements. This ASU Eliminates the requirement to retroactively adopt the equity method under these circumstances. Effective for fiscal years beginning after December 15, 2016 for all entities. Sensiba San Filippo LLP 14

15 Compensation Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU ) Current GAAP Several income tax related matters are cumbersome to measure and present in the financial statements. Compensation cost must be reduced by a forfeiture rate estimated by management. Required to estimate the period of time an option will be outstanding. Nonpublic entities are allowed to measure liability-classified awards at intrinsic value (current FMV - strike price). Common for stock appreciation rights (SAR s). This ASU Income tax related matters have been simplified to reduce cost and complexity. Can elect to account for forfeitures as they occur. A practical expedient is available for estimating the expected term for all awards. Non-public entities can make a one-time election to switch from measuring liability-classified awards at fair value to intrinsic value. Effective for fiscal years beginning after December 15, 2017 for private entities. Effective for public entities one year earlier. Early adoption is permitted. Some portions of standard must be applied retroactively while other portions can be applied prospectively. Sensiba San Filippo LLP 15

16 Consolidation: Interests Held through Related Parties That Are under Common Control (ASU ) Current GAAP When considering whether an entity is the primary beneficiary of a VIE, direct and indirect interests carry the same weight ( full attribution approach ). If the related party is NOT under common control then they would use the proportionate approach (based on % ownership). The full attribution approach can require an entity holding an indirect interest to consolidate a VIE even in instances when the entities indirect interest in the VIE is clearly not significant. This ASU Entities will only need to consider their proportionate indirect interest in a VIE held through common control. This will make consolidation of a VIE less likely when an entity holds only a minor indirect interest in the VIE through a non-consolidated common control affiliate. Effective for fiscal years beginning after December 15, 2016 for all entities. Early adoption is permitted and standard must be retroactively applied. Sensiba San Filippo LLP 16

17 Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU ) Current GAAP There s diversity in practice how certain cash receipts and cash payments are presented in the cash flow statement. This ASU Addresses eight specific cash flow issues: 1) Debt prepayment or extinguishment costs should be classified as financing. 2) Debt instruments with coupon interest rates cash payments for interest classified in operating and cash payments for principal classified as financing. 3) Contingent payments relating to a business combination contingent liability recognized at acquisition date should be financing and excess should be operating. 4) Settlement of insurance claims receivable should be classified on the basis of the related coverage. 5) Proceeds from settlement of corporate owned life insurance policies classified as investing, however premium payments may be classified as operating or investing. 6) Distributions received from equity method investments must make accounting policy election to classify under cumulative earnings or distribution approach. Distributions received will be classified as either operating or investing depending on policy election. 7) Transfers and proceeds from beneficial interests in securitization of financial assets should be noncash activity and an investing activity, respectively. 8) Transactions with aspects of more than one classification and no specific guidance in GAAP classification should depend on the activity that is the most predominant. Effective for fiscal years beginning after December 15, 2018 for private entities. Effective for public entities one year earlier. Early adoption is permitted and standard must be retroactively applied. Sensiba San Filippo LLP 17

18 Statement of Cash Flows: Restricted Cash (ASU ) Current GAAP There s diversity in practice in the classification and presentation of changes in restricted cash on the cash flow statement. This ASU Restricted cash should be included with cash and cash equivalents when reconciling the beginning and end-of-period totals in the cash flow statement. Cash and restricted cash should be broken out and reconciled in the notes to the financial statements to agree with the totals in the cash flow statement. Effective for fiscal years beginning after December 15, 2018 for private entities. Effective for public entities one year earlier. Early adoption is permitted and standard must be retroactively applied. Sensiba San Filippo LLP 18

19 Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU ) Current GAAP Equity securities with readily determinable fair values must be classified into different categories (i.e. trading or available-for-sale) and changes in their fair value must be recognized through comprehensive income. This ASU Targets improvements with the following: 1) Changes in fair value can be recognized in net income. Also may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes from observable price changes for an identical or a similar investment of the same issuer. 2) Simplifies the impairment assessment for equity investments without readily determinable fair values by requiring a qualitative assessment (as opposed to quantitative). 3) Eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for private entities. 4) Requires an entity to present separately in other comprehensive income certain changes in liabilities measured using the fair value option for financial instruments. 5) Requires separate presentation of assets and liabilities by measurement category and form of financial asset (i.e. securities, loans, receivables). 6) Clarifies that an entity should evaluate the need for valuation allowance on a deferred tax asset related to available-for-sale securities in combination with other deferred tax assets. 7) Two additional changes apply to public entities only. Effective for fiscal years beginning after December 15, 2018 for private entities. Effective for public entities one year earlier. Early adoption is permitted by one year and a cumulative catch-up adjustment to the balance sheet should be made at the beginning of the year of adoption. Sensiba San Filippo LLP 19

20 Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU ) Current GAAP Recognition of the full amount of a credit loss is delayed until the loss is considered probable. This ASU Replaces the incurred loss impairment methodology for assets measured at amortized cost with a methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates (such as more forward-looking metrics like financial forecasts). Also requires credit losses to be presented as an allowance rather than a write-down. Effective for fiscal years beginning after December 15, 2020 for private entities. Effective for public entities one year earlier. Early adoption permitted for the fiscal years beginning after December 15, A cumulative catchup adjustment to the balance sheet should be made at the beginning of the year of adoption. Sensiba San Filippo LLP 20

21 Leases (ASU ) Current GAAP Two types of leases Capital lease Recognize asset and liability on the balance sheet. Lease payments reduce liability and asset is amortized over its useful life. Operating lease Do not recognize asset or liability on balance sheet. Lease payments are expensed on a straight line basis over lease term. Future lease commitments are an off-balance sheet liability and only disclosed in the footnotes. This ASU Still has two types of leases Finance lease (previously capital lease) Accounted for similar to capital leases under current guidance. Operating lease Recognize asset and liability on the balance sheet (measured at present value of lease payments). Recognize single lease cost on straight line basis over lease term. All cash payments classified in operating activities in cash flow statement. Allowed to make policy election not to recognize assets and liabilities for leases with terms of one year or less. Sensiba San Filippo LLP 21

22 Leases (ASU ) Continued Impact to loan covenants: Current Ratio - although assets equal liabilities at initial recording, a portion of liabilities will be short term, but all assets will be long term Leverage Ratio - liabilities will be added without corresponding equity EBITDA - For certain leases a portion of expense will now be depreciation and interest expense rather than rent Other Business Implications: Accounting policies and business implications will need to be addressed for lease activity. Some areas of consideration include: Budgeting and planning processes Lease vs. buy decisions Internal controls over lease transactions Sensiba San Filippo LLP 22

23 Leases (ASU ) Continued Lessor accounting has remained largely unchanged. Effective for fiscal years beginning after December 15, 2019 for private entities. Effective for public entities one year earlier. Early adoption is permitted and standard must be retroactively applied. Sensiba San Filippo LLP 23

24 Revenue from Contracts with Customers (ASU ) Core principle: recognize revenue upon transfer of goods or services to a customer in the amount of consideration expected to be received from the customer. Applies to all contracts to provide goods or services to customers Exception: Leasing transactions, insurance contracts, and financial instruments Adds certain disclosure requirements and guidance to account for costs to obtain or fulfill a contract (when not covered by other standards) Emphasis on judgement Effective for calendar year 2019 for private companies and one year earlier for public companies Private companies can elect to early adopt by one year. No early adoption for public companies. Sensiba San Filippo LLP 24

25 Revenue from Contracts with Customers: Principal vs. Agent Considerations (Reporting Revenue Gross vs. Net) (ASU ) Mainly addresses whether an entity controls goods or services before they are transferred to the customer (thus determining principal vs. agent). Clarifies the following: Must determine principal or agent for each distinct good or service promised to the customer. It s possible to be a principal for some and an agent for others. Must determine the nature of each specified good or service - is it a good, a service, or a right to a good or service? An entity is a principal if it obtains control of a) a good from another party that it then transfers to the customer b) a right to a service that will be provided by another party c) a good or service from another party that the entity combines with other goods or services to make the distinct good or service. Sensiba San Filippo LLP 25

26 Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (ASU ) Expected to reduce the cost and complexity of applying the revenue guidance by adding the following: Immaterial promised goods or services don t need to be assessed as separate performance obligations. Allowed to account for shipping and handling that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service (or performance obligation). Improves the guidance to determine if goods are distinct. Improves the licensing guidance around intellectual property. Improves implementation guidance around sales-based or usage-based royalties promised in exchange for a license of intellectual property. Sensiba San Filippo LLP 26

27 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (ASU ) Clarifies the objective of the collectability criterion in Step 1 of the new revenue standard relating to a customer s ability and intention to pay. New criterion is added to Step 1 that allows revenue recognition if: Control of goods or services has transferred Transfer of goods or services has stopped There s no obligation under the contract to transfer additional goods or services Consideration received from the customer is nonrefundable Can exclude amounts collected for sales (and other similar) taxes from the transaction price. Specifies the measurement date for noncash consideration is contract inception. Provides a practical expedient to reflect contract modifications in prior periods when identifying the satisfied and unsatisfied performance obligations. Sensiba San Filippo LLP 27

28 Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (ASU ) - Continued Clarifies that a completed contract for purposes of transition is a contract where all (or substantially all) of the revenue was recognized under legacy GAAP before adoption. Elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete. Permits an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed. An entity that retrospectively applies the revenue recognition guidance to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption, however, is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. Sensiba San Filippo LLP 28

29 Revenue from Contracts with Customers: Technical Corrections and Improvements (ASU ) Areas for correction or improvement includes 13 areas as follows: 1) Loan Guarantee Fees 2) Contract Costs Impairment Testing 3) Contract Costs Interaction of Impairment Testing with Guidance in Other Topics 4) Provisions for Losses on Construction-Type and Production-Type Contracts 5) Scope of Topic 606 6) Disclosure of Remaining Performance Obligations 7) Disclosure of Prior-Period Performance Obligations 8) Contract Modifications Example 9) Contract Asset versus Receivable 10) Refund Liability 11) Advertising Costs 12) Fixed-Odds Wagering Contracts in the Casino Industry 13) Cost Capitalization for Advisors to Private Funds and Public Funds Sensiba San Filippo LLP 29

30 Questions Sensiba San Filippo LLP 30

31 Significant Tax Updates Sensiba San Filippo LLP 31

32 Reminder: Changing Due Dates! Partnership Returns: moved back one month from April 15 to March 15 (2 ½ months after the end of the taxable year). Partnerships will be allowed a 6-month extension. S corporations will not change - the due date will continue to be March 15 (2 ½ months after the end of the taxable year) Sensiba San Filippo LLP 32

33 Reminder: Changing Due Dates! C corporation returns: moved forward one month from March 15 to April 15 (3 ½ months after the end of the taxable year) Note that the due date for C corporations with a June 30 th fiscal year end will not be changing until after December 31, 2025; the due date will continue to be September 15 Foreign Bank Account Report (FBAR) / FinCen Form 114: changed from June 30 to April 15. Taxpayers will be allowed an automatic 6 month extension Sensiba San Filippo LLP 33

34 Reminder: Changing Due Dates! California conforms to federal changes for tax years beginning on or after January 1, 2016: March 15 (Extended due date Sept 15) Form FTB 565 (Federal Form 1065) Form FTB 100S (Federal Form 1120S) Form FTB 568 (LLCs classified as partnerships) April 15 (Extended due date Oct 15) Form FTB 100 (Federal Form 1120) Form FTB 568 (LLCs classified as corporations) Sensiba San Filippo LLP 34

35 R&D Credit: Overview The R&D Tax Credit is designed to incentivize companies in the advancement of new technologies and to encourage hiring of employees to perform R&D activities in the United States. The credit was made permanent in December, Most States, including California, allow for a state-specific R&D Tax Credit for qualified expenses related to R&D activities conducted in the State. The credit can be claimed for all open tax years. Generally there is a 3 year statute of limitations for federal purposes and 3 or 4 year statute of limitations for most states. Unused federal R&D credits carry back 1 year and forward 20 years. Sensiba San Filippo LLP 35

36 R&D Credit What Industries Qualify? The R&D Tax Credit is available for most industries. Any taxpayer developing a new or improved product, process, technique, formula, invention, or software, could qualify for the R&D Tax Credit. Manufacturing Aerospace engineering Software companies/game developers Medical device companies Utility companies Athletic footwear companies Pharmaceutical companies Wineries and Vineyards Sensiba San Filippo LLP 36

37 R&D Credit: What Activities Qualify? The Four Part Test Permitted Purpose The activity must be intended to develop or improve a business component s (product, process, technique, formula, invention, or software): Functionality Performance Reliability, or Quality Technology in Nature The activity performed must not rely on any social sciences and instead, must fundamentally rely on principles of: Physical science Biological science Computer science, or Engineering Elimination of Uncertainty The activity must be intended to discover information to eliminate technical uncertainty concerning the capability or method for developing or improving a product or process, or the appropriateness of the business components design. Process of Experimentation Substantially all of the activities must be elements of a process of experimentation: The activities must involve the evaluation of one or more alternatives to achieve a result where the method of achieving that result is uncertain. Activities should include designing experiments to evaluate and test alternatives through process of systematic trail and error, simulation, or modeling. Sensiba San Filippo LLP 37

38 R&D Credit Common Qualified Activities Concept Development Feasibility Evaluation Specification Design Experimental Prototype Development Design, Test, and Execution Technical Design Reviews and Meetings Technical Writing Compiling Research Data/Preparing R&D Documentation Directly Supervising or Supporting R&D Sensiba San Filippo LLP 38

39 R&D Credit What Expenses Qualify? There are ONLY 3 categories of expenses that qualify for the R&D credit. These expense categories are referred to as Qualified Research Expenditures (QRE) Wages Contractor Expenses (@ 65%) Supplies Sensiba San Filippo LLP 39

40 R&D Credit Non-Qualified Activities Training Routine or Maintenance Activities Activity Conducted Outside the U.S. Activities in the Social Sciences, Arts, or Humanities Research after Commercial Production Advertising or Marketing Activities Reverse Engineering Routine Data Collection Activity related to a Management Function Market Research Other General and Administrative (G&A) Tasks Sensiba San Filippo LLP 40

41 R&D Payroll Tax Credit Election New for tax year 2016 and later Election can be made by eligible small business, which is defined as one with <$5 million in gross receipts for year claiming election, and no more than 5 years with gross receipts Election can be made a maximum of 5 years Sensiba San Filippo LLP 41

42 R&D Payroll Tax Credit Election Can elect up to $250k of credit from current year only towards payroll tax Can be used to offset only employer portion of SSA (6.2%), with unused amount carried-over to future quarters Can only elect credit amount that would otherwise be carried forward Sensiba San Filippo LLP 42

43 R&D Payroll Tax Credit How is Election Made? Make election on Form 6765 After electing up to $250k of credit towards payroll tax on Form 6765, the client or payroll tax provider will file Form 8974 with the Form 941 for the first quarter following return filing Any unused amount will be carried over (waiting for clarification on C/O time limit) Sensiba San Filippo LLP 43

44 R&D Payroll Tax Credit Common Questions I use a Professional Employer Organization (PEO) for my employees, do I still qualify? I m not currently performing an R&D Study, should I start? How do I know if I qualify in (2016, 2017, etc.)? 2 Questions: When was first year of gross receipts, and do you expect GR > $5 million for current tax year? Sensiba San Filippo LLP 44

45 Domestic Production Activities Deduction Incentives for keeping production inside the U.S. A deduction up to 9% of net income Qualified activities include: manufacturing, production, growth or extraction of tangible personal property, computer software, real estate (MPGE) Court cases and proposed regulations may affect how IRS will handle issues surrounding DPAD. Sensiba San Filippo LLP 45

46 Domestic Production Activities Deduction Qualified activities include: Manufactured Produced Grown Extracted Of tangible personal property, computer software, sound recordings, film production, electricity, natural gas, water, real estate construction (including engineering and architectural services related to such construction) Sensiba San Filippo LLP 46

47 Business Tax Extenders: Permanent Changes Built-In Gains The five-year holding period for purposes of computing built-in gain on the conversion of a corporation from a C corporation to an S corporation is permanent. A maximum tax rate of 35% is applied to any recognized built-in gain. Sensiba San Filippo LLP 47

48 Business Tax Extenders: Permanent Changes Enhanced Section 179 deductions Businesses may immediately deduct up to $500,000 of the cost of qualifying asset acquisitions; indexed to inflation Applies to purchases of computer software and qualified leasehold, retail and restaurant improvements Heating and air conditioning units are now eligible property Certain improvements do not qualify: Enlargement of the building, escalators, elevators, internal structural framework of the building or any improvement to the common area of the building. Sensiba San Filippo LLP 48

49 Business Tax Extenders through December 31, 2019 Bonus Depreciation 50% in 2015, 2016, % in % in 2019 Definition of Qualifying Property has been expanded New law continues to follow prior rules, including: 1. Property must be tangible depreciable property with a recovery period of 20 years or less 2. Qualified leasehold improvement property 3. Original use must commence with the taxpayer; used machinery doesn t qualify. Sensiba San Filippo LLP 49

50 Business Tax Extenders Bonus Depreciation New law now includes as a qualifying category of property qualified improvement property instead of qualified leasehold improvement property, with a broader definition: Improvement to an interior portion of a building that is nonresidential real property Does not include: The enlargement of the building Any elevator or escalator The internal structural framework of the building Must be placed in service after the date the building was first placed in service (placed in service by other taxpayers is OK) In a win for agricultural interests, the new law also permits certain trees and vines to be eligible for bonus depreciation when planted or grafted, rather than when placed in service Sensiba San Filippo LLP 50

51 Repair Regulations Capitalize or Expense? Capitalization policy not required without AFS but recommended; if AFS* applies, the policy must be written $5,000 per invoice may be expensed if the business has AFS If no AFS, effective for tax years beginning on or after January 1, 2016, the de minimis safe harbor threshold increased from $500 to $2,500 per invoice Annual election to be made with the tax return *Applicable Financial Statements defined as Reviewed or Audited financial statements Sensiba San Filippo LLP 51

52 Change to Partnership Audit Rules Bipartisan Budget Act of 2015 clarified Partner definition and repealed the TEFRA Audit Provisions. Background: TEFRA Increased partnership audit efficiency Difficulty obtaining statute of limitation waivers Difficulty obtaining partnership/partner information Most partnerships subject to TEFRA (except small partnerships and Electing Large Partnerships) Tax Matters Partner is primary interface with the IRS Sensiba San Filippo LLP 52

53 Change to Partnership Audit Rules TEFRA now replaced. New Partnership Representative New Audit and Collection options New Administrative procedures Effective for tax years beginning after 2017 Recommendation: review existing Partnership Agreement to consider amending in consideration of the new rules for auditing partnerships. Sensiba San Filippo LLP 53

54 Potential 2017 Legislative Agenda Items President-elect Trump Priorities Tax Reform Infrastructure Immigration Reform Affordable Care Act Repeal and Replace Veterans issues Regulatory Reform Trade Issues Sensiba San Filippo LLP 54

55 Tax Reform: Legislative Update State of Play: President-Elect Trump 15% business income rate, 25% pass-through rate Elective expensing for manufacturers with loss of interest expense deduction (choice) Eliminates DPAD and business credits except R&D 10% mandatory tax on accumulated foreign earnings Taxes repatriation of foreign profits at 10% Eliminates corporate AMT Retains credit for employer-provided child care, increases cap. Sensiba San Filippo LLP 55

56 Tax Reform: Legislative Update State of Play: House Reduced individual tax rates Replace corporate income tax with 20% cash-flow tax 25% business income tax for pass-through entities Territorial system of taxing future foreign earnings Mandatory tax on accumulated foreign earnings Destination-basis tax system exempts exports while taxing imports Sensiba San Filippo LLP 56

57 Tax Reform: Legislative Updates State of Play: Senate Senate Finance Committee Chairman Hatch: readying corporate integration proposal to eliminate double taxation of corporate income Senate Majority Leader McConnell: insists that any tax reform be comprehensive Incoming Senate Democratic Leader Schumer: international tax reform to fund infrastructure spending Sensiba San Filippo LLP 57

58 Questions Sensiba San Filippo LLP 58

59 Contact Information Donna Holm Senior Tax Manager Justin Scripps Audit Manager Katie Owen Experienced Senior Audit Associate Jarret Warner Senior Tax Manager Jacqueline Pruscha Audit Manager Keith West Senior Audit Associate Sensiba San Filippo LLP 59