Top Federal Tax Risks and Rewards

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TAKE ACTION NOWTOP FEDERAL TAX RISKS AND REWARDSOriginal Publication Date: November 2013


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


Agenda

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


Michael BoenziSenior Manager, Midwest Region R&D Practice Leader

Travis ButlerDirector, Corporate - SFTS

David CavinDirector, Corporate - SFTS

Andy MechavichDirector, Compensation and Benefits

Today's Presenters


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


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.”


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.


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.


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?


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


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.


SECTION 199RECENT UPDATES


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


IRC Section 199 – Benefits and Burdens of Ownership: 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?



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



• 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.



• 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.


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


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


FINAL REPAIR REGULATIONSWHAT HAS CHANGED AND HOW IT WILL IMPACT YOU?


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


Practical implications

Rules affect any business that owns or leases tangible property.

Therefore these rules affect all businesses


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


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


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


Next Steps

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

• Consider financial statement impact


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


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


COMPENSATION AND BENEFITSWHICH RISKS OR REWARDS IMPACT YOU?


Employment TaxSeverance and FICA TaxUnited 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.


Executive CompensationConserve 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.


Retirement – Pension PlansManaging 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.

© Grant Thornton LLP. All rights reserved.

Health Care Reform's Employer MandateBeginning 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.

OR

Coverage Offered to Less than 95% of Full-

Time Employees During the Month

Coverage Offered to 95% or More of Full-

Time Employees During the Month But

Does Not Satisfy Affordability and Minimum Value Requirements

AffordabilityEmployee Premium for Self-Only

Coverage Is 9.5% or Less

of Employee’s Income

Minimum ValuePlan Covers At Least 60%

of Plan Costs

$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

$166.66 Per Month ($2,000 Per Year)

Per Full-Time Employee (Minus 30 Employees**)

* 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.


Health Care Reform's Employer Mandate 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


• 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).

The IRS rules define who is and who is not a full-time employee.

Health Care Reform's Employer MandateSteps to Determine Eligibility and Limit Risk


Questions?

Mike [email protected]

312-602-8046

Travis [email protected]

312-602-8984

David [email protected]

312-602-8044

Andy [email protected]

312-602-8044

mailto:[email protected]




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Top Federal Tax Risks and Rewards