The document summarizes key points from a presentation on accounting and tax updates. It discusses opportunities and compliance requirements related to the new Tangible Property Regulations, including the ability to deduct previously capitalized repairs and make partial disposition elections. It also provides an overview of state budget balances and revenues in Kansas and Missouri.

1. 2014 KC CFO Breakfast Series
Quarter 4: 2014 Accounting & Tax Update
October 30, 2014
PRESENTED BY: CBIZ & MAYER HOFFMAN MCCANN PC

2. Agenda
•Welcome
•Tax Panel
–Tangible Property Regulations
–State and Local Taxes
–Tax Minimizing Strategies
–IRS Statistics & Other Interesting Tax Facts
•Accounting Updates
•Questions and Closing

3. Don’t Try This At Home…
The information in this presentation is a brief summary and may not include all the details relevant to your situation.
Please contact your CBIZ MHM service provider to further discuss the impact on your financial statements.

4. Tangible Property Regulations
Jo An Ketchum, Tax Director

5. Today’s Agenda
1.Background and current developments
2.Opportunities under the Tangible Property Regulations
3.Compliance with the Tangible Property Regulations
4.Nuances of the Tangible Property Regulations
5.Implementing the Tangible Property Regulations

6. BACKGROUND & CURRENT DEVELOPMENTS

7. Background
•The IRS has long been interested in getting some clarity in whether an expenditure related to tangible property should be:
–Capitalized: Fixed asset
–Deducted: Repair & maintenance or materials & supplies
•Tangible property includes real property (not just personal property).
•Up until 2006, this area was driven by Court cases
•In 2006 and then in 2008, the IRS issued proposed regulations which were highly criticized

8. Timeline of Regulations & Guidance
2011
2012
2013
2014
December 2011 Temporary regulations issued March 2012 Implementation guidance issued (Rev. Procs. 2012-19, 2012-20) November 2012 Implementation delayed to 2014 (optional adoption in 2012/2013 permitted) September 2013 Final regs. issued re: acquisition, production, improvements & repairs Proposed regs. issued re: dispositions January 2014 Implementation guidance on final regulations issued (Rev. Proc. 2014-16) February 2014 Implementation guidance on proposed regulations issued (Rev. Proc. 2014-17) August 2014 Final disposition regulations and related implementation guidance
Final rules must be followed beginning with 2014 tax years

9. Why Are These New Rules Important
•Example actions required many taxpayers:
–Review and validate current capitalization policies.
•Critical for de minimis safe harbor
–Consider tax accounting method changes for 2014 along with impact on taxable income.
–Consider annual tax return elections.
–Consider financial statement implications.
•Some book conformity required
•Effect on deferred taxes
–Evaluate materials and supplies accounting.
–Review prior year treatment of expenditures.

10. OPPORTUNITIES UNDER THE TANGIBLE PROPERTY REGULATIONS

11. Opportunities Under Tangible Prop. Regs.
Late Partial Disposition Election Routine Maintenance Safe Harbor De Minimis Safe Harbor
Previously Capitalized Repairs Depreciation Review / Other Beneficial Methods

12. Partial Disposition Election
•Under prior rules, if a taxpayer disposed of a portion of an asset (e.g., a roof that had been replaced), it had to continue to depreciate the old roof as well as the new one.
•Under the proposed regulations, a taxpayer can elect to dispose of a portion of an asset.
–Common examples: Roof, elevators, HVAC, engine of an airplane.
–May need a Cost Segregation study to determine a cost basis of disposed property, but regulations to provide some simplified methods to reasonably calculate.
–Write-offs should generate an ordinary deduction.

13. Late Partial Disposition Election
•The partial disposition provision is an annual election, i.e. generally only available in the year the asset is partially disposed of.
•Taxpayers have a limited opportunity to file an automatic accounting method change to make a late partial disposition election for assets partially disposed of in prior years.

14. Partial Dispositions – Examples
•Client acquired a building on 3/1/03, depreciable over 39 years
•Client spent $781,000 to replace some elevators in 2012/2013
Facts
•Client is making a late partial disposition election to write off approx $460,000 of undepreciated basis allocable to the original elevators
•Should result in nearly $200,000 tax benefit (Fed & State)
Results

15. Partial Dispositions – Examples
•Group of several restaurants
•Client had made numerous replacements over several years – HVACs, roofs, signage, ceilings, flooring, etc.
•10 – 12 replacements per restaurant
Facts
•20 late partial disposition accounting method changes
•Cumulative write-off approx. $500,000
•Tax savings approx. $200,000
Results

16. Partial Dispositions – Action Steps
•Review additions of real property (including land improvements) for additions in current and prior years.
•Determine if these additions were improvements or replacements of already existing capitalized real property or land improvements.
•If so, there may be a loss available under a partial disposition election.

17. Routine Maintenance Safe Harbor
•Maintenance taxpayer expects to perform more than once during asset’s ADS class life (or 10-year period of a building).
•Expenditures to keep unit of property in its ordinarily efficient operating condition.
–Example: Replacing parts
•Such expenditures can be immediately deducted.
•Automatic accounting method change to write off routine maintenance expenditures capitalized in previous years.

18. Routine Maintenance Safe Harbor- EX.
•Client manufactured and transported water purification chemicals
•Containers used to store chemicals reconditioned 2 – 3 times during their class lives (new valves, liners, etc.)
Facts
•Automatic accounting method change to write off $1 million of previously capitalized costs
•$400,000 tax savings
Results

19. De Minimis Safe Harbor
•De minimis safe harbor – an annual tax return election that permits a taxpayer to currently deduct otherwise capital expenditures (including materials & supplies) if the taxpayer:
–(1) has an “accounting policy” (as of the beginning of the tax year) that treats as an expense for book purposes (a) property that costs no more than a specified dollar amount, or (b) property with an economic useful life of 12 months or less and
–(2) elects to apply that policy for book purposes
•“Safe Harbor” avoids the issue in an IRS examination; however taxpayers can continue to use higher amounts but do not have protection of the safe harbor

20. De Minimis Safe Harbor cont…
Taxpayer with AFS
Taxpayer without AFS
Must have written capitalization policy
Must have accounting procedures (not required to be written)
Amount paid for property that does not exceed $5,000 per invoice (or per item as substantiated on the invoice) is eligible
Amount paid for property that does not exceed $500 per invoice (or per item as substantiated on the invoice) is eligible
• De minimis safe harbor – an annual tax return election that permits a taxpayer to currently deduct otherwise capital expenditures (including materials & supplies) if the taxpayer:

21. De Minimis Safe Harbor cont..
•If book policy is less than $5,000/$500 ceiling then the lower amount is the amount allowed for tax
–Ex. Taxpayer with AFS has $2,500 capitalization policy- Taxpayer can rely on the de minimis safe harbor for property up to $2,500
•If book policy is more than $5,000/$500 ceiling then the $5,000/$500 amount is the amount allowed for tax
–Ex. Taxpayer with AFS has $10,000 capitalization policy – Taxpayer can rely on the de minimis safe harbor for property up to $5,000

22. De Minimis Safe Harbor cont..
•The de minimis safe harbor is effective for tax years beginning on or after 1/1/14.
–Since the de minimis safe harbor requires the policy to be in existence at the beginning of the tax year, to utilize this rule the policy needed to be prepared in 2013 for 2014 tax years.
– Taxpayers without a policy on 1/1/14 should institute a policy in preparation for 2015.
•No provision to apply safe harbor in earlier years using an accounting method change.

23. De Minimis Safe Harbor cont..
•Gather an understanding of the accounting policy and determine if it satisfies the de minimis safe harbor regulation
–May need to modify policy to fit the regulation
•Ensure the book treatment is consistent with the tax treatment for items under the dollar ceiling.
•Attach the annual election to the timely-filed tax return.

24. Deducting Previously Capitalized Repairs
•Under the new rules concerning improvements to tangible property, taxpayers may have capitalized expenditures in the past that can now be deducted as repairs
•An automatic accounting method change allows the taxpayer to:
–Conform treatment of similar expenditures in the future to the new definitions
–Write off prior year expenditures that had been capitalized but that now qualify as repairs
Caution: Change goes both ways- could have to capitalize expenditures previously deducted as repairs

25. Depreciation Review
•Depreciation calculations have become increasingly complex over the last 10 years due to:
–50% or 100% bonus depreciation
–Expanded Sec. 179 expensing election
–15 year recovery for certain real property improvements
•A review of tax depreciation records may discover situations where assets have been under-depreciated.
–Natural extension of engagement to review fixed asset records for partial dispositions, previously capitalized repairs.
–May be able to catch up depreciation via automatic accounting method change.

26. NUANCES OF THE TANGIBLE PROPERTY REGULATIONS

27. Improvement and Unit-of-Property
•Improvements to buildings
–Determine if an expenditure to a building improves the building structure itself or a building system:
•HVAC,
•Plumbing systems
•Electrical systems
•Escalators
•Elevators
•Fire protection and alarm systems,
•Security systems,
•Gas distribution systems

28. Improvements & Unit-of-Property, cont.
•Improvements to personal property
–Functional interdependence is the test – the placing in service of one component is dependent upon the placing in service of another component.
–For plant property there is a smaller level to consider; need to measure the expenditure against each component that performs a discreet & major function.

29. Improvements to Tangible Property
•Critical tax compliance area
•What is a Capitalized Improvement vs. a Deductible Expense?
Capitalized Improvement
Betterment
Restoration
Adapt to New or Different Use

30. Improvements, cont..
•Betterment: In general, an expenditure is a Betterment and must be capitalized if it has a “material” impact on the unit-of-property.
–Improves a material defect, is for a material addition, or a material increase in capacity or quality.
•Restoration: In general, an expenditure is a Restoration and needs to be capitalized if:
–It is for the replacement of a major component or returns the unit-of-property to its ordinarily efficient operating condition after its class life.
•Facts of Circumstances, no bright-line tests but many examples in the Final Regulations.

31. Improvements, cont..
•Restoration examples in the regulations provide some interesting results of expenditures that do not need to be capitalized:
–Replacement of 30% (3 out of 10 units) of HVAC units does not involve a significant portion of the major component (all HVAC units) or a large portion of the physical structure of the unit (the HVAC system).
–Replacement of 30% of the wiring in a building electrical system is not a significant portion of the major component (all the wiring) or a large portion of the physical structure of the unit (electrical system).
–Replacement of 40% of the sinks (not the piping) in a building does not involve a significant portion of the major component (all the sinks) or a large portion of the physical structure of the unit (the plumbing system).

32. Improvements, cont..
•Restoration examples continued
–Replacing 10% of the floors in a building does not involve either a significant portion of the major component (all the floors) or a large portion of the physical structure of the building structure (the unit)
•On the other hand, replacing 40% of the floors in a building does involve replacement of a significant portion of the major component (all the floors)
–Replacement of 25% of the elevators in a building does not involve a significant portion of a major component (as each elevator does not perform a discrete and critical function) or a large portion of the physical structure of the unit (the elevator system)

33. Improvements – Actions Steps
•Significant expenditures from prior years should be reviewed:
–Previously deducted expenditures: look at all open tax years.
–Capitalized items: look at any fixed assets currently on the tax depreciation records.
•Taxpayers can apply these new rules to prior year expenditures
–An accounting method change may be allowed whereby the taxpayer can currently write off that capitalized amount from the prior year since under these new rules it could be a deductible expense (and vice versa).

34. COMPLIANCE WITH THE TANGIBLE PROPERTY REGULATIONS

35. Other Compliance Issues
•Other situations may require accounting method changes:
–To capitalize improvements that don’t qualify as repairs (or qualify for safe harbors) under new rules
–To conform to definition of, and rules for, materials and supplies:
•Deducting incidental supplies in year purchased
•Deducting non-incidental supplies in year consumed
•$200 threshold (may not be necessary if using de minimis safe harbor)
–To conform to unit of property definition

36. Benefits of Filing Accounting Method Changes under Current Guidance
•Automatic change
–No user fee
–Due with tax return vs. at end of tax year
•Audit protection for years prior to year of change.
•Waiver of scope limitations that typically apply to taxpayers under exam or who have made similar changes within last 5 years.
•Some positive & negative 481(a) adjustments don’t need to be netted.

37. IMPLEMENTING THE TANGIBLE PROPERTY REGULATIONS

38. Strategic Tangible Property Analysis
•Comprehensive, multi-phase engagement to help taxpayers comply with, and take advantage of, all provisions of the tangible property regulations.
•Phases
–Assessment
–Detailed Analysis
–Implementation

39. Timeline of Implementation
January 1 Capitalization policy must be in place to use de minimis safe harbor March 15 / April 15 2013 tax return filing deadline for early adopters of method changes / elections September 15 Extended 2013 tax return filing deadline for early adopters of method changes / elections January 1 Capitalization policy must be in place to use de minimis safe harbor March 15 / April 15 2014 tax return filing deadline for final adoption of method changes September 15 Extended 2014 tax return filing deadline for final adoption of method changes
2014
2015

40. Summary
•These rules may provide opportunities for tax deductions.
–Requires analysis of various policies, procedures, records…
–2014 tax year is a must implementation year.
–Limited time to search for deductions for prior year capitalized expenditures.

41. Summary Cont.
•Some of these rules will require filing if one or more Forms 3115 (Application for Change in Accounting Method) or attach annual elections to their tax returns.
•Form 3115 is used to request an Automatic Change.
–Original Form 3115 is filed as an attachment to the income tax return and a copy sent to the IRS.
•Critical to take advantage of the automatic change provisions now to avoid risk of IRS making changes.

42. The Time is NOW!
Expectation is that after the transition period for making these changes (tax years beginning 1/1/15) the IRS will begin heavy examination activity in this area
Compliance is REQUIRED by the end of 2014
Some opportunities are for a LIMITED TIME only

43. State and Local Taxes
Michael Moore, Managing Director

44. State General Fund Balance
Kansas1
Missouri2
FYE 2009
66,492,000
1,258,241,000
FYE 2010
1,000
1,202,095,000
FYE 2011
227,911,000
1,415,751,000
FYE 2012
540,340,000
1,163,593,000
FYE 2013
764,786,000
1,446,419,000
FYE 2014
435,269,000
1,167,990,0003
1Department of Administration accounting records with the Office of Chief Financial Officer, Audit & Assurance, Finance Integrity Team.
2Missouri Office of Administration, Division of Accounting, Fiscal Year Comprehensive Annual Financial Reports (for each fiscal year noted).
3Missouri Office of Administration, Division of Accounting, Financial Summary – All Funds – June 30, 2014 (estimated).

45. State Revenues (net) v. Budget (billions)
Actual
Budget
Variance
Percent
Kansas1
FYE 2013
$6,341,125
$6,250,414
$90,711
101.45%
FYE 2014
$5,653,197
$5,986,481
($333,283)
94.43%
FYE 2015 (September)
$1,350,571
$1,374,040
($23,469)
98.29%
Missouri2
FYE 2013
$8,082,688
$7,691,700
$390,988
105.08%
FYE 2014
$8,003,289
$8,310,500
($307,211)
96.30%
FYE 2015 (September)
$2,026,897
NA
Increase of $80 M from PY
4.1% Increase
1Kansas Division of the Budget, Comparison Report (for each fiscal year noted)
2Missouri Office of Administration, Division of Accounting, Fiscal Year Comprehensive Annual Financial Reports.

46. Population and Growth Projections
Kansas1
Missouri2
2000
2,688,824
5,596,687
2005
2,745,299
5,781,293
2010
2,853,118
5,979,344
2015
2,916,705
6,184,390
2020
3,003,691
6,389,850
2025
3,071,541
6,580,868
2030
3,137,345
6,746,762
1U.S. Bureau of the Census, Statistical Abstract of the United States, various issues; Population Division (2014); CEDBR, Wichita State University.
2Missouri Office of Administration, Budget and Planning

47. Unfunded Pension Liability (in billions)
Kansas
Missouri
Moody’s (2013) 1
$2.8
$6.5
State Budget Solutions (2013)
$32.9
$72.7
Milliman Public Pension Funding Study (2012)
$9.2
$9.3
Harvard Kennedy School (2012)
$25.7
$61.6
1Moody’s Investors Service, Median Report: Adjusted Pension Liability Medians for US States, June 27, 2013.
2State Budget Solutions, Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers, September 3, 2013
3Milliman, Inc., Milliman 2013 Public Pension Funding Study, 2013
4Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government, Underfunded Public Pensions in the United States; The Size of the Problem, the Obstacles to Reform and the Path Forward, 2012

48. Personal Income Tax Rates (2014)
Kansas
Missouri
Married filed jointly
■ taxable income not over $30,000: 2.7 %
■ taxable income over $30,000: $810 plus 4.8% of excess over $30,000
1½% on the first $1,000, plus ½% for every $1,000 increment up to $9,000. Then 6% on Missouri taxable income exceeding $9,000.
Residents, other
■ taxable income not over $15,000: 2.7%
■ taxable income over $15,000: $405 plus 4.8% of excess over $15,000
Same for all individual taxpayers.

49. Kansas Income Exclusion
Kansas now provides a subtraction modification for three categories of income. By allowing these three categories of income to be subtracted from federal adjusted gross income to calculate Kansas adjusted gross income, this income is made exempt from Kansas income tax (and they are cumulative, not exclusive.
Categories are:
(1)income that is net profit from a business (e.g. “flow-through”);
(2)income from certain entities or of certain types; and
(3)farm income.

50. Kansas Personal Income Tax Revenues
Actual1
Budget1
Variance
FYE 2012
$2,908,029,408
$2,955,000,000
($46,970,592)
FYE 2013
$2,931,167,870
$2,862,181,000
$68,986,870
FYE 2014
$2,218,238,892
$2,525,000,000
($306,761,108)
1st Qtr. 2015
$524,367,067
$578,000,000
($53,632,936)
1Kansas Division of the Budget, Consensus Revenue Estimates (for each fiscal period noted)

51. STATE INCOME APPORTIONMENT

52. Nexus for State Income Tax
Nexus is the connection between the corporate activity and the taxing state that allows the state to impose its taxes on an entity. Any one of the following activities may establish nexus:
1)Owning or leasing property or employing capital or property in the state;
2)Having employees in the state; or
3)Deriving income from sources in the state.
The Interstate Income Tax Act (P.L. 86-272) places restrictions on the imposition of a state income tax (but not other taxes). It provides that mere solicitation is not enough to establish nexus for corporate net income tax purposes.

53. Sourcing Sales of Tangible Personal Property (TPP)
Delivery Address
State Imposes No Income Tax

54. Throwback Rule Implications
Many states provide that the sale of tangible personal property that is shipped from an office, store, warehouse, factory, or other place of storage within their jurisdiction is “thrown back” to their state if the taxpayer is not taxable in the state of the purchaser.
Sales to the United States government sometimes fall in this category as well.

55. Joyce v. Finnigan Implications
Throwback of sales is also complicated by reporting requirements of combined filing unitary states and the definitions of “taxpayer”. Joyce counts throwbacks on a separate company basis. Finnigan counts throwbacks on a combined reporting or unitary method.
The terms "Joyce" and "Finnigan" come from two court cases in California, Appeal of Joyce, Inc., Cal. State Bd. of Equalization, Nov. 23, 1966, Dkt. No. 66-SBE-070 and Appeal of Finnigan, Cal. State Bd. of Equalization, Aug. 25, 1988, Dkt. No. 88-SBE-022, on reh'g, Jan. 24, 1990.
As a perfect example of complexity, California initially followed the Joyce rule, then later switched to the Finnigan rule, then back to Joyce, and effective January 1, 2011, back to Finnigan.

56. Throwback Rule (TPP Sales)
Throwback Rule/ Finnigan
State Imposes No Income Tax
Throwback Rule Not Available
Throwback Rule/ Joyce

57. Sourcing Sales of Services
Market Based
State Imposes No Sales/Use Tax
Cost of Performance

58. Industries with “Unique” Apportionment
•Airlines
•Construction Contractors
•Financial Institutions
•Insurance Companies
•Mutual Fund Service Providers
•Pipelines and Natural Gas
•Professional Sports
•Railroads
•Regulated Investment Companies
•Telecommunication Companies
•Trucking Companies
•TV and Radio Broadcasting

59. NATIONAL SALES TAX ACTIVITY

60. Total State Spending by Fund Source1
1State Expenditure Report, Examining Fiscal 2011-2013 State Spending, National Association of State Budget Officers

61. Sales Tax Revenue v. Retail Sales
Retail Sales
Sales Tax
Percent
1990
2,000,000
154,000
7.70%
2000
3,287,537
252,147
7.67%
2010
4,307,947
344,522
8.00%
2012
4,869,032
378,288
7.77%
2013
5,066,255
392,715
7.75%
This chart provides U.S. retail sales and total sales tax collections. Amounts are in millions of dollars and were taken from the U.S. Bureau of the Census’ on-line information portal.
If the 8.00% rate average for 2010 is considered with the 2012 and 2013 retail sales, the result is a decline in sales tax revenue of $11,198,773,600 and $12,665,637,500 respectively.

62. Implications – Click Through Nexus
• A click-through nexus policy requires sales and use tax be collected and remitted by out-of-state vendors that compensate residents of that state for sales made via links on their websites.
• Conclusions of nexus in this arena often ignore Due Process, the Commerce Clause, various judiciary rulings (state and federal) and sometimes the state’s own statutes.

63. “Click Through” Nexus (With Caveats)
Nexus
State Imposes No Sales/Use Tax
Nexus May Exist

64. Internet Tax Freedom Act (“ITFA”)
•Federal law passed in 1998 that prevents federal, state and local governments from taxing internet access (the service; not applicable for sales occurring over the internet).
•Some states had already implemented sales/use taxes on these types of transactions, and those were grandfathered in.
•Current expiration is November 1, 2014…

65. Marketplace and Internet Tax Fairness Act (“MFA”)
•Passed in Senate in 113th Congress on 5/6/13. Authorizes states to require that all sellers not qualifying for the small seller exception to collect and remit sales and use taxes on remote sales.
–Small Seller Exception – gross annual receipts in the U.S. in the preceding year less than $1,000,000.
No other taxes are considered for this compliance. Not passed in the House.

66. Lame-Duck Session
•Senate Majority Leader harry Reid (D-Nev.) has implied that he will do “whatever it takes to get that done.”
•Supporters are trying to pair MFA and ITFA.
•Speaker John Boehner (R-Ohio) and House Judiciary Committee Chairman Bob Goodlatte (R- Va.) oppose MFA in its current form.

67. Tax Minimization Strategies
Kathy Rhodes, Tax Managing Director

68. Domestic Production Activities Deduction (DPAD)
•Available to qualified taxpayers and limited to lesser of 9% of taxable income or qualified production activities income (QPAI) or 50% of W-2 wages related to qualified production activities.
•Qualified Production Activities Income is equal to the taxpayer’s domestic production gross receipts less cost of goods sold and allocable other deductions.

69. DPAD
•Domestic Production Receipts (DPGR)
–Derived from sale, lease, rental, license of qualifying production property that is manufactured, produced, grown or extracted by the taxpayer in whole or significant part within the U.S.
–Construction of real property in the U.S. by a taxpayer engaged in the active conduct of a construction trade or business.
–Engineering or architectural services performed in the U.S. with respect to the construction of real property in the U.S.

70. DPAD
•Qualifying production property (QPP) is any tangible personal property, computer software or sound recordings.
•Manufactured, produced, grown or extracted (MPGE) includes:
–Manufacturing, producing, growing, extracting, installing, developing, improving and creating QPP.
–Making QPP out of scrap or salvage, as well as new raw material.
–Cultivating soil, raising livestock, fishing and mining minerals.

71. DPAD
•The “in significant part” requirement is met if the MPGE is substantial in nature, including relative value added by the taxpayer.
–Safe harbor – if the taxpayers U.S. conversion costs (direct labor and overhead) are 20% or more of the total cost of goods sold.
–Overhead includes costs required to be capitalized under UNICAP (263A).
–Does not include R&D.

72. QPAI
•DPGR less COGS and allocable other costs.
•DPGR required to be calculated on an item-by-item basis.
–Generally does not include receipts for the performance of services, unless embedded services and not charged for separately.
–All receipts can be DPGR if non-DPGR are less than 5% or total receipts.

73. QPAI
•DPGR excluded receipts:
–Sales to related parties.
–Retail food and beverages.
–Gross receipts from sale, lease or rental of land.
–Gross receipts from services, except for embedded services.

74. Research & Development Credit
•Expired in 2013 – legislation pending to extend.
•Can claim on amended returns for prior open years.
•Is calculated separately for incremental credit and credit for contract research payments.
•Component of general business credit so carries back and forward.

75. R&D Credit
•Calculated based on in-house research expenses and contract research expenses.
•In-house research expenses include wages for employees involved in research, supplies used in research, and payments for computer time used in research.
•Contract research expenses are paid to an unrelated party to perform research and count at 65% of the cost.

76. R&D Credit
•Qualified research expenditures
–Experimental or laboratory sense,
–For purpose of discovering information technical in nature and to develop a new or improved business component; and
–Substantially all of activities which constitute a process of experimentation,
–Includes development of pilot model, process, formula, invention or similar property.

77. R&D Credit
•Incremental credit – 20% of qualified research expenditures (QRE) over a base amount.
–Base amount is fixed base % times average of last 4 years annual gross receipts.
–Fixed base % is based on 1984-1988 if in existence.
–Fixed base % starts at 3% for startups after 1994 and is calculated in later years.

78. R&D Credit
•Alternative Simplified election – 14% of qualified research expenditures exceeds 50% of the prior 3 year average qualified research expenditures.
•Annual election to claim smaller credit and no reduction to R&D expense deduction.
•Tier 1 audit issue.

79. Other Federal Credits
•Small Employer Health Credit (Sec. 45R)
–Eligible small employers with less than 25 employees and meeting certain wage limitations and phases out for more than 10 employees.
–Employer makes non-elective contribution to qualified health plan (must be exchange in 2014).
–Only available for 2 consecutive years after 2013.
–Credit is generally 50% (30% for tax-exempts) of amount paid to qualified health plan.

80. Other Federal Credits (cont’d)
•Work Opportunity Credit – expired in 2013 but legislation pending to reinstate.
•Qualified workers previously included veterans, ex- felons, qualified SSI recipients, qualified needy recipients, long-term out of work individuals and long- term family assistance recipients.
•Consider continuing to qualify workers in classes that qualify.
•Must be screened prior to starting work.

81. Other Federal Incentives
•Section 179D – Energy Efficient Commercial Buildings Deduction expired in 2013, but legislation pending.
–A deduction is available for energy efficient commercial building property that meets certain 50% or more energy reduction standards.
–Applies to interior lighting systems; heating, cooling, ventilation or hot water systems; or the building envelope.

82. Other Federal Incentives (cont’d)
•Section 179D provides for a deduction up to $1.80 per square foot ($.60 per system if not all qualify as energy saving).
•Deduction claimed by owner but must reduce depreciable basis.
•However, can be claimed by designer of building on certain government owned buildings.
•Subject to recapture rules.
•Can be claimed on amended returns.

83. Interest Charge Domestic International Sales Corporation (IC-DISC)
•Tax savings opportunity for domestic sellers of U.S. manufactured, grown or extracted property for foreign destination sales.
•Sale must be ultimately to a foreign destination.
–Distributors qualify.
–Sales to distributors who can provide details on ultimate destination qualify for the manufacturer.

84. IC-DISC
•IC-DISC must be a C corporation.
•Must make timely election.
•Must at all times meet certain requirements, including:
–95% of all sales are qualified export receipts
–95% of all assets are qualified export assets

85. IC-DISC
•IC-DISC is not taxable and shareholders are taxable on distributions of the IC-DISC which allows for a potential 20% tax savings.
•If accumulated income not distributed, can be interest charge or can disqualify the IC-DISC.

86. IC-DISC
•Savings achieved by manufacturer or distributor paying commission to IC-DISC.
•IC-DISC does not pay tax and shareholder receives taxable dividend distribution from IC-DISC.
•As a result, manufacturer/distributor gets a deduction for commission at ordinary rates and shareholder then has dividends taxed at dividend rates – overall group saves up to 20%.

87. IC-DISC
•Example
Manufacturer Total Sales
$35,000,000
Manufacturer Foreign Sales
$6,000,000
Manufacturer COGS
10,000,000
COGS for Foreign Sales
1,800,000
Manufacturer Wholly US Expenses
3,000,000
Allocable Foreign Other Expenses
3,428,571
Manufacturer Other Expenses
20,000,000
Foreign Taxable Income
$771,429
Manufacturer Taxable Income
$2,000,000
Commission Options
4% of Foreign Sales
$240,000
50% of Combined Profit
$385,714
Potential Tax Savings
$77,143

88. Other International Considerations
•Companies expanding significantly and willing to leave money off-shore can structure global organization to lower overall global tax burden.
•Controlled foreign corporation planning.
–Certain income can be deemed repatriated
–Required reporting
•Other required foreign reporting considerations.

89. State Incentives
•Both states attempting to reduce or restructure state tax incentives.
•Kansas significantly revamped state incentives over last several years and have eliminated or reduced applicability of some programs.
•Missouri has consolidated some of its popular incentive programs into one new program to compete.

90. State Incentives
•Promoting Employment Across Kansas (PEAK), provides for potential retention of employee withholding by company if certain requirements are met.
•High performance Incentive Program (HPIP) provides for sales tax exemption and potential investment and training credits to certain businesses significantly expanding and paying greater than average wages to employees.
•Employer health insurance contribution credit for certain amounts paid on behalf of eligible employees for health insurance in a small plan or contributions to HSA’s – C- Corps only.

91. State Incentives (Kansas cont’d)
•PEAK
–New employees of a Kansas qualified company
•New employees include relocated employees from out of state
•Must be Kansas employees not leaving the state (i.e. transportation or delivery)
• Greater than 20 hours per week
–Qualified company makes available to full-time employees adequate health insurance and pays at least 50% of the premiums

92. State Incentives – Kansas (cont’d)
•HPIP
–Employer must pay above average wages to its employees.
–Make a significant investment in the training of employees.
–Be either a manufacturer or able to document that most of its sales are to Kansas manufacturers and/or out-of-state businesses or government agencies.
–A headquarters or back-office operation of a national or multi-national corporation can qualify.

93. State Incentives - Missouri
•Missouri Works Program
–Must be applied for before publicly announced, employees hired, or any site work is started.
–Allows for employer retention of employee’s withholding for a period of years if creates new jobs:
•10 or more new jobs and 90% or more of average wage.
•2 or more new jobs, 90% or more of average wage and adding $100,000 of investment.
•2 or more new jobs in enterprise zone, 80% or more of average wage and $100,000 of investment.

94. State Incentives – Missouri (cont’d)
•Missouri Works Training Program
–Train net new or existing employees (or both) over a 12 month period.
–Training topics should be job specific but can now also include OSHA and customer service training.
–Capital investment should equate to 20% or more of total request (e.g. $100k in investment for $20K training grant request).
–Funding typically capped at $50,000 per project, with average award of about $15,000 per project.

95. IRS Statistics & Other Interesting Tax Facts
Jeff Stolper, Senior Associate

96. Number of Returns Filed
C or other Corp
2,248,000
S Corp
4,566,000
Partnership
3,683,000
Individual
145,996,000
Estate and Trust
3,192,000
Tax Exempt
1,463,000

97. How Were They Filed?
•Paper – 10,036,510
•Electronically – 151,114,490

98. Collections By Type of Tax
Business Income Taxes
Individual, Estate and
Trust Income
Employment Taxes
Estate and Gift Taxes
Excise Taxes
Amount
$ 270,424,731,000
$ 1,250,130,812,000
$ 891,471,426,000
$ 18,782,819,000
$ 59,895,910,000

99. Examination Coverage
•Types of Exams
–Correspondence Audit
–Office Audit
–Field Audit

100. C Corp Returns
•Under $250,000 in assets – 0.8%
•$250,000 - $1,000,000 in assets – 1.3%
•$1,000,000 - $10,000,000 in assets – 1.5%
•Over $10,000,000 in assets – 15.8%

101. Nontaxable Returns
•Partnership Returns – 0.4%
•S Corp Returns – 0.4%

102. Individual Returns
•Less than $200,000 Total Income
–No Schedule C, E or F – 0.4%
–With Schedule C, E or F – 1.0%
•$200,000 - $1,000,000 of Total Income
–Non-Business Returns – 2.5%
–Business Returns – 3.2%
•Over $1,000,000 of Total Income – 10.8%

103. QUESTIONS ???

104. Accounting Update
Mark Winiarski, Senior Manager

105. Agenda
•Financial Reporting Changes for 2014
•Private Company Accounting
•Look to the Horizon – Accounting in the Next Year

106. FINANCIAL REPORTING CHANGES FOR 2014

107. New Standards Everywhere
•For calendar year end private companies, there are:
–Eight standard effective for December 31, 2014 financial statements.
–15 standards effective for periods after December 31, 2014, but that can be early adopted.
–An additional two standards effective for periods after December 31, 2014.
The standard setters are probably not done yet…

108. Reclassifications from Accumulated Other Comprehensive Income (AOCI)
•Private Companies will now be required to:
–Present parenthetically in the income statement or disclose amounts that are reclassified in full from AOCI to the income statement.
–Disclose information about items that are reclassified to the balance sheet prior to affecting the income statement, such as amortization of defined benefit pension items.

109. Internal Controls: COSO 20 Years in the Making…
The 1992 COSO framework is superseded as of December 15, 2014.

110. Control Environment
Risk Assessment
Control Activities
Information & Communication
Monitoring Activities
Update articulates principles of effective internal control
1.Demonstrates commitment to integrity and ethical values
2.Exercises oversight responsibility
3.Establishes structure, authority and responsibility
4.Demonstrates commitment to competence
5.Enforces accountability
6.Specifies suitable objectives
7.Identifies and analyzes risk
8.Assesses fraud risk
9.Identifies and analyzes significant change
10.Selects and develops control activities 11. Selects and develops general controls over technology
12.Deploys through policies and procedures
13.Uses relevant information
14.Communicates internally
15.Communicates externally
16.Conducts ongoing and/or separate evaluations
17.Evaluates and communicates deficiencies

111. Update describes important characteristics of principles, e.g.,
•Points of focus may not be suitable or relevant, and others may be identified
•Points of focus may facilitate designing, implementing, and conducting internal control
•There is no requirement to separately assess whether points of focus are in place
Control Environment
1.The organization demonstrates a commitment to integrity and ethical values.
Points of Focus:
•Sets the Tone at the Top
•Establishes Standards of Conduct
•Evaluates Adherence to Standards of Conduct
•Addresses Deviations in a Timely Manner

112. Update describes how various controls effect principles, e.g.,
Control Environment
1. The organization demonstrates a commitment to integrity and ethical values.
Component
Principle
Controls embedded in other components may effect this principle
Human Resources review employees’ confirmations to assess whether standards of conduct are understood and adhered to by staff across the entity Control Environment
Management obtains and reviews data and information underlying potential deviations captured in whistleblower hot- line to assess quality of information Information & Communication
Internal Audit separately evaluates Control Environment, considering employee behaviors and whistleblower hotline results and reports thereon Monitoring Activities

113. •If 1992 Framework has been appropriately applied to each of the five components of internal control, the transition should not result in significant changes or incremental efforts.
•Mapping of principles to controls (using points of focus) may reveal “gaps” in design.
•A fresh look may reveal opportunities to re-design or remove controls to enhance effectiveness or efficiency.
•Points of Focus should assist in the mapping, evaluation and controls identification process.
If you use COSO…

114. PRIVATE COMPANY ACCOUNTING

115. Private Company Accounting Alternatives within US GAAP
The Private Company Council (PCC) has two principal responsibilities:
The PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.
The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

116. Without the Alternative
• Goodwill is indefinitely lived
• Three-step impairment test performed annually at the reporting unit level:
1.Optional qualitative assessment
2.Fair value test of the reporting unit
3.Measurement of impairment loss
With the Alternative
•Elect to amortize goodwill
•10 year period (or shorter)
•Amortize all goodwill
•Simplified impairment test only if a triggering event occurs
•Elect to perform the impairment test at the entity or reporting unit level
ASU 2014-02 Accounting for Goodwill

117. •Must amortize all goodwill, including goodwill arising from an equity method investment.
•Must elect whether to perform an impairment test at the entity or reporting unit level.
•Must determine the amortization period.
•Evaluate whether an impairment test is required for the year of adoption.
•Additional disclosure.
Goodwill - Requirements and Elections
117

118. Goodwill - Implementation Challenges
Evaluating the impact of amortization on covenants and other contracts
Determining the amount of goodwill related to an equity method investment
Allocating the impairment loss when it occurs
Potential reversal of the election if your company no longer qualifies as a Private company as defined for accounting purposes.

119. U.S. GAAP Today
•Contemporaneous documentation of the hedge
•Required effectiveness testing
•Fair value
With the Alternative
•Documentation of six criteria before the end of the reporting period
•Elect to record and disclose the swap at settlement value instead of fair value
ASU 2014-03 Simplified Hedge Accounting

120. The standard may be adopted for interest rate swaps that meet the following criteria:
1.Debt (hedged cash flows) and swap use the same index and reset period.
2.“Plain-vanilla” swap, any floor or cap on the variable interest rate of the swap must be comparable to the same term in the debt.
3.Re-pricing and settlement match or differ by no more then a few days.
4.Fair value of the swap at inception is at or near zero.
5.Swap notional value is equal to or less then the principal of the related debt.
6.All interest payments occurring on the borrowing during the term of the swap are designated as hedged whether in total or in proportion to the amount being hedged.
Simplified Hedge Accounting - Requirements
120

121. Swaps - Implementation Challenges
121
Must meet very specific criteria to use this accounting alternative. Only allowed for certain plain-vanilla interest rate swaps
If entity plans on changing the instrument or major terms of the instrument in the future, should think about whether this alternative should be elected
The election may need to be reversed if an entity becomes a public entity

122. Variable Interest Entity and Common Control Leasing Arrangements (ASO 2014 -01)
•The accounting alternative permits the following:
–A qualifying private company does not have to evaluate a qualifying lessor entity for consolidation under the VIE model.
–The alternative is applied to all qualifying lessor entities.
–Applied retrospectively -> restate prior financial statements for the effect of the election.
–Include enhanced disclosures.

123. Requirements:
–The lessor entity and the private company are under common control,
–The private company has a lease arrangement with the lessor entity,
–Substantially all the activity between the two entities is related to the leasing activities between the two entities; and
–If the private company explicitly guarantees or provides collateral for obligations of the lessor entity, then the principal amount of the obligation must be less then the value of the asset at inception of the guarantee.
Variable Interest Entity and Common Control Leasing Arrangements
123

124. VIE – Implementation Challenges
124
Evaluating the impact of the adoption on financial covenants, contracts and expectations of users of the financial statements.
Evaluating common control and whether the value of the collateral property is greater than the principal of a debt obligation of the lessor guaranteed by the reporting entity.
Computing the impact of other applicable US GAAP over multiple periods.

125. Business Combinations
•FASB is considering an accounting alternative that will permit a private company to not recognize the following intangible assets in a business combination:
–Non-competition agreements
–Customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business
•Mortgage servicing rights, commodity supply contracts and core deposits would be recognized

126. AICPA Alternative
The American Institute of Certified Public Accountants (AICPA) is a professional organization representing CPAs.
The AICPA has published its own Financial Reporting Framework (FRF) for Small to Medium-Sized Entities (SME).

127. FRF for SME is separate from US GAAP & PCC
FRF for SMEs
•Not GAAP – Special Purpose Framework
•Complementary to efforts by FAF’s PCC – AICPA fully Supports the work of the PCC, FAF and FASB to address the private company environment
Private Company Council
•GAAP
•Modify GAAP for private companies

128. LOOK TO THE HORIZON – ACCOUNTING IN THE NEXT YEAR

129. Simplification
•Short term projects designed to reduce complexity in accounting standards:
–Narrow in scope.
–Improve or maintain the usefulness of information.
–Reduce costs and complexity in financial reporting.
If issued as final standards you may have the option to early adopt for December 31, 2015

130. Simplification
Proposal (Project)
Expected Impact
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Item.
Removes the need to evaluate whether an event should be classified as an extraordinary item.
Simplifying the Subsequent Measurement of Inventory.
Change Lower of Cost or Market to be Lower of Cost or Net Realizable Value.

131. Simplification
Proposal (Project)
Expected Impact
Simplifying the Presentation of Debt Issuance Cost
Include debt issuance cost as a contra liability in debt instead of an amortizable asset
Simplifying the Measurement Date for Plan Assets
For non-calendar period ends (i.e. 12/25) permits the use of the end of the month (i.e. 12/31) for measurement of plan assets

132. Simplification
Proposal (Project)
Expected Impact
Simplifying the Balance Sheet Classification of Debt
Modify the rules based approach to a principle based on contract terms and covenant compliance
Simplifying accounting for Share-Based Payment
Narrow scope simplification in the accounting for share based compensation

133. Simplification
Proposal (Project)
Expected Impact
Accounting for Income Taxes: Intra-Entity Asset Transfers.
Eliminates the prohibition on recognizing taxes for transfers of assets between jurisdictions.
Accounting for Income Taxes: Balance Sheet Classification of Deferred Taxes.
Eliminate the requirement to classify deferred taxes and current and non-current and instead require presentation as non-current.

134. New Revenue Recognition Guidance (ASU 2014-09)
An entity should recognize revenue to depict the transfer of promised goods, or services, to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services.

135. Five-Step Process
1
•Identify the contract(s) with a customer.
2
•Identify the performance obligations in the contract.
3
•Determine the transaction price.
4
•Allocate the transaction price to the performance obligations in the contract.
5
•Recognize revenue when (or as) the entity satisfied a performance obligation.

136. Revenue Recognition
Effective for Calendar Year Entities:
Public: December 31, 2017
(early adoption not permitted)
All others: December 31, 2018
(early adoption permitted up to the date of public companies)
Why are we talking about this for next year?

137. Deciding how to transition
•Retrospective
–Restate the prior year financial statements presented
•Apply the new guidance to 2017 sales (and earlier if contracts extend over multiple years)
•Have the 2017 sales audited
•Modified Retrospective
–Adjust beginning equity in the year of adoption
–Disclose what the revenues and expenses would have been had you not adopted the standard (i.e. calculate and audit revenues twice for 2018)

138. Revenue Recognition – Why 2015?
Start turning over those rocks now so there are no surprises in on January 1, 2018.
If you start to talk about it in 2015, you can plan in 2016 and work on implementation in 2017
2015
•Learn about the new standard
2016
•Plan how you will adapt
2017
•Work on implementation
2018
•Implement!

139. What could be under those rocks?
•New patterns of revenue recognition
–New evaluations of variable consideration
–Identification of new performance obligations
•Discover changes that could be needed in:
–Accounting for expenses
–Terms of contracts
–Compensation arrangements
–Processes and Internal Controls
–Computer Systems
–Reporting/disclosure (disclosures, taxes, etc)

140. A Team Approach
•Establish a team to determine how it impacts your business:
–C-Suite Champion
–Accounting
–Financing
–Sales
–Information Technology
–Legal
–Tax

141. Going Concern (ASU 2014-14)
•For annual periods ending after December 15, 2016 management must evaluate if conditions and events, in aggregate, indicate it is probable that the entity will be unable to meet its obligations as they come due within one year after the date the financial statements are issued (available to be issued)

142. Consolidation - Principle vs. Agent
•Expected to be issued soon.
•All entities will need to re-evaluate entities in which they hold a variable interest upon adoption.
–Removes the deferral from the VIE model for investment companies, but scopes out money market funds.
–Expected to expand the number of limited partnerships that are considered VIEs.
–Narrows the circumstances when a decision maker fee/service arrangement is a variable interest.
–Modifies the related party rules.

143. Leasing
•Final standard issued in 2015?
–Lessees will capitalize leased assets and liabilities on virtually all leases
–Lessors may experience little change from current practice

144. Additional Information
•Contact your CBIZ & MHM service provider
•Explore our thought leadership publications at www.mhmcpa.com
•Attend our Fourth Quarter Accounting update webinar on 12/11/14 & 12/16/14

145. QUESTIONS ???

146. PRESENTER INFORMATION
Jo An Ketchum Tax Director 913.234.1084 jrketchum@cbiz.com
Michael Moore Managing Director 913.234.1278 mmoore@cbiz.com
Jeff Stolper Senior Associate 913.234.1879 jstolper@cbiz.com
Kathy Rhodes Managing Director 913.234.1017 klrhodes@cbiz.com
Mark Winiarski Senior Manager 913.234.1656 mwiniarski@cbiz.com