Top Federal Tax Risks and Rewards

TAKE ACTION NOW
TOP FEDERAL TAX
RISKS AND REWARDS
Original Publication Date: November 2013

© Grant Thornton LLP. All rights reserved.

1

Learning Objectives

• Understand existing and proposed R&D tax credit
changes, and the impacts on your organization
• Understand the benefits and burdens of ownership, and the
exceptions relevant to Section 199
• Assess your organization's risk and opportunities as a
results of the long-awaited Final Repair Regulations
• Understand your organization's opportunities and
potential cash exposures relating to executive
compensation and employment benefits Issues, including
the Affordable Care Act

2

Agenda

•
•
•
•

R&D Tax Credit
Section 199
Final Repair Regulations
Compensation and Benefits Issues


3

Today's Presenters

Michael Boenzi
Senior Manager, Midwest Region R&D
Practice Leader
Travis Butler
Director, Corporate - SFTS

David Cavin
Director, Corporate - SFTS

Andy Mechavich
Director, Compensation and Benefits

4

R&D TAX CREDIT
WHAT IS THE CURRENT
STATE & WHAT DOES
THE FUTURE HOLD?


5

Recent Developments

• Statutory changes to Section 41
– Controlled group allocations
– Acquisitions
• New proposed regulations under Section 174
– The “ultimate success, failure, sale, or other use of
research property resulting from research and
experimentation is not relevant to a determination of
eligibility under section 174.”

6

Recent Developments (Cont'd)

– The term “pilot model” is defined as “any representation
or model of a product that is produced to evaluate and
resolve uncertainty.”
– Costs may be eligible under Section 174 if paid or
incurred after production begins, as long as uncertainty
relating to the development or improvement of the
product remains.


7

Recent Developments (Cont'd)

– The “depreciable property” rule is an application of the
general definition of research expenditures and should
not be applied to exclude otherwise eligible
expenditures.
– Regulations do not provide any specific guidance on
what is “sufficient” to document 174 costs.


8

What does the future hold?

Generally, Congress agrees on the basics
• Bipartisan support
• Enhancements included in the President's budget;
proposals from both parties in Congress

Then why don't these changes happen?


9

What does the future hold? (Cont'd)

Difficulties in making the credit permanent
• Cost
• Momentum for extending other provisions
• Lack of consensus on details of a permanent credit


10

What does the future hold? (Cont'd)

Tax reform is not dead
• Ways and Means Committee chair Dave Camp (R-Mich.)
has been working on reform for more than 2 years, and
will likely produce a bill this year.
• If Camp unsuccessful then a possible combination tax
extender/taxpayer bill of rights bill (December 2013).

• Rumor: Retroactive extension of the credit and other
expiring provisions happening sometime in the Spring
2014.

11

SECTION 199
RECENT UPDATES


12

IRC Section 199 – Benefits and Burdens of Ownership:
Contract Manufacturing Arrangements

• LB&I examiners directive issued on February 1, 2012
• General rule - Treas. Reg. 1.199-3(f)(1) – one taxpayer
that has the "Benefits and Burden" ("B&B") under a
contract manufacturing arrangement is engaged in the
qualifying activity


13

Contract Manufacturing Arrangements (Cont'd)

• LB&I directive - new 3 step process to determine B&B
1. Contract terms
– Did the Taxpayer have title, risk, or primary insurance
responsibility to the work in process?
2. Production activity
– Did the Taxpayer develop the qualifying activity
process, exercise oversight and direction over the
employees engaged in the qualifying activity, or
conduct more than 50% of the quality control tests
over the WIP while the qualifying activity was
occurring?

14


•

1. Economic risk
– Was the Taxpayer primarily liable under the "make good"
provisions of the contract?
– Did the taxpayer provide more than 50%, based on cost, of
the raw materials and components used to produce the
property?
– Did the taxpayer have the greater opportunity for profit
increase or decrease from production efficiencies and
fluctuations in the cost of labor and factory overhead?
If 2 of the 3 steps are completed – taxpayer has B&B, if not
completed - facts & circumstances


15


• LB&I has released a major change in audit guidance
related to the examination of section 199 DPAD claims in
a contract manufacturing setting.
• Rather than follow the 3 by 3 analysis of the earlier
guidance to determine which party is eligible to claim the
deduction, agents are now directed to accept an
agreement between unrelated parties to a contract
manufacturing agreement as to which of them is entitled to
the claim the section 199 deduction.


16


• Signed certification statements from both parties are
required and must be provided within 30 days of an IDR
request from the agent. For taxpayers currently under
examination, signed certification statements will be
required within 60 days of the date of the guidance.


17

IRC Section 199 – Third Party Comparable Software
Exemption

– If a taxpayer derives gross receipts from providing customers
access to computer software produced in whole or significant part
within the United States for the customers' direct use while
connected to the Internet or any other public or private
communications network (online software), then such gross
receipts could qualify as Domestic production gross receipts, if one
of two exceptions is met
– Discuss the exceptions


18

IRC Section 199 – Third Party Comparable Software
Exemption

– If a taxpayer derives gross receipts from providing customers
access to computer software produced in whole or significant part
within the United States for the customers' direct use while
connected to the Internet or any other public or private
communications network (online software), then such gross
receipts could qualify as Domestic production gross receipts, if one
of two exceptions is met
– Discuss the exceptions


19

FINAL REPAIR
REGULATIONS
WHAT HAS CHANGED
AND HOW IT WILL
IMPACT YOU?


20

What was issued?

• Final regulations under 162 and 263(a)
– Amounts paid to acquire, produce, or improve tangible
property
• Re-proposed regulations under 168
– General asset accounts and disposition of depreciable
property
• IRS and Treasury expect to finalize these regulations
in 2014


21

Practical implications

Rules affect any business that owns or leases tangible
property.
Therefore these rules affect all businesses


22

Effective dates

• Final and re-proposed regulations effective for years
beginning on or after January 1, 2014
• TP may choose to apply the final, reproposed, temporary
or any combination thereof for 2012 and 2013
• Transitional relief for elections
in 2012 and 2013


23

Transitional rules

• Revenue procedures expected to be issued in November
or December
• Expected to provide for late partial disposition election for
2012, 2013, and 2014 tax years
• Will provide guidance on changes made under the
temporary regulations


24

Next Steps

• Compare current policies
– Acquisition policy (de minimis)
– Capitalization policy (repairs)
• Consider modification to current procurement process
– Capital expenditures request (CER)
– Capital appropriations request (CAR)
• Consider current method change opportunities
• Consider annual elections going forward


25

Next Steps

• Consider state and local tax impact
– Possible sales and property tax differences
• Consider financial statement impact


26

Method change opportunities

• Deduct repair and maintenance costs
– Use the routine maintenance safe harbor to deduct
routine costs
• Possible late partial disposition election to recoup costs
from pre-2012 dispositions
• Materials and supplies
• Depreciation methods and lives
• Possible tax reform impact


27

New annual elections

• Partial disposition
• De Minimis safe harbor (statement required)
• Capitalize repair and maintenance costs (statement
required)
• Safe harbor for small taxpayers (statement required)
• Capitalize and depreciate any rotable, temporary or
emergency spare part


28

COMPENSATION AND
BENEFITS
WHICH RISKS OR
REWARDS IMPACT YOU?


29

Employment Tax
Severance and FICA Tax
United States v. Quality Stores, Inc.
• The Supreme Court will determine whether FICA tax
applies to certain severance payments.
– A favorable decision would allow companies to obtain
FICA tax refunds on supplemental unemployment
benefits payments.
– Clients should preserve their ability to obtain refunds by
filing protective claims or extending their window for
filing suit on any denied protective claims. The 2010,
2011 and 2012 calendar years are open, and 2010 will
close on April 15, 2014.

30

Executive Compensation
Conserve Cash with Compensation Alternatives

• Implement steps to conserve cash. (A company may
need to provide an incentive encourage participation.)
– Establish a new deferred compensation or phantom
stock plan and defer all/portion of FY2013 bonuses
&/or remainder of 2013 salary into the new plan (Sec.
409A provides for initial deferral elections to be made
within 30 days of plan implementation.)
– Pay bonuses or salary in stock. For public companies
with employee stock plans, pay 2013 bonuses in
restricted stock.

31

Retirement – Pension Plans
Managing Interest Rate Risk for Pension Plans

• Moving Ahead for Progress in the 21st Century Act
(“MAP-21”).
– Due to historically low interest rates, MAP-21 allows
pension plan sponsors to value their pension funding
liabilities using higher interest rates, which results in
lower minimum cash contributions in the short term.
– Planning is required. These higher interest rates are
phased out through the next few years and current low
rates could translate to higher costs and a reduction in
the plan's funded status.

32

Health Care Reform's Employer Mandate
Beginning in 2015, employers with 50 or more full-time and full-time equivalent
employees (taking into account related employers) may be subject to a monthly
excise tax.

Coverage Offered to
Less than 95% of FullTime Employees
During the Month

OR

$166.66 Per Month
($2,000 Per Year)
Per Full-Time Employee
(Minus 30 Employees**)

Affordability
Coverage Offered to
95% or More of FullTime Employees
During the Month But
Does Not Satisfy
Affordability and
Minimum Value
Requirements

Employee Premium for Self-Only
Coverage Is 9.5% or Less
of Employee’s Income

Minimum Value
Plan Covers At Least 60%
of Plan Costs

* These 2014 amounts are annualized and will be indexed for inflation.
** For control groups, the 30 is allocated among the members of the controlled group.

$250 Per Month
($3,000 Per Year)
Per Full-Time Employee
Who Purchases Insurance
Through an Exchange and
Receives a Premium Tax
Credit or Subsidy

Exposure to Significant Excise Tax
Who? Applies to employers with 50 or more full-time and full-time
equivalent employees
What? An excise tax is assessed for not offering coverage to 95% or
more of full-time employees even if most employees are covered
Impact to Employers? Employers that slip below the 95% threshold
are assessed the full tax ($2,000 [indexed] x number of full-time
employees [minus 30 employees])
Total number of full-time employees

5% threshold

Excise tax per year

100

5

$140,000

250

12

$440,000

500

25

$940,000

1,000

50

$1,940,000


Steps to Determine Eligibility and Limit Risk

• Review plan's eligibility and employee hours to limit risk of
penalties
– Each month, an employer must
1. Identify its full-time employees (30 or more average
hours of service per week)
2. Determine who was offered coverage
– Employee may be classified as part-time, but employee
actually works an average of 30 or more hours per week.
– Coverage may be expanded to new categories of
employees (A full-time employee is defined at 30 or more
hours).

Questions?

Mike Boenzi

David Cavin

Michael.Boenzi@us.gt.com
312-602-8046

David.Cavin@us.gt.com
312-602-8044

Travis Butler

Andy Mechavich

Travis.Butler@us.gt.com
312-602-8984

Andy.Mechavich@us.gt.com
312-602-8044


36

Top Federal Tax Risks and Rewards

Recommandé

Recommandé

Contenu connexe

Tendances

Tendances (20)

Similaire à Top Federal Tax Risks and Rewards

Similaire à Top Federal Tax Risks and Rewards (20)

Plus de Grant Thornton LLP

Plus de Grant Thornton LLP (20)

Dernier

Dernier (20)

Top Federal Tax Risks and Rewards