2014 Business Federal Tax Update. Presented to the Institute of Management Accountants by : Daniel Lynn, CPA & Trace Bauman, CPA

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1 2014 Business Federal Tax Update Presented to the Institute of Management Accountants by : Daniel Lynn, CPA & Trace Bauman, CPA

2 Objective Provide a high level overview of tax provisions affecting businesses

3 2014 Legislation Lots of activity, not much in terms of billed passed Hot issue: Legislative activity on curtailing corporate inversions- Schumer/ Durbin bill limits interest expense of US Subs. to foreign owners LIFO- still with us Big news is what didn t get done

4 What Didn t Get Done?

5 Expired Provisions Awaiting an Extender Bill 55 provisions expired in 2013 R&D Credit Credit for construction of energy efficient homes Work Opportunity Tax Credit 15-year cost recovery on certain retail leaseholds 50-percent bonus depreciation $500K 179 (now $25K) Energy efficient commercial blg- 179D Reduction of period for S Corp. BIG recognition

6 Extenders Create Uncertainty Action on extenders not likely until after the election, maybe January IRS has already announced 1-2 week delay in commencement of filing season Delays likely affect individuals most, but may affect small businesses Proposed extender bills include extension of depreciation provisions and R&D Credit Should you make those big fixed asset purchases before the end of the year? Who knows?

7 IRS Gets Tough on Foreign Reporting: Comply Yesterday, or Else!

8 Foreign Account Filings/ FATCA FACTA designed to prevent tax evasion via offshore accounts. 1. Requires US taxpayers to disclose any interest in specified foreign; and 2. Requires foreign financial institutions, through withholding and information reporting, to identify US taxpayers that might not be complying self-disclosure of foreign assets. Failure to comply may subject taxpayers to SIGNIFICANT penalties

9 Foreign Account Filings/ FATCA Form 8938 is in addition to potential FBAR requirements Due with annual 1040 federal tax return (including extensions) Thresholds vary depending on filing status (MFJ, $400K/ $600K threshold) May apply to corporations in the future Indirect ownership in a lower tier foreign entity may necessitate filing (E.g. shareholder of S Corp. that files a 5471 may be required to file Forms 8938 and 5471) Penalties $10,000 for late filing $10,000 for each 30 day delay after notification of the IRS

10 Other Common Foreign Reporting Form Information Return of US Persons with Respect to Certain Foreign Corporations Form Return of US Persons with Respect to Certain Foreign Partnerships Form Information Return of US Person with Respect to Foreign Disregarded Entity FinCEN Report 114 (FBAR) Failure to file penalties for the above start at $10,000 per failure and potential reductions of foreign tax credits

Foreign Reporting Example A (US Indvl) US Corp CFP FDE 1 FDE 2 US Corp files: 8865 for CFP 8858 for FDE 1 8858 for FDE 2 A is responsible for the above filings, however, US Corp.

11 Foreign Reporting Example A (US Indvl) US Corp CFP FDE 1 FDE 2 US Corp files: 8865 for CFP 8858 for FDE for FDE 2 A is responsible for the above filings, however, US Corp. may satisfy with joint filings If A has signing authority over any foreign accounts of CFP, he may also be required to file FBARs If failure to file, A and/or US Corp. could be subject to $10,000 per return per occurrence failure.

12 The IRS Issues Final Regs. Under 263. And Kills a Few Trees in the Process.

13 Tangible Property Regulations Assess conformity of your current policies and procedures with the TPRs Capitalization policies Minimum capitalization thresholds Routine maintenance expenditures Internal tracking and capturing data Current method(s) conform to TPRs? If not, need to file 3115s for any entity with a deprecation schedule Audit risk?

14 Tangible Property Regulations Required 3115 Forms Repairs and Maintenance Materials and Supplies Unit of Property Restoration, adaption, betterment and improvement of property Routine maintenance safe harbor Acquisition of property Depreciation impermissible methods Wrong lives Bonus depreciation

15 Tangible Property Regulations Optional 3115 Forms Removal costs Partial asset dispositions

16 Tangible Property Regulations The final and proposed regulations have many new annual elections including 1. Election to capitalize and depreciate certain materials and supplies ( (d) A TP may elect to treat as a capital expenditure and to treat as an asset subject to the allowance for depreciation the cost of any rotable spare part, temporary spare part, or standby emergency spare part

17 Tangible Property Regulations 2. De minimis safe harbor election ( (f)(1) A TP with and without an AFS may not capitalize any amount paid in the taxable year for the acquisition or production of a unit of tangible property nor treat as a material or supply under (a) any amount paid in the taxable year for tangible property if the amount specified meets the rules $500 and $5,000 per invoice respectively

18 Tangible Property Regulations 3. Election to capitalize amounts paid for employee compensation or overhead as amounts that facilitate the acquisition of property (1.263(a)-2(f)(iv)(B)) 4. Safe harbor for small taxpayers (1.263(a)-2(h)(1) A TP may elect not to capitalize improvements or repairs to an eligible building property ) if the total amount paid during the taxable year for repairs, maintenance, improvements, and similar activities performed on the eligible building property does not exceed the lesser of 2% of the unadjusted basis of the eligible building property; or $10,000

19 Tangible Property Regulations 5. Election to capitalize repair and maintenance costs (1.263(a)-2(n)(1) A taxpayer may elect to treat amounts paid during the taxable year for repair and maintenance (as defined under ) to tangible property as amounts paid to improve that property under this section and as an asset subject to the allowance for depreciation if the taxpayer incurs these amounts in carrying on the taxpayer s trade or business and if the taxpayer treats these amounts as capital expenditures on its books and records

20 Tangible Property Regulations 6. Disposition of a portion of an asset (aka partial disposition election) ( 1.168(i)-8(d)(2) A taxpayer may make an election under this paragraph (d)(2) to apply this section to a disposition of a portion of an asset Must make the election by the due date (including extensions) of the original federal tax return for the taxable year in which the portion of an asset is disposed of by the TP

21 Patient Protection and Affordable Care Act

22 W-2 Reporting Reporting of the aggregate cost of employer provided coverage on Form W-2 is currently required for all employers over 250 employees Small employers (<250) reporting is optional Determination of small employer is based on the number of W-2s reported under each EIN number the preceding year; no aggregation required for related taxpayers Notice relief applies until additional guidance is issued

23 3.8% Net Investment Income Tax 3.8% Net Investment Income Tax is a Medicare tax added as part of the Patient Protection and Affordable Care Act of 2010 Net investment income includes business income treated as passive (under IRC 469) Tax kicked in 2013; planning in 2014

24 3.8% NIIT: Passive Income Income generated from business activities in which the owner does not materially participate Generally, all rental income: importance exception exists for self-rentals Material participation- complex rules, but generally over 500 hours spent in activity Grouping Election in order to group activities may be permitted to determine material participation

25 Grouping Example John and Jim each own 50% of Bourbon Corp. and Beer Corp., each S Corporations. They also own Oak Barrel, LLC, 50% each. John spends all of his time operating Bourbon Corp., while Jim spends all of his time operating Beer Corp. Oak Barrel, LLC leases barrels, on alternating basis, to Bourbon and Beer. Bourbon and Beer have taxable income of $1MM, while Oak Barrel has income of $250K in 2014 Absent grouping elections, how much NIIT is due by John and Jim.

26 Grouping Example (Con t) John Jim Active Passive Active Passive Bourbon Corp. 500, ,000 Beer Corp. 500, ,000 Oak Barrel LLC 62,500 62,500 62,500 62,500 Passive Income Subject to NIIT 562, ,500 Net Investment Income Tax 21,375 21,375 The above example assumes John and Jim meet the NIIT income thresholds with other income Oak Barrel income is subject to re-characterization rules, thus a portion of that income is treated as active. John and Jim are treated as passive investors in the corporations in which they do not actively participate. As such, that income is subject to the NIIT

27 Grouping Example (Con t) Reg permits grouping of trades or businesses depending on facts and circumstances, including common control, common ownership, and other factors. Assuming Jim and John can group Bourbon and Beer, and they each appropriately elect to group those businesses, all of the income will be considered material participation for each of Jim and John and will not be subject to the NIIT.

28 Significant Tax Savings Through Grouping Review all activities of closely held business owners and determine level of activity by owners Examine self-rental activities, ensure they are being properly classified. Grouping of self rentals may also provide benefits Analyze benefits of making appropriate grouping elections in 2014; once activities are grouped, they may not be regrouped or ungrouped unless changes in facts and circumstances Remember, if material participating in the last 5 years, may treat as non-passive.

29 Internal Revenue Service: Service is our Last Name

30 What to Expect on Examination Review of owner perqs. Personal use of autos- keep track of miles; W-2 reporting M&E Other Disguised dividends Reasonable compensation Reasonable rents R&D Credit Deferred Revenue 481 adjustments- auditors are not letting timing adjustments slide ( 263A, prepaids, etc.) Automatic application of underpayment penalties Do you have problems with LIFO or other accounting methods? Consider accounting method change for audit protection.

31 New M-3 Reporting Requirements Effective tax years ending December 31, 2014 and later Companies with assets between $10 million and $50 million can file Sch M-1instead of Sch M-3 Parts II and III Still need to file Sch M-3 Part I May voluntarily still file full Sch M-3

32 Questions? Daniel Lynn, CPA Tax Partner Trace Bauman, CPA Tax Senior Manager

Tangible Property Regulations and Tax Update for the Oil and Gas Industry

Tangible Property Regulations and Tax Update for the Oil and Gas Industry and Tax Update for the Oil and Gas Industry Laura Roman, CPA, CMAP Partner, Tax and Strategic Business Services 0 Repair Regulations Affect almost all taxpayers Govern capitalizing and deducting expenditures