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TS & QS Summer 2016 Lunch and Learn - QS Only
- 1. Quantitative Services (QS) Lunch& Learn July 27, 2016
- 2. Page 2 Agenda ► Introduction& Background on QS – Myunghee Geerts, Manager ► Uniform Capitalization (UNICAP) - Daniel Chang, Staff ► Research Credit - Christine Lafferty, Staff ► Accounting Method Changes - Dan Stillman, Staff ► Section 199 Deduction - Leah Rand, Staff ► Transaction Costs – Leah Rand, Staff ► Tangible Property Regulations (TPR) - Ariana Clarke, Senior ► Next steps: Let us know! – Myunghee Geerts, Manager
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- 4. Page 4 What isQuantitative 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 makesa 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
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- 8. Page 8 12July 2016
- 9. ► Compliance ► Verifycompliance 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
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- 12. Page 12 Purpose ofthe 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 ofResearch 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 Relatedto 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
- 18. Accounting Method Changes DanStillman
- 19. Page 19 Purpose ► Taxtreatment 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 ► Softwaredevelopment 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 ► Revenuedeferral ► 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
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- 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 forthe Client ► Reduce Taxable Income ► Permanent tax savings ► Reduce Effective Tax Rate ► Increase Earnings & Profit ► Increase Cash Flow 12 July 2016
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- 27. Page 27 Transaction CostAnalysis ► Fees for professional services in connection with transactions ► Transactions: ► Third- Party domestic Acquisition ► Internal restructuring ► Initial public offerings ► Bankruptcies 1 January 2014 Presentation title
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- 29. Page 29 Tangible PropertyRegulations ► 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 Forwardwith 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 SafeHarbor 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 DepreciationSystem (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?
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Editor's Notes
- #3 Add the four pages after AGENDA
- #7 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
- #8 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.
- #9 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?
- #10 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.
- #11 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
- #23 -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
- #24 -Film : as long as 50% of total compensation relating to production was completed within the US -Must produce, not just transport
- #25 -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).
- #26 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
- #29 -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