4. Page 4
What is Quantitative Services (QS)?
► The QS practice is focused on assisting clients with
application of federal tax regulations and laws to their
specific facts and businesses in the following technical
areas:
► Tangible Property Regulations
► Research Credit services
► Accounting Methods
► Inventory
► Section 199 Domestic Manufacturing Deduction
► Transaction Costs
► Meals & Entertainment
► Capitalization and Depreciation
5. Page 5
What makes a good QS target?
► Any company is a good target!
► Taxpayers
► Companies coming out of an NOL position
► Companies that need to clean up exposures and risks
► Companies that want to decrease ETR
9. ► Compliance
► Verify compliance with capitalization rules/regulations.
► IRS can challenge the company’s position:
► IRS Audit
► Company Exposure
► Efficiency
► Improve financial reporting capabilities through greater predictability and
timeliness.
► Substantial time savings in calculation preparation and record-keeping
processes.
Why is this important?
10. Page 10
Potential Opportunities
► Taxpayers that capitalize
accounts that are
excludible for tax
purposes.
► Ex. Warranty, Freight out,
R&D costs, etc.
Negative 263A Costs
12. Page 12
Purpose of the Credit
► Established to encourage U.S. businesses to increase
investments in developing new and improved
technologies, products, and processes.
► Goal was to make U.S. companies more competitive
through creation of technologically improved products and
processes and to encourage businesses to increase their
R&D spending.
13. Page 13
Summary of Research Credit Rules
► Qualifying research expenses
► Wages
► Supplies
► Contract research expenses
► Four-Part Test
► Technical Uncertainty
► Process of Experimentation
► Technological in Nature
► Functional Development
14. Page 14
Opportunities Related to R&D
1
Requirements NON-Software Software
Innovative test
Significant economic
risk test
Not commercially
available test
Non internal-use
software
Dual function software
R&D Credit
Opportunities (IRC §41)
3
3
Technological in nature
Process of
experimentation
New or improved
functions
Technical uncertainty
R&D Credit
Opportunities
(IRC §41)
Internal-use software
R&D Credit
Opportunities (IRC §41)
Proposed
Regulations
Deductible software
development costs
Rev. Proc. 2000-50
Deductible Expense
(IRC §174)
15. Page 15
Existing Clients: R&D Conversation Starters
► Has significant R&D-related expenditures
► Has large amount of software as a new asset appearing on tax
return
► Has annual revenues $1 billion
► Within computer services industry or producer of product held for
sale
► Pays or expects to pay regular tax
► Focused on reducing federal/state ETR
► Already utilizing EY for Section 199 services
16. Page 16
Existing Clients: R&D Risks
► Prohibitive controlled/aggregated group arrangement and/or
research credit computation
► Has “funded” research
► Has research conducted outside the U.S.
17. Page 17
Existing Clients: Increased R&D
Service Offering Opportunities
► Claiming research credit but no contemporaneous documentation
► Claiming federal but not state research credit
► Claiming research credit only based on those conducting R&D; not
on those supporting or supervising
19. Page 19
Purpose
► Tax treatment is established in either first or second year,
and filing method change is required in order to move
forward with new method
► Incorrect method
► Two years of filing, incorrect method is the established method
► Correct method
► One year of filing, correct method is the established method
► May be an advantageous or preferred method
20. Page 20
► Software development costs
► Immediate expense, 36-month, or 60-month deferral
► Companies undertaking enterprise resource planning
► Companies with large software expenditure amortization
► Prepaid expense acceleration
► Expense amounts paid to create any right or benefit for the
taxpayer that does not extend beyond:
► 12 months after the date of realizing the right or benefit
► End of tax year in which payment is made
► Insurance, warranty & service contracts, license, software
maintenance, taxes (business/ real estate/ personal property)
Common Types Filed
21. Page 21
► Revenue deferral
► Recognize income from an advance payment in the tax year of
receipt to the extent the payment is recognized in applicable
financial statements
► Remaining amount recognized in the next succeeding tax year
► Services, sale of goods, use of intellectual property, sale/ lease/
license of computer software, sale of gift cards
► Accounts receivable
► Identify receivables that can be deferred or excluded from income
recognition and/or accelerate deductions related to receivables
Common Types Filed
23. Page 23
Qualified Activities
► Domestic Production Gross Receipts (DPGR):
► Manufacture tangible personal property
► Produce qualified film
► Produce electricity, natural gas, or water
► Construction of real property
► Service of architecture/engineering
► Software Development
1 January 2014 Presentation title
24. Page 24
Software Development
► §1.199-3
► DPGR include gross receipts from computer software
services if:
► 1) Taxpayer also derives gross receipts from lease, rental, or other
disposition of computer software
► 2) Another person derives gross receipts from lease, rental, or
other disposition of substantially identical software
1 January 2014 Presentation title
25. Page 25
Value for the Client
► Reduce Taxable Income
► Permanent tax savings
► Reduce Effective Tax Rate
► Increase Earnings & Profit
► Increase Cash Flow
12 July 2016
27. Page 27
Transaction Cost Analysis
► Fees for professional services in connection with
transactions
► Transactions:
► Third- Party domestic Acquisition
► Internal restructuring
► Initial public offerings
► Bankruptcies
1 January 2014 Presentation title
29. Page 29
Tangible Property Regulations
► Change in accounting method for the treatment of tangible
property.
► Effective for tax years beginning on or after January 1,
2014.
► Breakdown of the TPR
► Materials & Supplies
► Acquisitions
► Improvements
► General Asset Accounts (GAA) and Dispositions
30. Page 30
Moving Forward with TPR
► Maintaining the method
► Ensure clients have not “blown” their methods
► Filing annual elections
► De minimis safe harbor election
► Election to capitalize otherwise deductible repairs
31. Page 31
Retail-Restaurant IIR
► Rev. Proc. 2015-56
► Remodel-Refresh Safe
Harbor
► Deduct 75% and capitalize
25% of qualifying remodel
costs
► Simplified formula
► Conclusions under the
TPR
► Impact of IRC Section
263A
► Dispositions
► Form 3115 and 481(a)
adjustment
32. Page 32
Remodel-Refresh Safe Harbor
Calculation
total fixed asset additions (per AFS)
(subtract listed exclusions)
= qualifying remodel-refresh costs
75% deducted 25% capitalized
25% Improvement Asset
► Recovered over 15 or 39 years
► Section 263A does not apply
► Included in a group GAA
► Depreciate out unless
entire store location is
disposed of
General Operation of the Safe Harbor
33. Page 33
EY Depreciation System (EYDS)
► Technology-based service to assist clients in:
► Compliance with tax depreciation/amortization guidance
► Tax planning opportunities
► EYDS can result in significant tax benefits including:
► Reduces federal and state effective tax rates.
► Streamlines tax compliance in the deprecation/amortization space.
► Streamlines reviews and audits.
► Supports a wide range of federal and state depreciation methods
and reporting.
34. Page 34
Target Market/Profile
► Companies in all industries and all sectors
► Significant investments in capital assets or intangible assets
► Companies willing to amend tax returns or interested in
tax benefits on current year returns.
35. Page 35
Next Steps: Let us know!
► Does your client have any high accrual balances?
► Does your client employ engineers, scientists, software
developers?
► Does your company manufacture goods?
Hey guys, my name is Dan Chang, I’m a staff 2, and I will be introducing you to UNICAP.
let’s use an example
Let’s say a company makes cameras. Now you would THINK you’d know all the costs related to this camera, but according to UNICAP, there are more costs than you think.
Now let’s disassemble the camera into separate parts.
Each cost of these camera parts are directly or indirectly related to the production of the camera.
For example: the freight in costs of direct materials, depreciation of equipment shaping the metal casing, the repair and maintenance costs related to that equipment, compensation & benefits of employees directly working with the camera parts.
So hopefully this example helps you understand how much is involved with UNICAP.
SO why is this so important?
My colleagues will talk about different projects QS has…and while their projects may provide a benefit to companies. UNICAP MAY provide benefits to a company, but it mostly provides risk reduction.
Companies need to be compliant to cap rules/regs to reduce the risk of the IRS challenging a companies position, auditing them, and opening for unwanted exposure.
For the past 6-7 months, I’ve worked on many UNICAP calcs and different clients. And almost all my clients have something in common: the trial balances are a mess: they don’t have proper cost centers, departments, and sometimes merge two accounts together that don’t comply with UNICAP rules.
UNICAP ensures that a company would be compliant with cap rules.
It will also provide efficiency:
Many of our clients attempt to calculate UNICAP internally and if you don’t know UNICAP rules, it’s extremely time consuming. Not only that, but if you follow an incorrect method for years….and if the IRS challenges their position, they have no way of explaining their calculation.
Proper UNICAP calculations provide
With proper UNICAP calculations, you have increased accuracy in financial reports: mainly 481(a) adjustments, you save a ton of time in calculating UNICAP in the future, and have a record-keeping process so when the IRS challenges a company, they’re able to provide documentation and easily explain their calculation and how they’re compliant with 263A rules.
Like I said before, UNICAP provides risk reduction, but also can provide benefits such as Negative 263A.
With proper UNICAP calculations, companies can immediately expense these costs and potential have favorable 481(a) adjustments
-Section 199 – Domestic Production Activity Production – Tax deduction for businesses that perform domestic manufacturing and certain other production activities
Created to ease the tax burden on domestic companies in 2004, seen as an incentive to keep factories in the US instead of sending them to other countries
-In 2010 the deduction maxed out at a 9% of the lesser of QPAI or Taxable Income, limited to 50% of W-2 wages
-S corps and Partnerships can utilize this deduction, is allocated based on ownership percentage
-Film : as long as 50% of total compensation relating to production was completed within the US
-Must produce, not just transport
-Lease, rental, or other disposition of computer software MPGE by the taxpayer in US, qualify as DPGR, even if software is provided to employees or over the internet
-Receipt from customer and tech support, online services (online banking), do not constitute as DPGR
If customer is given app to access computer software it will be considered lease, rental etc if:
Taxpayer also derives gross receipts from lease, disposition to customer that are not related person of computer software that, has only minor differences form online software, has been MPGE by taxpayer in US, and has been provided to customer in tangible medium or download onto computer
Another person derives GR from lease, rental, disposition of substantially identical software to its customers pursuant to an activity in part 3 of exception 1
Example 2.
M is an Internet auction company that produces computer software within the United States that enables its customers to participate in Internet auctions for a fee. Under paragraph (i)(6)(ii) of this section, gross receipts derived from online auction services are attributable to a service and do not constitute gross receipts derived from a lease, rental, license, sale, exchange, or other disposition of computer software. M's activities constitute the provision of online services. Therefore, M's gross receipts derived from the Internet auction services are non-DPGR.
Example 4.
O produces tax preparation computer software within the United States. O derives, on a regular and ongoing basis in its business, gross receipts from both the sale to customers that are unrelated persons of O's computer software that has been affixed to a compact disc as well as from the sale to customers of O's computer software that customers have downloaded from the Internet. O also derives gross receipts from providing customers access to the computer software for the customers' direct use while connected to the Internet. The computer software sold on compact disc or by download has only minor or immaterial differences from the online software, and O does not provide any other goods or services in connection with the online software. Under paragraph (i)(6)(iii)(A) of this section, O's gross receipts derived from providing access to the online software will be treated as derived from the lease, rental, license, sale, exchange, or other disposition of computer software and are DPGR (assuming all the other requirements of this section are met).
Look for clients coming out of NOL in near future
Focus on clients who make substantial investment in software
Increased cross-border and contract manufacturing arrangements
-Section 199 – Domestic Production Activity Production – Tax deduction for businesses that perform domestic manufacturing and certain other production activities
Created to ease the tax burden on domestic companies in 2004, seen as an incentive to keep factories in the US instead of sending them to other countries
-In 2010 the deduction maxed out at a 9% of the lesser of QPAI or Taxable Income, limited to 50% of W-2 wages
-S corps and Partnerships can utilize this deduction, is allocated based on ownership percentage
