6th Annual Tax Update

6th Annual Tax Update
Steven M. Mills, CPA

Steve is a Tax Partner with over
30 years of experience in public
accounting. As our Tax Services
leader, Steve is responsible for all
tax services our firm delivers. His
experience includes domestic,
international, and state and local
taxes with a focus on planning,
transactional analysis and
research. Steve is a hands-on
leader who will ensure his
department exceeds your
expectations for all recurring
compliance as well as the
development, design, and
implementation of tax strategies.
www.inserocpa.com | 2Insero & Co. CPAs

TOPICS FOR TODAY
1. The Real Economy: The Long Quiet before the Fiscal
Storm
2. Tax Reform
3. Federal Tax Update
4. NYS Tax Update
5. Current Events
Insero & Co. CPAs www.inserocpa.com | 3

THE REAL ECONOMY:
THE LONG QUIET BEFORE THE FISCAL STORM
Used with permission as a McGladrey Alliance member

Fiscal Matters
• Medium to Long Term Fiscal Outlook
• The purpose of this presentation is to inform our clients and
contacts of the necessary information to prepare for the medium
and longer-term challenges ahead with respect to tax reform or
lack thereof.
• Current Trends
• Growth in tax revenues and restraint in outlays (the “sequester”)
have yielded a federal deficit at about 2.8 percent of GDP in 2014
with a small decline to 2.7 percent forecast for fiscal year 2015
both below the 30-year average of 3.1 percent.
• Those improvements driven by a modest increase in economic
activity mask the coming demographic and growth challenges
that if left unchecked will drive up the costs of policy changes
necessary to prevent a budget crisis over the next decade.

Fiscal Matters
• The Policy Challenge
• Paying for Social Security, Medicaid and Medicare.
• Preserving the social contract under rapidly changing
demographics and economics.
• What “social contract” do we want to create?
• Tax Reform and Revenues
• A number of different alternatives that involve lowering marginal
rates and broadening the base.
• Reduce the cost of labor via tax reform
• New revenue sources

Middle Market Implications
• Why This is Important for our Client Base:
• Expectations on taxes shape capital investment decisions over the
medium to long-term that provide the foundation of rising
productivity and living standards in the economy.
• Should these firms notice a drift in the fiscal direction of the U.S.
towards no reform and additional layers of taxation on top of an
already inefficient tax code, they will pull back on capital investment
and expansion plans in a way that bodes ill for growth, productivity
and living standards.
• This can already be seen in the cash hoards of various large
companies
• All lines of business and across industry areas will be impacted
• Energy, coal, oil, manufacturing and transportation firms are
particularly at risk

Quiet Before the Fiscal Storm
14
15
16
17
18
19
20
21
22
23
24
25
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
PercentageofGDP
Revenues Outlays Average Revenues,
1965 to 2014
Average Outlays,
1965 to 2014
Source: McGladrey, CBO

Why Tax Reform
• Budget on an Unsustainable Path:
• If no tax and entitlement reform is put into place that reduces costs,
broadens the base and brings in more revenues over the next few
years additional layers of taxes via a value-added tax or a carbon
tax are likely to be imposed on firms and the public.
• Broadening the base: making sure more people pay taxes than currently is
the case via the elimination of subsidies, tax expenditures and special
interest carve outs in the tax code.
• Should a mix of tax and entitlement policies not be put into place
that stimulates faster rates of productivity and growth, the U.S. is
heading toward another searing period of adjustment that will likely
fall on the broad shoulders of middle market firms that comprise the
bulk of the real economy.
• Either way substantial change to the U.S. tax code is coming despite
the temporary improvement in the fiscal condition of the economy.

Why Tax Reform
• Policy Goal: Balancing the Primary Budget
• Over the next few years policy makers should bring the primary
budget deficit (the deficit excluding interest owed on past debt,
which should be equal to roughly 2.2 percent of GDP on average
over the next decade) to balance or to surplus.
• That would provide the necessary space to respond to any
economic shock or earlier-than-anticipated test of the political
system’s capacity to produce significant budget and taxation
reform.
• Implementing policies that foster growth along with substantial
tax and entitlement reform remains the key to putting the fiscal
path on a sustainable footing.

Quiet Before the Fiscal Storm
-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
Budget Deficit as a Percentage of GDP
Alternative
Baseline
Source: CBO

Why Tax Reform and Economic Growth Matter
• Policy Goal: Balancing the Primary Budget
• From 1950 to 2007, the U.S. averaged 3.5 percent annual real growth.
Since the end of the recession in 2009, it’s been 2.3 percent.
• The Federal Reserve has reduced it’s long-run real growth projection to
2.15 percent, which is in line with the CBO’s 2.3 percent projection over
the next decade. Such a slow pace significantly challenges the support
of entitlement obligations to future retirees.
• Impact
• The one percentage point lost in growth translates to around $1 trillion in
output lost by 2025 and more than $3 trillion lost 20 years later.
Assuming an average federal tax rate of about 21.7 percent (average
1990-2010) during the next decade indicates a net loss of about $230
billion in tax revenue to support demand for medical and retirement
services.

Demographic Realities
• Pressure Starts in 2016
• 2016-17: CBO estimates the Social Security Disability Insurance
facility—comprised of the Old-Age and Survivors Insurance and
Disability Insurance Fund—will exhaust its trust fund.
• At that point the government will start shifting funds from the old age
and survivors benefits-the other leg of social security-bringing
forward the day it will exhaust its fund.
• 10 Years Out
• The next and most serious test will begin in 2024 when the ratio of
the population aged 65 and older to that aged 20-64 rises to 31
percent from 14 percent.
• During the succeeding 15 years, the tidal wave of retirees will
increase, sending that ratio to 39 percent. During that time spending
on Social Security will increase to 6.3 percent of GDP in 2039 from
4.9 percent.

Alternative Paths
• Value Added Tax
• A value added tax is a form of a consumption tax that is placed on a
good or service wherever value is added at each stage of production
and again at the final sale.
• Carbon Tax
• A carbon tax is a tariff on fossil fuels such as coal, oil and natural
gas and on biofuels.
• Like a value added tax, a carbon tax would not be evenly distributed.
Producers of energy, coal, oil, transportation firms and producers of
goods and services that resulted in large amounts of C02 would
bear a disproportionate share of the burden of the cost of
adjustment to such a new tax.
• The impact on households would be regressive and hit lower income
households, small and medium enterprises in a way that is less than
how it would hit wealthy households or larger firms.

Prognosis?
• This path of unsustainability, along with currency factors,
led, over time, to the current Greek situation.
• Low growth
• Aging populace
• High unemployment
• High government spending
• Massive tax evasion
• And lack of independent national currency
• Obviously, the U.S. has some huge advantages that
Greece does not have, but it is a sobering thought.

Form 1040-GR
Name:
Address:
Note: this will not effect your
refund
Income: (check all that
apply)
Tax on Income: (Estimate
if necessary)
Amount already paid:
Amount due: (check all
that apply)
Joe Taxpayeropoulos
Athens, Greece
 Please give 3 Euros to the nice people at the European Union
Bank
 No, do not give 3 Euros to those thieves
 I have no idea
 You have no idea
 ________
 ZERO
 Check is in the mail
 Come and get it

TAX REFORM

Tax reform (cont.)
2012 tax revenue
Individual
Income Tax
46%
Other Taxes
(Customs, Estate, etc.)
5%
Corporate
Income
Tax
10%
Corporate
FICA Tax
18%
Excise
Taxes
3%
Individual
FICA Tax
18%

Tax reform (cont.)
1. Economy and job growth
2. Business taxes
3. International tax
structure
4. Complexity
5. Permanency
6. Legacy
1. Deficit down
2. Unwillingness to compromise
3. Philosophy
• Revenue-neutral
• Revenue-raising
Key InhibitorsKey Drivers

Tax reform (cont.)
1. Economy and Job Growth
• Economic improvement has been slow but seems to be
accelerating
• Wage growth has been uneven
• Job growth has been slow
• Participation rate is lowest since the 1970s
• Average length of economic expansion post-WWII: 7 years, and we
are in the 6th year of a “recovery”
• “It’s the economy, stupid!”
Key Drivers

Tax reform (cont.)
Key Drivers
2. Business Taxes
Corporate Tax Rates
Top 10
1 USA 39.0%
2 Japan 38.0%
3 France 36.1%
4 Argentina 35.0%
5 Pakistan 35.0%
6 Brazil 34.0%
7 Venezuela 34.0%
8 Belgium 34.0%
9 Germany 33.0%
10 Colombia 33.0%
Others (selected)
15 Mexico 30.0%
22 Canada 26.2%
23 China 25.0%
35 UK 24.0%
38 Russia 20.0%
41 Greece 20.0%
46 Singapore 17.0%
49 Ireland 12.0%
50 United Arab Emirates 0.0%

Tax reform (cont.)
Key Drivers
2. Business taxes
Corporate Tax Rates
Cutting tax expenditures to lower
the rate
• Roughly, a 1%-point reduction in the
U.S. corporate tax rate costs $110
billion/10 years
• Thus, reducing the statutory corporate
rate from 35% to 25% requires “base
broadening” of up to $1.2 trillion/10
years
Top corporate expenditures
1. Deferral offshore
2. Tax-exempt bond interest
3. Manufacturing activities deduction
4. Credit for low-income housing
5. Deferral of gain on non-dealer
installment sales

Tax reform (cont.)
Key Drivers
2. Business Taxes — Flow-through Businesses
Business Rate Structure If Only Corporate Taxes Reduced
Rates
Top Corporate Rate 25%
Top Individual Rate 39.6%
Does a rate differential of that size make sense?
Note: This corporate rate achieves virtual parity with flow throughs
(40% v. 39.6%) when corporate plus capital gain/dividend rates are
combined. Coincidence?

Tax reform (cont.)
Key Drivers
2. Business Taxes
• Areas of previous agreement
• Corporate tax changes should
be revenue-neutral within the
corporate community
(Note: no similar agreement for
individuals)
• Lower rate
• Broader base

Tax reform (cont.)
Key Drivers
3. International Tax Structure
• United States is only developed country with:
• Rate > 30 percent
and
• Worldwide tax system
• 65 percent of top 20 economies have a territorial system

Tax reform (cont.)
Key Drivers
3. International Tax Structure
• Major areas of focus
• Territorial-like system versus existing “worldwide” system
• Base erosion rules
• Recent proposals
• Patents
• Repatriation incentives

Tax reform (cont.)
Key Drivers
4. Complexity
• Facts
• Code: 4 million words
• Regulations: 5+ million words
• Small businesses: 90 percent use a tax return preparer
• Individuals:
• 60 percent use a tax return preparer
• 31 percent use software
• 9 percent of returns are wrong!!!
• Hours: 6.1 billion hours/year to fill out tax forms
• Cost of compliance: $168 billion annually

Tax reform (cont.)
Key Drivers
4. Complexity
War and
Peace
562,579
788,000 928,913
2,279,492
928,913
788,000
562,579
3,980,000

Tax reform (cont.)
Key Drivers
5. Permanency
• Major portions of the Internal Revenue Code expire every year,
leading to increased complexity

Tax reform (cont.)
Key Drivers
6. Legacy
• Believe it or not, members of Congress are concerned about
their legacy……. and their image

Tax reform (cont.)
Three main areas of focus
Corporate
• General consensus
is that many tax
expenditures should
be eliminated in
favor of lower rate
• Republicans target
25%
• Democrats aim for
28%
International
• Republicans pushing
for territorial system
• Democrats skeptical
of territorial over
base erosion
concerns
• Republicans also
favor anti-base
erosion provisions –
making international
tax reform revenue-
neutral
Individual
• Republicans
propose lowering top
individual rate to
25%; one other
bracket of 10% plus
surtax and
eliminating tax
expenditures
 Republicans:
revenue-neutral
 Democrats:
revenue increase

Tax reform - Corporate
Key issues
• Can corporate rate be lowered enough to make losing tax
expenditures “worth it”?
• Will deductibility of interest be limited?
• What is the rate?
• What tax expenditures get eliminated
• Impact on pass-through entities if expenditures eliminated,
only corporate rate lowered?
• Will large pass-through entities be taxed as corporations?

Top 10 corporate tax expenditures FY2013 - 17
0 25 50 75 100 125 150 175 200 225 250 275 300
Deferral of active income of controlled foreign corporations
Tax exempt bond interest
Production/manufacturing activities deductions
Credit for low-income housing
Deferral of gain on non-dealer installment sales
Expensing of R&E expenditures
Deferral of gain on like-kind exchanges
Inventory methods and valuation
R&E credit
Inventory property sales source rule exception
$b
Source: Joint Committee On Taxation (JCS-1-13) .

Tax reform - Flow-throughs
Key issues
• Do I get a rate cut?
• What is the rate?
• What tax expenditures get eliminated?
• Is lowering the rate “worth it”?
• Interest deductibility
• Accounting methods
• Cash ($10 million)
• Expensing of fixed asset acquisitions (AKA Bonus
depreciation and Section 179)
• FICA Coordination among S Corps and LLCs

Tax reform - International
Key issues
• Territorial versus worldwide
• Minimum tax on foreign earnings
• Base erosion
• Intangibles

Tax reform - Business
Political trade-offs
• Corporate interests versus pass-throughs
• Corporate-only base broadeners versus comprehensive base
broadeners
• Multinational interests versus domestic-only interests
• Capital-intensive entities versus labor-intensive entities
• Industry versus industry
• Historic versus new entities within the same industry
• Specific tax incentives versus rate reduction as a better
economic growth driver
• Transition rule design

Tax reform - Individuals
Key Questions For Individuals To Ask
1. Will my taxes go up or down?
2. Is my life simpler or more complex?
3. Will the tax law become stable?
4. Will there be two Levels of tax?
5. Do I feel I am treated fairly?

Tax reform - Individuals (cont.)
How do you broaden the tax base?
Itemized deductions and exclusions
• Dollar cap
• Percentage of AGI cap
• Limit tax benefit, e.g., 28 percent
• Reduce or eliminate specific exclusions
and deductions

BREAK

Tax reform - Individuals
Distribution of Income, Excise and Employment Tax (2011)
Combined Income, Social
Insurance, and Excise Taxes
Under Present Law
Income Category
Number of
Returns
(000s)
Share of
Returns
Share of
Income $ Billions
Percent
Share
Average
Tax Rate
Less than $10,000 20,429 13.1% 0.8% 4.4 0.2% 5.3%
$10,000 to $20,000 16,910 10.8% 2.4% 1.6 0.1% 0.6%
$20,000 to $30,000 18,400 11.8% 4.2% 23.9 1.3% 5.2%
$30,000 to $40,000 15,387 9.8% 5.0% 46.2 2.5% 8.6%
$40,000 to $50,000 13,602 8.7% 5.7% 64.3 3.5% 10.5%
$50,000 to $75,000 26,719 17.1% 15.3% 212.1 11.7% 12.8%
$75,000 to $100,000 16,955 10.8% 13.6% 218.6 12.1% 14.9%
$100,000 to $200,000 22,128 14.1% 27.6% 574.1 31.7% 19.3%
$200,000 to $500,000 4,945 3.2% 12.6% 327.2 18.1% 24.1%
$500,000 to $1,000,000 631 0.4% 3.9% 113.3 6.2% 26.8%
$1,000,000 and over 330 0.2% 8.9% 226.9 12.5% 23.6%
Total, All Taxpayers 156,435 100.0% 100.0% 1,812.4 100.0% 16.8%
Source: IRS

Source: Putting a Face on America’s Tax Returns: A Chartbook (First Edition), Tax Foundation (2012), ISSN 2169-9534

Top 10 individual tax expenditures
All amounts in billions

President’s previous Framework For Business Tax
Reform: At a glance
Cut corporate rate
• 28% corporate rate
• No comprehensive list of
provisions to be cut, but
some highlighted:
• LIFO, oil/gas, carried interest,
jet depreciation
• Depreciation, deductibility
of interest expense should
also be considered
Manufacturing incentives
• Cut effective rate for
manufacturers to 25% by
refocusing section 199
manufacturing deduction
• Increased to 10.7%
• Permanent R&D credit
• Energy incentives
International tax
• Comes out against pure
territorial system
• U.S.-based companies to
pay an unspecified minimum
tax on foreign earnings
Small business
• Make tax filing simpler
• Allow expensing up to $1 million in
investments
• Allow cash accounting on businesses with
up to $10 million in gross receipts

Senator Hatch’s seven principles for “comprehensive
tax Reform for 2015 and beyond”
1. Promote economic growth
2. Fairness
3. Simplicity
4. Permanence
5. Enhance competitiveness
6. Promote saving and investment
7. Revenue-neutral

tax Reform for 2015 and beyond” (cont.)
1. Promote economic growth
• Reduce high marginal tax rates
2. Fairness
• Broaden the base and lower tax rates
3. Simplicity
• Eliminate exclusions, exemptions, deductions and credits
4. Permanence
• Enact or eliminate temporary provisions
5. Enhance competitiveness
• Reduce high business tax rates
• Eliminate worldwide taxation

tax Reform for 2015 and beyond” (cont.)
6. Promote saving and investment
• Savings incentives for individuals
AND
7. REVENUE NEUTRALITY
“Tax reform should not be used as an excuse to
raise taxes on the American people or on U.S.
businesses”

Tax reform - A key issue
DYNAMIC
REVENUE
SCORING
In the House of
Representatives

FEDERAL TAX UPDATE

Tax extenders
• Over 50 tax provisions were extended through Dec. 31, 2014, then
expired…again
• Major business provisions:
• Research and development (R&D) tax credit
• Bonus depreciation
• Section 179 ($500,000)
• S corporations (charitable deductions/built-in gains tax)
• Major individual provisions:
• State and local sales tax deduction
• IRA charitable contributions
• Issue: What about 2015? The never ending problem

Government Accountability Office report on
partnership compliance and audits
• Low IRS audit rate
• But much better tax compliance than in corporate sector!
• Multiple-tier entities and TEFRA rules delay and deter IRS
audits of partnerships and LLCs
• But the same factors may make partnerships more
conservative–not wanting changes for the investors, even
positive changes
• Better case selection
• Potential change: Who owes tax on audit?

Importance of flow-through businesses in the
economy today
94% of all businesses
54% of all employees
36% of all business receipts
44% of all business taxes
64% of all new jobs–past 15 years

The rise of flow-throughs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Percent of total business receipts
C corporations versus tax partnerships and S corporations
Source: IRS Statistics of Income
S Corps and Tax Partnerships C Corporations

Flow-through advantages since 1986
• Top individual rate lower than top combined rate on corporations
PLUS capital gains (or dividends)
• Question: Timing of dividends/capital gains?
• Easier access to capital for non-publicly traded entities
• Limited liability companies and check-the-box
• Greater legal protection and one level of tax
What about 2015, “C” versus “S”?
• Current pass-through advantage: 7 percent to 8 percent
• 39.6 percent versus 48.0 percent (without 3.8 percent tax)
• 43.4 percent versus 50.47 percent (with 3.8 percent tax)

Flow-through businesses: Key tax technical issues
• C versus S
• FICA tax–S corporation “reasonable compensation”
• Uncertain Applicability to LLC activities. MAJOR issue for
LLCs
• Tangible property regulations
• IRS deployment of audit resources from large businesses to
mid-size businesses (C and S)
• Net investment income tax (3.8 percent)

The 3.8 percent tax on net investment income
• Planning for the 3.8 percent tax
• Sounds small, but equivalent to a large surtax
• 9.6 percent surtax on ordinary income
• 19 percent surtax on capital gains and dividends
• Do you have sufficient “activity” to be exempt?
• Challenges:
• Dispositions of interests in pass-throughs
• Rental and Estate income
• Areas of focus: (1) passive activity planning, (2) like-kind
exchanges, (3) installment method, (4) retirement planning
(including Roth accounts), (5) capital gain planning, (6) municipal
bonds

NYS TAX UPDATE

Startup NY
• Benefits
• 100% business tax credit for 10 years
• 100% sales tax exemption
• 100% property tax exemption (usually)
• 100% income tax exemption for net new employees

Startup NY (cont.)
• Qualifiers
• Must be located in certain properties, generally college
campuses or property specifically identified by NYS.
• Some limitations (square feet, etc.)
• Must create jobs immediately
• Must be new business to NYS, or expansion of existing (no loss
of jobs anywhere else)
• Alignment with academic mission of host campus
• Must maintain net new jobs
• Many prohibited businesses – service, real estate, financial,
restaurants, hotels, etc. are prohibited.

Corporate Tax Reform
• Effective 1/1/15, say
goodbye to:
• Corporate AMT
• Investment allocation
• Complex NOL rules

Corporate Tax Reform (cont.)
• Say “Hello” to
• 0% tax rate on income of manufacturers. C Corps only!!
• Real property tax credit for manufacturers (unrelated lessor)
• New economic nexus rules (for out of state companies) at
$1,000,000 to NYS customers

Corporate Tax Reform (cont.)
• So, you’re an S Corp manufacturer, unable to take advantage
of the 0% NYS rates…what do you do?

CURRENT EVENTS

Current Events
• House of Rep 6/20/2015 – Held hearings on examining the
taxation of foreign earnings as a potential revenue source for
funding Highway Trust Fund. Sen Schumer has said this
could be a way of accomplishing significant International Tax
Reform
• Fed Tax Alert 7/16/15
• Lawmakers to consider Extender package
“early” in 2015
• Proposed modification to R&D Credit
• WSJ – 7/20/2015
• Hillary Clinton proposes revised Capital gain rates

Current Events (cont.)
• Temporary Highway Act Signed 8/3/15
• More reporting on home mortgage interest
• Adjusts Tax filing due dates
• Veterans health care coverage eased
• Estate reporting

Thank you
Thank you for your attendance at
today’s program.
For more information regarding the topics discussed today, please feel
free to contact:
Tax Partner
steven.mills@inserocpa.com
585.697.9629
Insero & Co. CPAs
www.inserocpa.com
www.inserocpa.com | 70Insero & Co. CPAs

Insero & Co. CPAs
Certified Public Accountants
Business & Financial Advisors
Rochester | Ithaca | Corning
Cortland | Watkins Glen
Disclaimer
These materials were prepared solely for the purpose of continuing professional education. They are distributed with the understanding that
Insero & Company CPAs, P.C. and its employees are not engaged in rendering legal, accounting, or other professional service as part of this
CPE presentation. If advice or other expert assistance is required, the services of a competent professional person should be sought. Please
contact an Insero team member with any questions.
The information contained herein is general in nature and based on authorities that are subject to change. Insero & Company CPAs, P.C.
guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omission, or for results obtained
by others as a result of reliance upon such information. Insero & Company CPAs, P.C. assumes no obligation to inform the reader of any
changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide
legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situation.
Any information contained herein, or on any website or email link associated with this document is not intended or written to be used, and
cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
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6th Annual Tax Update

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