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Talking Tax webcast provides insightful updates on current tax issues
 

Talking Tax webcast provides insightful updates on current tax issues

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In this summary of the ninth Talking Tax webcast from PwC's Industrial Products & Service Tax Sector, read about updates on tax law and accounting methods. It includes what the extensions in the ...

In this summary of the ninth Talking Tax webcast from PwC's Industrial Products & Service Tax Sector, read about updates on tax law and accounting methods. It includes what the extensions in the American Taxpayer Relief Act of 2012 will mean for your organization, how to treat milestone payments, and when to account for self-insured medical payments.

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    Talking Tax webcast provides insightful updates on current tax issues Talking Tax webcast provides insightful updates on current tax issues Document Transcript

    • Industrial Products & Services Tax Alert Talking Tax webcast provides insightful updates on current tax issues January 30, 2013 In brief PwC‟s Industrial Products & Services Tax Sector recently conducted the ninth installment of its Talking Tax executive webcast series. Hosted by Michael Burak, PwC‟s US & Global Industrial Products Tax Leader, the webcast provided insightful updates on tax legislative developments and accounting method issues. Featured panellists included: Pam Olson, former Deputy Assistant Secretary for Tax Policy and Assistant Secretary for Tax Policy at the US Department of the Treasury and current Deputy Tax Leader for PwC‟s Washington National Tax Services Practice Don Longano, former Chief Tax Counsel of the House Ways and Means Committee and current principal in PwC‟s Legislative & Regulatory Services Practice Alan Fischl, former legislation attorney at the Congressional Joint Committee on Taxation and current partner in PwC‟s International Tax Services Practice George Manousos, former tax specialist in the Office of Tax Policy at the US Department of the Treasury and current partner in PwC‟s Federal Tax Services Practice. This tax alert provides a summary of the webcast discussions and includes links to additional PwC publications on the covered topics. For those who were unable to participate in the webcast, please click here to access the archived webcast. In detail Tax legislative update The webcast‟s tax legislative update included discussions on the 2012 election results, the temporary and permanent extenders included in the recently enacted „fiscal cliff‟ legislation, and a comparison of various corporate tax reform proposals. Extenders included in American Taxpayer Relief Act of 2012 President Obama on January 2, 2013 signed into law the American Taxpayer Relief Act of 2012 (the Act) which includes permanent extensions of certain 2001 and 2003 tax provisions for individuals with incomes below $400,000 ($450,000 for joint filers). Individuals with incomes above these amounts will be subject to top rates of 39.6% for ordinary income and 20% for capital gains and dividends. See the January 1, 2013 WNTS Insight: Congress passes fiscal cliff agreement to extend tax rates for incomes below $450,000; deal includes business "tax extenders” for a summary of key individual and business tax provisions enacted as part of the Act. Bonus depreciation for qualified property has been used by Congress in recent years as an economic stimulus. The Act www.pwc.com
    • Industrial Products & Services extends 50% bonus depreciation through 2013. offset by „base-broadening‟ measures in a revenue neutral manner. The Act includes retroactive extensions through 2013 of certain expired business and energy tax provisions. The renewed business tax provisions include the research credit (with modifications), controlled foreign corporation look-through, 15 year straight-line cost recovery for qualified leasehold improvements, and certain other provisions that expired at the end of 2011. See the January 2, 2013 WNTS Insight: New tax law extends business tax incentives for a summary of these business and energy tax provisions. Chairman Camp in October 2011 released for public comment an international tax reform „discussion draft‟ proposing a 25% top corporate rate and 95% exemption for active foreign business earnings. See the November 1, 2011 WNTS Insight: Ways and Means Chairman releases Discussion Draft for corporate rate reduction, territorial tax system for more information on Camp‟s discussion draft. Burak pointed out during the webcast that despite the retroactivity to 2012 of these provisions, many taxpayers operating on a calendar year system will not be expected to reflect the financial statement benefits of these provisions in their 2012 calendar yearend financial statements. Rather, President Obama‟s signing of the bill on January 2 would be a financial statement event for the first quarter of calendar year 2013, said Burak. Nonetheless, financial statement disclosure in 2012 may be appropriate depending upon the potential impact of the legislation, he added. Comparison of corporate tax reform proposals Using a discussion of the 2012 election results, upcoming fiscal policy deadlines, and the federal budget outlook as a backdrop, Olson, Longano, and Fischl discussed the likelihood of corporate tax reform in the 113th Congress. Over the past several months, President Obama and Ways and Means Chairman Dave Camp (R-MI) have put forth corporate tax reform principles in an effort to set the stage for comprehensive tax reform. Both Obama and Camp call for a corporate rate reduction to be 2 In February 2012, the Obama Administration released The President’s Framework for Business Tax Reform calling for reducing the top corporate rate to 28% while increasing US tax on income earned by foreign subsidiaries of US companies. See the February 22, 2012 WNTS Insight: Obama Administration releases business tax reform framework for more information on the President‟s framework. Since the webcast, Chairman Camp on January 24, 2013 released for public comment a discussion draft on reforming the tax treatment of financial products as part of the Ways and Means Committee‟s broader effort on comprehensive tax reform. Camp released 43 pages of draft statutory text and a 27-page technical explanation prepared by Ways and Means staff with a brief overview and summary. See the January 24, 2013 WNTS Insight: Ways and Means Chairman Camp releases discussion draft for financial products tax reform for more information on this discussion draft. Accounting methods update During the webcast‟s accounting methods update, Manousos discussed options for adopting the repairs regulations, the treatment of milestone payments, and the timing of self-insured medical deductions. Options for adopting repair regulations The IRS on December 14, 2012 published regulations amending the temporary regulations regarding the deduction and capitalization of expenditures related to tangible property (the temporary repairs regulations) to delay the effective date of the regulations. The temporary regulations are now effective for tax years beginning on or after January 1, 2014. See the December 14, 2012 WNTS Insight: IRS formally delays effective date of the new temporary repairs regulations for more information on the delay of the effective date. Manousos said during the webcast that the Service‟s decision to defer until 2014 the effective date of the repair regulations gives taxpayers the following three options for deciding whether and when to change their methods of accounting: Retain their present methods of accounting if they determine that they are using proper accounting methods. File a change in accounting method to shift to the law prior to the temporary regulations. Adopt the temporary repairs regulations early. In addition, Manousos said that, prior to the deferral of the effective date, the IRS issued a directive to agents to not audit taxpayers in the process of changing their accounting methods prior to 2012. He speculated that the IRS might once again apply the same rationale that it would not wish to audit taxpayers based on old law and issue a similar directive with pwc
    • Industrial Products & Services instructions to agents not to audit taxpayers in transition until 2014. Treatment of milestone payments During the webcast, Manousos advised taxpayers to be cognizant of the accounting implications of the Service‟s decision to not treat milestone payments as success-based fees. In Internal Legal Memorandum 201234027, the IRS said that nonrefundable milestone payments made to a service provider for activities performed with respect to an acquisition or reorganization do not qualify for the safe harbor provision of Rev. Proc. 2011-29 that permits a taxpayer to treat 70% of all successbased fees incurred during a taxable year as non-facilitative (i.e., deductible or amortizable, as appropriate) costs and the remaining 30% as facilitative, capitalizable costs. While the 70/30 safe harbor for success-based fees greatly relieved the documentation burden on taxpayers for substantiating their allocation of success-based fees, Manousos said that the Service‟s decision not to allow milestone payments the same treatment both undercuts the benefits of the safe harbor and places the burden of documentation of the allocation of milestone payments back on the taxpayer. However, the IRS could ameliorate this outcome by modifying its regulatory definition of a success-based fee, said Manousos, adding that such a decision would likely take a while to occur. Timing of self-insured medical deductions A provision of the Health Care and Education Reconciliation Act of 2010 could provide a method for optimal accounting to self-insured taxpayers with incurred but not reported (IBNR) losses, said Manousos during the webcast. Effective for years beginning 3 after December 31, 2012, this provision eliminates the deductibility of retiree health costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage. Manousos said that the health care law provisions allow taxpayers to accelerate retiree medical costs to the year they were incurred, rather than paid, through a medical IBNR change. “That means that if in 2013 I receive a federal subsidy for retiree health costs, I get the subsidy but the costs are no longer deductible, Manousos told Bloomberg BNA in an interview following the webcast. “So if I can accelerate the deduction of those costs from 2013 into 2012, I‟m taking a non-deductible cost from 2013 to a deductible one in 2012.” The takeaway Despite speculation that Congress would allow some of the tax extenders to permanently expire after 2012, the Act renews most business and energy tax extenders through 2013. For example, the research credit, which enjoys significant support in Congress and from the President, was extended through 2013. While this is a welcome development, the fate of many of the extenders may ultimately be decided if and when Congress takes up comprehensive tax reform. Comprehensive tax reform remains a priority agenda item for Congressional tax writing committees. As a capital intensive industry benefiting from manufacturing and investment tax provisions, it is critical that corporate tax executives in the industrial products and services sector continue to monitor these events and plan accordingly for potential outcomes. Tax Legislative Outlook Our 2013 Tax Legislative Outlook report has been released. In this publication, PwC's Washington National Tax Services Practice offers a preview of the key tax policy issues facing the Obama Administration and Congress in 2013, including the outlook for tax reform, deficit reduction measures, and other tax policy matters of importance to today's business leaders. Coming soon Stay tuned for our 2013 Assessing tax report. This tax rate benchmarking study for industrial products and services companies is scheduled to be released in the spring of 2013. Let's talk: For a deeper discussion of how these issues might affect your business, please contact: Michael Burak (973) 236-4459 michael.burak@us.pwc.com Pam Olson (202) 414- 1401 pam.olson@us.pwc.com Don Longano (202) 414- 1647 don.longano@us.pwc.com Alan Fischl (202) 414-1030 alan.l.fischl@us.pwc.com George Manousos (202) 414-1543 george.manousos@us.pwc.com Phillip Galbreath (202) 414-1496 phillip.galbreath@us.pwc.com © 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers (a Delaware limited liability partnership), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. pwc