Plante & Moran - 2009 Tax Webinar Presentation

PREPARE FOR THE UPSWING: >> WHAT'S NEW ON THE TAX FRONT? TOPICS4THETIMES >> PRESENTED BY: PLANTE & MORAN’S TAX DEPARTMENT plantemoran.com

TODAY’S PRESENTERS KURT PIWKO JIM MANNING 586.416.4948 616.643.4054 KURT.PIWKO@PLANTEMORAN.COM JIM.MANNING@PLANTEMORAN.COM CURTIS RUPPAL JERRY JONCKHEERE 616.643.4069 616.643.4044 CURTIS.RUPPAL@PLANTEMORAN.COM JEROME.JONCKHEERE@PLANTEMORAN.COM

PREPARE FOR THE UPSWING: >> FEDERAL TAX TOPICS4THETIMES >> PRESENTED BY: KURT PIWKO plantemoran.com

PRESIDENT OBAMA’S TAX POLICY 2009 2011 – Current Law 2011 – Obama Ordinary Income Tax Rates 10% 15% 10% 15% 15% 15% 25% 28% 25% 28% 31% 28% 33% 36% 36% 35% 39.6% 39.6% Capital Gain Tax Rates 0%/15% 8%/18% & 10%/20% 0%/15%/20% Qualified Dividend Tax Rates 0%/15% Up to 39.6% Up to 39 6% 0%/15%/20%

PRESIDENT OBAMA’S TAX POLICY • INDIVIDUAL – Restoration of the exemption and itemized deduction phase- outs for high-income individuals – Limit the tax rate at which itemized deductions reduce tax liability to 28% – Make the Making-Work-Pay credit permanent – Supports 4% payroll tax surcharge on high income individuals high-income • BUSINESS – Repeal LIFO method of accounting for inventory – Make the research credit permanent – Tax carried interests as ordinary income – International tax reform

OTHER TAX DEVELOPMENTS • WORKER, HOMEOWNERSHIP, AND BUSINESS ASSISTANCE ACT OF 2009 (SIGNED NOVEMBER 6, 2009) – Extends unemployment benefits by 14 weeks (20 in some states) – Extends and expands first-time homebuyer credit • Extended through April 30, 2010 and includes a 60 day “grace period” after April 30 as long as a purchase agreement is in place • I Increases AGI limitations to $145k ( i l ) and $245k (j i t) li it ti t (single) d (joint) • Creates $6,500 credit for individuals who owned and lived in their principle residence for 5 of the past 8 years – Creates election to carryback a 2008 or 2009 net operating loss 3, 4 or 5 years • Applies to both corporations and individuals • Election available for only one year, not both

OTHER TAX DEVELOPMENTS • THE FOLLOWING PROVISIONS ARE SOME OF THE ITEMS SCHEDULED TO EXPIRE A THE END O 2009 P R AT D OF – Individual Deduction for state and local sales taxes Tuition and fees deduction Educator expense deduction Direct contribution of IRAs to charity Sales tax deduction for motor vehicle purchases Increased AMT exemptions I d ti Availability of personal credits against AMT – Business Research credit 15 year amortization of qualified leasehold improvements 50% bonus depreciation Increased §179 expense limitations • LEGISLATION ON OTHER ISSUES IS BEING DEBATED IN CONGRESS

HEALTH CARE REFORM PROPOSALS House Leadership – Affordable Senate Finance Committee – Health Care for America Act Health Care for America Act America s Healthy Future Act of America’s Healthy Future Act of (H.R. 3962) – 10/29/2009 2009 – 10/13/09 High‐income individual 5.4% surcharge on individuals n/a tax surcharge with AGI >$500k (or families >$1M), effective 1/1/11 $ Excise tax on 2.5% of adjusted income above $750 per adult, phased‐in beginning individuals without minimum level, up to minimum in 2014 q qualifying coverage y g g cost of plan, effective 1/1/13 p , / / Employer fees and 8% of payroll fee for employers Fee for each employee not covered taxes not providing minimum by plan, effective 1/1/13 (equal to the coverage and subsidies, average tax credit received by employees effective 1/1/13 effective 1/1/13 in the U.S. multiplied by # of employees in the U S multiplied by # of employees not covered) Excise tax on insurers of n/a 40% of value of plan exceeding employer‐sponsored defined minimums, phased‐in “luxury” plans luxury plans beginning in 2013 beginning in 2013

HEALTH CARE REFORM PROPOSALS House Leadership – Senate Finance Committee – Affordable Health Care for America’s Healthy Future Act of 2009 America Act (H.R. 3962) – – 10/13/09 10/29/2009 Non‐qualified HSA Increases penalty from 10% Same as House distributions to 20%, effective 1/1/11 to 20% effecti e 1/1/11 Reimbursements from Prevent OTC drugs from Same as House HSA, FSA, HRA or Archer, being reimbursed tax‐free, accounts effective 1/1/11 Medical expense n/a Increase 7.5% of AGI floor to 10% with itemized deductions exemption for individuals >65 years FSA contributions Limits contributions to Same as House $2,500, effective 1/1/13 Medical industry 2.5% tax on first sale of a Impose fees over 10 years: $2.3B on RX taxes/fees medical device, effective producers, $4B on medical device 1/1/13 producers, $6.7B on health insurers producers $6 7B on health insurers

ESTATE & GIFT TAX CURRENT STATE OF ESTATE AND GIFT TAXES Year Basis of Estate & Estate & Gift Tax Gift Tax Inherited GST* GST* Rate Exemption Rate Assets Exemption 2008 Fair market $2,000,000 45% $1,000,000 45% value 2009 Fair market $3,500,000 45% $1,000,000 45% value 2010 Carryover Repealed Repealed $1,000,000 35% 2011 Fair market $1,000,000 55% $1,000,000 55% value * GST = GENERATION SKIPPING TAX

ESTATE & GIFT TAX PROPOSED ESTATE TAX REFORMS Bills Introduced H.R. 436 H.R. 498 S.722 H.R. 2032 Obama in 2009 (Pomeroy) (Mitchell) (Baucus) (McDermott) Administration January 9 January 14 March 26 April 22 Estate Tax $3.5M, NOT indexed $5M, indexed , phased $3.5M, indexed $2M, indexed $3.5M, indexed Exemption in from 2010‐2015 Estate Tax Rate 45%, with a surtax on $25M or less, Capital 45% $2M‐$5M, 45%; $5M‐ 45% estates >$10M gains rate (CGR); >$25m, 10M, 50%; >$10M, 2X CGR ; indexed 55%; Indexed Portability of No Yes Yes Yes No Unused Exemption by Surviving Spouse Reunification of Yes Yes Yes Yes No Estate and Gift Tax Reinstate State No No No Yes n/a Death Tax Credit Death Tax Credit Valuation Rules and Restrict valuation No Cap of $3.5M No Similar to HR 436, Transfer Strategies discounts on minority on special use but not as broad; interests and non‐ valuation minimum 10 year business assets reduction term for GRATs Stepped Up Basis Yes Yes Yes Yes Yes

TAX ISSUES FOR DISTRESSED COMPANIES LOSS COMPANIES MIGHT STILL PAY TAX • ALTERNATIVE MINIMUM TAX (AMT) LIABILITIES – Regular taxable income can be offset 100% by regular NOLs – Corporate AMT Income can be offset only 90% by AMT NOLs • Effectively a 2% tax on AMT income • STATE TAX LIABILITIES – Corporate consolidated groups • Taxes may be due on the income of profitable subsidiaries if combined/consolidated state returns are not available/filed • C ld apply t LLC groups if state d Could l to t t does not di t disregard single member d i l b LLCs – State franchise or privilege taxes not based on income • Gross receipts or margins tax (i.e., OH, MI, TX, etc.) • Franchise or capital tax • PAYROLL TAXES – Never cease as long as employees exist

TAX ISSUES FOR DISTRESSED COMPANIES PERSONAL LIABILITY FOR TAXES • “RESPONSIBLE PERSONS” CAN BE HELD LIABLE FOR CERTAIN FEDERAL PAYROLL AND EXCISE TAXES IF THEY “WILLFULLY” FAIL TO PERFORM THE DUTY TO PAY – This may include anyone who has responsibility over taxes or cash payments • MANY STATES IMPOSE PERSONAL LIABILITY ON CORPORATE OFFICERS AND OTHERS – This may include payroll taxes, sales tax, privilege taxes, or income/franchise taxes • EMPLOYEES AND OFFICERS MUST BE COGNIZANT OF THE GOVERNMENT’S POSITION ON A “PREFERRED PAYMENT” LIST WHEN CASH RUNS SHORT

TAX ISSUES FOR DISTRESSED COMPANIES BAD DEBT DEDUCTIONS • WHEN A BUSINESS TRADE RECEIVABLE BECOMES WHOLLY OR PARTIALLY WORTHLESS, A TAXPAYER GENERALLY MAY WRITE IT OFF TO OBTAIN AN ORDINARY DEDUCTION • TO BE DEDUCTIBLE, A TRADE RECEIVABLE MUST BE SPECIFICALLY WRITTEN-OFF ON THE TAXPAYER'S BOOKS VERSUS BEING RESERVED FOR IN AN ALLOWANCE ACCOUNT • BAD DEBT DETERMINATION IS NOT REQUIRED UNTIL YEAR-END Q BUT MID-YEAR DETERMINATIONS CAN BE TAKEN INTO ACCOUNT WHEN DETERMINING QUARTERLY ESTIMATES

TAX ISSUES FOR DISTRESSED COMPANIES BAD DEBT DEDUCTIONS (CONTINUED) • RELEVANT FACTORS SUGGESTING DECREASE IN VALUE: – Serious financial reverses of the debtor – Insolvency – Lack of assets – Persistent refusals to pay – Abandonment of the business – Bankruptcy and receivership – Security ( any) y (if y) – Expiration of the statute of limitations • RELEVANT FACTORS SUGGESTING NO DECREASE IN VALUE: – Creditors Creditors’ failure to press for payment – Creditors’ willingness to make further advances – Availability of collateral or guarantees – Debtors earning capacity – Continued operations

TAX ISSUES FOR DISTRESSED COMPANIES CANCELLATION OF DEBT (COD) • COD INCOME IS GENERALLY TAXABLE – Exclusions exist for bankrupt or insolvent taxpayers – If COD is excluded from income, tax attributes must be reduced (i.e., NOLs (i e NOLs, credit carryforwards, asset basis, etc ) carryforwards basis etc.) • BUSINESS COD INCOME RECOGNIZED IN 2009 AND 2010 CAN BE DEFERRED AND RECOGNIZED IN TAXABLE INCOME OVER A FIVE YEAR PERIOD BEGINNING IN 2014 – Applies to most types of COD income – Election i El ti is made at entity level and i d with th t return d t tit l l d is due ith the tax t – Partial and protective elections are available – Partnerships have flexibility to make the election for each partner’s allocable share of COD income

PREPARE FOR THE UPSWING: >> ENERGY TAX TOPICS4THETIMES >> PRESENTED BY: JIM MANNING plantemoran.com

ENERGY CREDITS & INCENTIVES • SEVERAL THINGS ARE DRIVING THIS MARKET FASTER AND IN NEW DIRECTIONS: – Cost – Opportunity to save dollars – Environmental awareness/concerns – Uncertainty around supply of nonrenewables – Effect of green house gases – Uncertainty around federal carbon p y policyy – RPS – Renewable Portfolio Standards in 28 States

ENERGY CREDITS & INCENTIVES • SECTION 179D OR ENERGY EFFICIENT COMMERCIAL BUILDING DEDUCTION OR EPACT • SECTION 45 RENEWABLE ELECTRICITY PRODUCTION CREDIT • SECTION 48 ENERGY INVESTMENT CREDIT • STATE & UTILITY INCENTIVES AND REBATES • SECTION 25C & D RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT

SECTION 179D – ENERGY DEDUCTION • ACCELERATED DEDUCTION INVESTMENTS IN EECB PROPERTY • MAXIMUM IS $1.80 PER SQ. FT. FOR: – HVAC — $.60 cents – Lighting — $.60 cents – Building Envelope — $ 60 cents $.60

SECTION 179D – ENERGY DEDUCTION • REQUIRED ENERGY IMPROVEMENT IS 50% TO GET FULL $1.80 OR 16 2/3% TO GET INDIVIDUAL SYSTEMS • OPPORTUNITY FOR A/E FIRMS DOING GOVERNMENT WORK • OPPORTUNITY FOR LIGHTING SYSTEMS • EXTENDED THROUGH 2013

ENERGY CREDITS & INCENTIVES

SECTION 45 RENEWABLE ELECTRICITY PRODUCTION CREDIT (PTC) • 10 YEAR CREDIT BASED ON ELECTRICITY PRODUCED: – Wind – Solar – Closed and open loop biomass – Geothermal – Small irrigation power – Municipal solid waste – Hydropower – Marine and hydrokinetic – Energy must be sold to unrelated party – Credits C dit can b sold t i be ld to investors t

SECTION 48A ENERGY INVESTMENT CREDIT (ITC) • 10% CREDIT FOR INVESTMENTS IN: – Geothermal – Combined heat & power systems

SECTION 48A ENERGY INVESTMENT CREDIT (ITC) • 30% CREDIT FOR INVESTMENTS IN: – Wind energy property – Solar property – Biomass – Fuel cell property – Other O h renewable energy (see Section 45) bl ( S i

SECTION 1603 CASH GRANT IN LIEU OF ITC • GRANT CAN BE ELECTED IN LIEU OF ITC: – Review depreciation and whether the client can use the deduction – The Grant is not taxable – Same technologies that qualify for ITC qualify for the grant

LIMITATIONS ON TAX CREDITS • PASSIVE ACTIVITY LOSSES – Limits deductions and incentives to only active investors – Posing significant financing hurdles for developers – Narrows investment to non-closely held corporations

LIMITATIONS ON TAX CREDITS • IN-SERVICE DATE S – Construction must start prior to December 31, 2010 – In-Service In Service by January 1, 2012 2014 1 2012-2014 • FOR-PROFIT CORPORATIONS P – Eliminates governments, NFP, institutional, and pension funds

LIMITATIONS ON TAX CREDITS

STATE & UTILITY INCENTIVES • UTILITY INCENTIVES – Standard (Prescriptive) incentives – Custom incentives – New building analysis – Load response & utilization • STATE INCENTIVES – Grants – Loans – Credits

SECTION 25C NON-BUSINESS ENERGY PROPERTY • 30% CREDIT FOR INVESTMENTS IN ENERGY EFFICIENT IMPROVEMENTS – MAX IS $1,500 FOR 2009 & 2010 – Building envelope – Windows, roof, doors – Furnace systems – Central air conditioners – Water heaters • CREDIT LAPSED IN 2008 • EXTENDED FOR PROPERTY PLACED IN SERVICE 2009 & 2010

SECTION 25D RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT • 30% CREDIT FOR RESIDENTIAL INVESTMENTS IN: – Solar – Small wind energy property – Fuel cell property – Geothermal • CAN INCLUDE INSTALLATION COSTS • TAX CREDIT – NOT GRANT

SECTION 25D RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT • EFFECTIVE FOR PROPERTY PLACED IN SERVICE 2009 – 2016 • $2,000 CAP WAS LIFTED IN FEBRUARY WHEN EXTENDED • CREDITS ARE LIMITED TO TAX AND DO CARRY FORWARD

PREPARE FOR THE UPSWING: >> STATE TAX TOPICS4THETIMES >> PRESENTED BY: CURTIS RUPPAL plantemoran.com

ILLINOIS • PARTNERSHIP INCOME MODIFICATIONS – Guaranteed payment add-back and reasonable compensation subtraction p • MANUFACTURER’S PURCHASE CREDIT – Credit extended through August 30, 2014

MICHIGAN • MICHIGAN BUSINESS TAX – Planning opportunities abound – Treasury Rules and Administrative Bulletins • SINGLE BUSINESS TAX REFUND OPPORTUNITIES – Kmart Michigan Property Services LLC – treatment of Services, federal disregarded entities – TMW Enterprises, Inc. – application of casual transaction to S corporations • FUTURE TAX POLICY

OHIO • COMMERCIAL ACTIVITIES TAX – 0.26% tax rate fully phased-in – New provisions: Penalty for pass through of tax; Joint and several liability – Ohio Grocers Association v. Levin – CAT is a tax on the privilege of doing business – Overstock.com, Inc. v. Levin – challenge to CAT economic nexus standard dismissed on procedural grounds • INDIVIDUAL INCOME TAX – HB 318 – 2009 tax rate reduction in jeopardy?

MULTISTATE – STATE REACTIONS TO RECESSION • BUSINESS/CORPORATE INCOME TAX – Enact combined/unitary group reporting – MA, WV, WI; previously MI MBT, OH CAT, TX Franchise (Margins) Tax – Enact tax base add-backs for certain related party expenses (types vary by state) – AR, DC, GA, CO, ND, OK, VA, WI, WV – Economic nexus - via enacted law, regulation, or administrative policy – ME MI, NH, NY, OH OR WI ME, MI NH NY OH, OR, – Sales Factor Apportionment • Shift to move heavily weight sales factor - CO, PA • Shif from origin sourcing to market sourcing f service Shift f i i i k i for i revenue – CA (2011), IL (2008), MI (2008), WI (2009) – Suspend NOL carryforward utilization – CA

MULTISTATE – STATE REACTIONS TO RECESSION • INCREASE SALES TAX RATE OR EXPAND TAX BASE – Tax rate increases – CA, MA, NV – Tax base expansion – CA, KY, ME, TN – Also have see enactment of “Amazon” nexus for internet sellers with certain types of relationships yp p with in-state independent companies Enacted in NY (lead), NC, RI Rejected in CA, HI Proposed in CT, IL, MD, MN, TN

MULTISTATE – STATE REACTIONS TO RECESSION • INCREASE UNEMPLOYMENT INSURANCE TAX WAGE BASE AND RATES – 2009 retroactive wage base increases – TN, WV – 2010 wage base increases – AR IN, IA FL MT MO VT AR, IN IA, FL, MT, MO, – Anticipated 2010 rate increases (not connected to individual employer experience history) – FL, HI, IA, KS • FEDERAL LOANS FOR SUI TRUST FUND – Borrowing can result in reduced FUTA credit for SUTA taxes paid 2009 – MI employers 2010 – possibly IN, MI, and SC 2011 – possibly AR, CA, IN, KY, MI, MO, NY, NY, NC, OH, PA, RI, SC, d SC and WI

MULTISTATE – STATE REACTIONS TO RECESSION • INCREASE INDIVIDUAL INCOME TAX RATE – Graduated income tax rate states have generally focused on high-income brackets only – Examples – NJ, NY, WI (NJ change estimated to increase state revenues $1 Billion in fiscal year 2010) – Also have see accele at o o state est ates lso ave seen acceleration of estimates For 2010, CA quarterly estimates are to be paid in as follows: 1st qtr = 30% 2nd qtr = 40% 3rd qtr = 0% 4th qtr = 30% t 30%; t 40%; t 0%; t (that’s right, pay 70% of estimated liability by June)

MULTISTATE – STATE REACTIONS TO RECESSION • ADMINISTRATIVE ENFORCEMENT – Increase in nexus non-filer discovery initiatives – Increase in quantity and aggressiveness of tax audits • AMNESTY PROGRAMS – Recently completed (2009) AL, AZ, CT, DE, HI, LA, MD, NJ, VT – On-going – ME, OR, VA – Scheduled – PA – Proposed – DC, IL, MI

PREPARE FOR THE UPSWING: >> INTERNATIONAL TAX TOPICS4THETIMES >> PRESENTED BY: JERRY JONCKHEERE plantemoran.com

FOREIGN BANK ACCOUNT REPORTING • IRS IS SERIOUS ABOUT REPORTING – They took on UBS (the large Swiss bank) – They took several aggressive tax cheats to court – and won – They set up a Voluntary Disclosure program to ferret out violators • LOOK FOR PENALTIES TO BE ASSESSED IN THE FUTURE FOR NON-FILERS

TIER ONE ISSUES • TRANSFER PRICING – Actually *not* a Tier One Issue –B A But Automatic on all A di i ll Audits – The “30 Day Letter” • WITHHOLDING ON PAYMENTS TO ALIENS – Forms 1042

FORM 5471 REPORTING (AND PENALTIES) • WINTER 2008: LATE 5471S WILL BE SUBJECT TO AUTOMATIC PENALTIES – Voluntary Disclosure ended 10/15 • IRS SEEMS SERIOUS ABOUT ASSESSING PENALTIES – Reasonable Cause is a high standard to prove g p to avoid penalties

MISTAKE CORRECTIONS • REV PROC 2009-41 2009 41 – Allows taxpayers three years (+75 days) to correct missed “check-the-box” elections check the box – As long as intent is clear in returns filed – P b bl more difficult to get 9100 relief if Probably diffi lt t t li f intent is not clear (wrong or no returns filed)

TAX PLANNING IDEAS • DISCS (DOMESTIC INTERNATIONAL SALES CORPORATION) – Still Viable – Obama has indicated he would continue preferential qualified dividend rates – Effective tax planning device for exporters

CROSSBORDER ISSUES • CANADA – Increased enforcement of Schedule 91s The “t Th “tax return t t ll C t to tell Canada you d ’t owe d don’t them a tax return” • UNITED STATES – Form 1120F for foreign corporation operating in the U.S.

“BUSINESS TAXES” • GROWING TREND TOWARD TAXES NOT DEFINED IN TREATIES – Taxes on foreign companies with no permanent establishments – Gross taxes on business income – NOT CREDITABLE for U.S. tax purposes

TRANSFER PRICING • U S COMPANIES WITH TRANSACTIONS WITH U.S. RELATED FOREIGN COMPANIES MUST: – Document how prices are determined – Documentation must meet U.S. and foreign standards for arm’s length documentation arm s – Increasing focus of U.S., Canadian, Mexican, and foreign audits

DOTTING THE “I”S AND CROSSING THE “T”S • IRS IS SCRUTINIZING RETURNS FOR ATTACHMENTS AND FORMS – Significant penalties are in statutes for non noncompliance – Form 3520 & 3520-A for foreign trusts 3520 A – Form 5713 for transactions or bids with countries boycotting Israel – Form 926 for cash or asset transfers overseas – Dual Consolidated Loss Statements

U.S. – CANADA TREATY -- FIFTH PROTOCOL • U S – CANADA FIFTH PROTOCOL TAKES U.S. EFFECT JANUARY 1, 2010 – Corrects prior ‘glitch’ that penalized US LLCs owning Canadian entities – Adds worse ‘glitch’ for U.S. companies owning glitch US Canadian ULCs – Lowers withholding rates for interest

FIN 48 – IS FINALLY HERE (?) • FIN 48 – Requires companies to quantify tax exposures –D Does not l k lik i will b d l look like it ill be delayed ( d (again) f i ) for non-public companies – M t document tax positions and id tif Must d tt iti d identify exposures as if you will be audited

OBAMA’S PROPOSAL • WOULD CLOSE SOME PERCEIVED LOOPHOLES IN THE CURRENT LAW • WOULD ADD ADDITIONAL PENALTIES FOR NONCOMPLIANCE.

THANK YOU! KURT PIWKO JIM MANNING 586.416.4948 616.643.4054 KURT.PIWKO@PLANTEMORAN.COM JIM.MANNING@PLANTEMORAN.COM CURTIS RUPPAL JERRY JONCKHEERE 616.643.4069 616.643.4044 CURTIS.RUPPAL@PLANTEMORAN.COM JEROME.JONCKHEERE@PLANTEMORAN.COM

Plante & Moran - 2009 Tax Webinar Presentation

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