5th Annual Tax Update

5th Annual Tax Update
presented by
Harlan J. Kwiatek, CPA, JD, LLM
Partner – New York, McGladrey LLP
June 17, 2014
Insero & Company’s 2014 Accounting & Finance Education Series

© 2012 McGladrey LLP. All Rights Reserved.© 2014 McGladrey LLP. All Rights Reserved.
June 17, 2014
5th Annual Tax Update

Today’s presenter
2
Harlan Kwiatek, CPA
Partner
New York City, NY
(212) 372-1903
Harlan.Kwiatek@McGladrey.com

Agenda
 Federal Taxes
- Capital Hill Update
- Tax Controversy Update
 State Taxes
- New York State Tax Reform Update
- New England States Tax Update
3

Capitol Hill update

Congressional stalemate: How did we get
here?
 Democrats control the White House
 Democrats control the Senate
 Who controls the House?
5

An uneasy coalition
 ATRA of 2013: January 2013
House passed 257 to 167; Senate passed 89 to 8
 Debt ceiling/continuing resolution: October 2013
 Bipartisan Budget Act: December 2013
6

Result of the stalemate
 The deficit
 Or, how much is $17 trillion?
17,000,000,000,000 Dollars
314,000,000 People
$54,000 Each
7

Federal revenue vs. spending for 2012
(actual)
$2.450
$3.538
0.000
1.000
2.000
3.000
4.000
Fiscal Year 2012 (trillion)
8
Revenue Spending

9
46.20%
34.50%
9.90%
3.20%
6.20%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Individual Income
Taxes
Social Insurance and
Retirement Receipts
Corporation Income
Taxes
Excise Taxes Other
Federal revenue by source
2012
$1,132.2 billion
$845.3 billion
$242.3 billion
$79.1 billion
$151.3 billion
Most federal revenues come from individual taxpayers. Personal income taxes are the
largest portion of total tax revenues. Social Security and Medicare payroll taxes are the
second largest source.
Federal revenue by source

Federal revenue vs. spending for 2013
(actual)
$2.813
$3.493
0.000
1.000
2.000
3.000
4.000
Fiscal Year 2013 (trillion)
10
Revenue Spending

Federal spending
11

Closing the deficit
 Economic growth?
 Less spending?
 More revenue?
 Guilty conscience?
12

Comprehensive tax reform
 President Obama
 Dave Camp
 Ron Wyden
 Reduce C corporation taxes—a real tax increase
13

14
$0
$200,000,000,000
$400,000,000,000
$600,000,000,000
$800,000,000,000
$1,000,000,000,000
$1,200,000,000,000
$1,400,000,000,000
$1,600,000,000,000
$1,800,000,000,000
$2,000,000,000,000
Total AGI
Total U.S. income (AGI) by income level
Source: IRS Statistics of Income for 2009
Income Level (AGI)

Affordable Care Act impact on the deficit
 Congressional Budget Office Affordable Care Act
(ACA) cost estimates for 2014 – 2024
Gross cost $1,877 billion
Less tax revenue (458) billion
Net cost $1,419 billion
 $458 billion includes $259 billion of new penalties
and excise taxes paid by employers starting in 2016
 IRS determines penalties based on employee
health plan information reported on new Form 1095
- Large employers file Form 1095 in 2016 for 2015
- Prepare in 2014 for 2015 data collection
15

ACA information reporting timeline
2014
Determine large
employer status and
implement data
collection systems
2015
Track employee and
health plan information
by month
2016
Provide Form 1095 to
employees by Jan. 31
and to IRS by Feb. 28
16

Tax Controversy Update

New IDR enforcement process

Background
 LB&I review of case development, audit closure
times and IDR response rates
- determined that IDR response rates were a major cause
of delayed audit closure times
- determined that best practices included discussing IDRs
in advance of issuance and getting agreement on
response times
- rolled out new issuance process with an automated
enforcement process
19

New IDR enforcement process
 Effective for all IDRs issued on or after March 3,
2014, including those related to currently open
audits
 Automated enforcement process
 IRS management personnel involved at each stage
 Enforcement process includes IRS counsel support
 All LB&I examiners and specialists should have
completed training on this by now
 LB&I directives issued
20

First….the good news
 IDRs should be issue-focused
 One IDR for each issue
 Must clearly state the issue and that the IDR’s
requests are relevant to the issue
 Pre-issuance coordination and negotiated response
time
 Issue-focused requirement does not apply to “IDR
One”
21

But ….
 Fixed IDR response times (once agreed to)
 Agent can grant a 15-day extension
 If IDR response time is not met, automatic
enforcement process begins
- Delinquency notice
- Pre-summons letter
- Summons
- Summons enforcement
22

Strategy points
 Must have open lines of communication
 Discuss issuing draft IDRs or including info in a
letter that is not labeled as an IDR
 Must immediately voice concerns with IDR or with
time frame for response
 Document reasons for requesting additional time
 Go up the IRS food chain to get agreement on
response dates and sufficiency of IDR
23

Strategy points, cont.
 Keep a log of IDRs and responses
 Partial IDR responses should not be part of the
enforcement process
 Prepare company management for worst-case
scenarios
- Letter to CFO/CEO
- Service of summons
24

IRS future state – what to expect

IRS future state – doing more with less
 Retirements (one-third of workforce)
 Affordable Care Act administration
 FATCA administration
 Can IRS systems secure taxpayer information?
- Identity theft is a top priority
- TIGTA report
 Less resources for customer service and for
enforcement
- More automation
- Less customer service
 Partnership examinations?
26

Other Current Tax Topics
 R&D Tax Credit
- IRS Eases Restrictions on Claiming Research Credit on
Amended Returns (June 2, 2014)
 TARS
- Fully implementation required for 2014; early
implementation for 2013 allowed
 PTIN
- Impact of Loving case
 Cash to Accrual Method Accounting Proposal
27

New York State Tax Reform Update

Overview
 On March 31, 2014, the Budget Act of 2014-15
(S.6359-D/A.8559-D) was into to law by Gov.
Cuomo.
- Effective date of most provisions, January 1, 2015
- First quarter 2014 financial statement event
 Fundamental reform of NYS’s tax system
- Lower tax rates
- Unitary taxation
- Economic nexus
- And much more….

Repeal of Bank Franchise Tax
 For tax years beginning on or after January 1, 2015.
 Article 32 taxpayers will be taxed in accordance
with the provisions of the general corporate
franchise tax (Article 9-A).
 These taxpayers will need to analyze the impact of
this change, particularly to the extent that those
entities relied upon administrative pronouncements
issued under Article 32 in arriving at tax positions.

Rate reductions and increases
 New York corporate franchise tax rate reduced from
7.1% to 6.5%, effective for tax years beginning on
or after January 1, 2016
- Alternative Minimum Tax base is repealed effective tax
year 2015.
 Metropolitan Transit Authority (MTA) Surcharge
increases to 25.6% effective for tax years beginning
on or after January 1, 2015 and before January 1,
2016.
- The MTA surcharge will be set based on state financial
projections for years thereafter.

 Effective for tax years beginning on or after January 1,
2014, the tax rate is 0% for a qualified New York
manufacturer.
- A “qualified New York manufacturer” is a manufacturer
having property in New York that is eligible for the investment
tax credit and
• either (1) the fair market value of that property has an
adjusted basis for federal income tax purposes of at
least $1 million or
• (2) all of the manufacturer’s real and personal property is
located in New York.
- Large manufacturer employers (2500 or more employees
that have at least $100 million in adjusted basis of property
for federal income tax purposes) may be deemed a “qualified
New York manufacturer.”

 The capital base tax rate will also be phased out by
2021.
 Repeal of Worldwide Income Tax Base for Alien
Corporations
- Alien Corporations now taxed only on effectively
connected income.

Economic nexus standards
 Businesses subject to the corporate franchise tax
and the metropolitan business tax surcharge
include those that derive $1 million or more in gross
receipts from activity in New York.
- A corporation that is part of “combined group” and that has
less than $1 million in receipts, but more than $10,000, is
deemed to satisfy the receipts threshold if the in-state
receipts of all members of the group that separately
exceed $10,000 meet the $1 million threshold in the
aggregate.

Article 32 Taxpayer Nexus
 Existing Article 32 nexus threshold for credit card
companies transferred to Article 9-A
- Such companies will be deemed to have New York nexus
for corporate income tax purposes if they have (1) issued
credit cards to 1,000 or more customers with New York
mailing addresses (2) 1,000 or more locations in New York
covered by merchant contracts to which the business
remitted payments, or (3) a combined total of 1,000 or
more New York customers and merchant locations.
 The Act does repeal the nexus rule for fulfillment
services.

Reporting methods for corporate partners
 The Act requires corporate partners to compute tax
under an “aggregate” method (as opposed to an
“entity” method).
- Under the new method, a corporate partner is deemed to
have an undivided interest in the assets, liabilities, and
items of receipts, income, gain, loss and deduction of the
partnership and the corporate partner is treated as
participating in the partnership’s activities and
transactions.
- Accordingly, if the partnership has “nexus” with New York,
so does all of its corporate partners, making any
corporation that is a partner in the partnership subject to
the franchise tax.

Customer-based apportionment
 The law combines the apportionment factor for
business income and capital into a new customer-
based single sales factor.
- Special rules apply to certain financial institutions,
allowing them to make an annual and irrevocable election
to use an 8% fixed percentage method instead of
customer-based sourcing.

Net operating losses
 Existing net operating loss (NOL) provisions have been revised
to switch from a pre-apportionment to a post-apportionment
computation, terminating the state’s tie to the federal NOL
amount.
 Because of these computational changes, the Act established
“prior year net operating loss” (PNOL) and provided transition
rules related to the use of NOLs generated before Jan. 1, 2015.
- A taxpayer’s PNOL corresponds to its NOLs generated under current law
modified to account for the change to calculation on a post-
apportionment basis.
 Taxpayers will be allowed to deduct both PNOL and newly
generated NOL, subject to a 20-year carryforward period, and
PNOL must be applied against the business income base before
post-reform NOLs.
 NOLs generated in post-reform tax years may be carried back
three years, provided that NOL can be carried back to a tax year
beginning before Jan. 1, 2015.

Combined reporting provisions
 Applicable to tax years beginning on or after Jan. 1,
2014, the Act “substantial intercorporate”
transaction rules with a full water’s-edge unitary
combined reporting with an ownership test of more
than 50%.
 The Act does provide for an election to permit
combined filing for certain commonly owned groups
with a seven year irrevocable election, which is
then automatically renewed for an additional seven
years unless it is affirmatively revoked.

Other Provisions
 Elimination of the tax on subsidiary capital
 Exemption of investment capital and investment
income and the implementation of limitations on the
definitions of each
 Significant changes to NYS tax credits regime
- Investment tax credit modified
- Musical and theatrical production credit established
- Workers with disabilities tax credit established
- Commercial production tax credit extended through 2017
- Youth works tax credit enhanced

Estate tax
 The Act aims to bring conformity with the federal estate
tax.
- While the top rate will remain at 16%, the exemption will be
raised to $5.25 million in yearly phases ending April 1, 2017.
- The exemption is structured as a tax credit, eliminating tax
liabilities for estates under the threshold but levying a full tax
on estates more than 105% percent above it.
- The Generation-Skipping Tax is also eliminated.
- Additionally, the law closes the "residential tax loophole."
• Effective with respect to income earned on or after June
1, 2014, trust will be treated as grantor trusts if they are
structured to avoid federal gift tax on contributions of
property to the trust.
• This provision also applies to New York City income tax.

New York City Impact
 New York City has yet to comment on any of these
new tax changes.
 Differences between New York State tax and New
York City tax will place compliance burdens on
those who conduct business within New York City.

Harlan J. Kwiatek, Partner, New York City, McGladrey LLP
New England States Tax Update

Connecticut
 Biennial Budget Bill: Key Provisions
- Corporate Income Tax Surcharge Extended
• Extended for an additional two years – through the 2014 and
2015 income years.
- Rate: Still 20%.
- Application is broad, but there are limitations.
- Electronic Sales and Use Tax Remittance Pilot Program
• Applies to periods beginning on or after October 1, 2013 and
prior to April 1, 2014.
• Connecticut can require retailers that are delinquent in paying
sales taxes to electronically remit the sales tax due on certain
sales.
• Requirement applies to sales the retailer makes by credit or
debit card or electronic transfer during the applicable tax
periods.
• Connecticut notified impacted retailers in writing by October 1,
2013.
44

Massachusetts
 Transportation Finance Bill: Key Provisions
- Apportionment Methodology Change: Receipts Factor
• Market-based sourcing.
- Applies to receipts generated from sales other
than sales of tangible personal property.
- Legislation articulates five situations where sales
are considered Massachusetts sales.
• Throw-out provision included.
• Effective date: January 1, 2014.
 Allied Domecq Spirits & Wins USA Inc. v. Comm’r of
Revenue
- “Reverse nexus” issue.
45

Massachusetts
 MA DOR took the position that cloud computing charges
for the use of a provider’s software by Massachusetts
customers are taxable as a sale of prewritten software.
Fees for data transfer (but not storage) are taxable as a
telecommunication service
- MA Letter Rulings:12-13 (9 Nov. 2012), 12-11 (25 Sep.
2012), 12-10(25 Sep. 2012) &12-8 (16 July 2012), and TIR
13-10
 But see TIR 13-17 (30 Sep. 2013) concerning MA Leg
“Act Repealing the Computer and Software Services
Tax” (relating to computer system design and to
modification, integration, enhancement, installation, or
configuration of standardized or prewritten software)
effective 31 July 2013

New York State
 Mangano v. Silver, New York Court of Appeals, 1/14/2014
- Metropolitan Commuter Transportation Mobility Tax held constitutional
 Infusiondev Corp., New York Division of Tax Appeals, 5/1/2014
- Personal Income tax case
- Lack of USPS date postmark doomed refund claim/challenge
 Crown Security LLC, New York Division of Tax Appeals, 5/1/2014
- Sales tax case
- Security company properly assessed sales tax on provision of guard services at
construction sites
 In matter of John Gaied, New York Court of Appeals, 2/18/2014
- Personal income tax case
- In order for a taxpayer to "maintain a permanent place of abode' in New York State,
within meaning of statutory residence provision imposing personal income tax on
individuals who are not domiciled in New York State but who maintain a permanent
place of abode in the State and spend more than 183 days of the taxable year in the
State, the taxpayer must, himself, have a residential interest in the property, i.e., there
must be some basis to conclude that the dwelling was utilized as the taxpayer's
residence, and it is not enough that the taxpayer merely maintains the dwelling.
47

New York State
 Overstock, LLC v. Department of Taxation and Finance
- The New York Court of Appeals held that New York’s “Amazon” statute
that subjects online retailers without physical presence in New York State
to the jurisdiction’s sales and use tax does not violate the Due Process
Clause of the United States Constitution.
 START-UP New York Program
- Designed to help high-tech companies and start-ups stay in New York
State.
- Tax benefits offered for business located in tax free New York areas and
their employees.
- Benefits are effective for tax years beginning on or after January 1,
2014, to sales tax quarters beginning on or after March 1, 2014, or to
transactions occurring on or after January 1, 2014 (whichever is
applicable).
- START-UP requires applicants to work with NYS universities
48

New Jersey
 Angel Investor Credit
- Effective for tax years starting on or after January 1, 2012.
- Credit applies against the corporation business and personal income
taxes for angel investor investments in New Jersey emerging technology
businesses.
- Credits equal:
• 10% of a taxpayer’s qualified investment in an emerging technology
company with fewer than 225 employees, of whom at least 75% are
filling a position in New Jersey.
• Credit is capped at $500,000 per year for each qualified investment.
• If there is excess:
- Personal income: Refunded.
- Corporation business: Refunded or carried forward for 15
years.
- The emerging technology company must employ or own capital or
property, or maintain an office in New Jersey.
• There are further requirements relating to the nature of the New
Jersey company.
49

Questions?

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