CBIZ & MHM Executive Education Series™

Eye on Washington: Quarterly Business Tax Update

April 30, May 5 and 6, 2015

Presented by: Stephen C. Henley, CPA National Tax Practice Leader, CBIZ MHM, LLC William M. Smith, Esq. Managing Director, CBIZ MHM, LLC National Tax Office

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Before We Get Started…

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Today’s Presenters

Stephen C. Henley , CPA Senior Managing Director, CBIZ MHM 770.858.4443 | shenley@cbiz.com Steve has 30 years experience in serving the tax needs of clients in a variety of industries including retail, distribution and manufacturing, services, technology and communications. In serving as lead tax engagement executive, Steve’s focus is identifying and executing value creating strategies to meet the needs of his clients in a variety of technical areas, such as revenue recognition, acceleration of deductions, research and experimentation credits, state and local tax minimization, M&A tax structures, international tax planning and tax implications of compensation programs.

William M. Smith, Esq. Managing Director, CBIZ National Tax Office 301.951.3636 | billsmith@cbiz.com Bill Smith is a managing director in the CBIZ National Tax Office. Bill monitors federal tax legislation and consults nationally on a broad range of foreign and domestic tax services for businesses and individuals, including mergers and acquisitions, domestic and international investments or divestitures, and the review, negotiation and drafting of tax aspects of business agreements.

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Agenda

Legislative Updates Obama 2016 Budget Overview Estate taxes Foreign Taxes GE, Microsoft and Pfizer face $506 billion tax bill GE Responds with $36 billion repatriation plan

Congressional reaction House Budget Senate Budget

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Agenda

Administrative Updates TPR small business relief 4980D excise tax on EPPs Overview Notice 2015-17 relief for small taxpayers

DPAD IRS Challenging Deductions (Benefits and Burdens

of Ownership) Activities Outside Scope

R&E Credit Simplified alternative credit Allocations among controlled group

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Agenda

Administrative Updates IRS Guidance on NIIT and passive losses OVDP to remain open indefinitely Final Regs Clarify $1 Million Deduction Limit

Regarding Performance-Based Compensation

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Agenda

Cases Supreme Court hears arguments in King v Burwell on

ACA challenge – decision expected in June Transferee liability in corporate dissolution

Andrews v US – shareholders not liable (USDC, MD N.C.) Kardash v Commr – shareholders liable (Tax Court) Feldman v Commr (7th Cir) – shareholders liable in “Midco”

transaction designed to eliminate double tax on C corp with appreciated assets

Stuart v Commr - IRS nixes two step approach to transferee liability (Tax Court)

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Agenda

Cases Pilgrim’s Pride v Commr (5th Cir.) – section 1234 did

not apply to abandonment of securities and TP entitled to ordinary loss

Stine v US (USDC W.D. La.) – building placed in service and eligible for bonus depreciation

Si Boo LLC v Commr (109 TCM 1079) -- Sales of real property by three LLCs produced ordinary income rather than capital gain, could not be reported on the installment method, and required payment of self-employment tax

LEGISLATIVE UPDATES

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Increase capital gains and dividend rates from 23.8% (with NIIT) to 28% Rate was 15% when Obama took office New rate same as under the Reagan Administration

Impose capital gains tax on asset transfers at death (closing “largest single loophole” – the “stepped-up basis”) No tax until death of second spouse First $200,000 exempt for couples with automatic portability, and

$100,000 for individuals Home exempt up to $500,000 for couples with automatic portability

($250,000 individuals) All personal property, except art and collectibles, exempt Delay tax on family owned businesses until sold Current estate tax exemption up to $10.86 million per couple

80% of taxes will be paid by top 0.1% of households, 90% by top 1%

Obama 2016 Budget – Individuals

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Up to $500 credit for double earners, with phase out at family income between $120,000 and $210,000 (5% of first $10,000 of lower earner) 80% of two earner couples would benefit (24 million)

Limit ability to contribute to retirement accounts worth $3.4 million or more ($210,000 annual income)

Increase maximum child care tax credit to $3,000 for families with children under 5 Make credit available for all families with income up to

$120,000 Consolidate education breaks into one $2,500 annual

credit for five years for students working towards degree

Obama 2016 Budget – Individuals

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Corporate Tax Rate reduced from maximum 35% to 28% 25% effective maximum rate for manufacturers Fight over individual reform

Section 179 2015: $500,000 with $2 million limit 2016: $1 million with $2 million limit 2017 and beyond: indexed for inflation

Bonus depreciation: no provision For 2014, 100% bonus depreciation for purchases of new

tangible property with recovery period 20 years or less; includes qualifying leasehold improvements

15 year Straight Line recovery for restaurants, retailers, or businesses with leasehold improvements

Obama 2016 Budget – Businesses

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Exclusion of gain from qualifying small business stock for non-corporate shareholders: permanent

Research credit: permanent Expand small business health insurance credit to cover

businesses with up to 50 employees (up from 25) Repeal LIFO accounting method (included in Camp

proposal) Expand cash method of accounting to companies with

up to $25 million gross receipts Tax on liabilities of largest financial institutions (7 basis

points) to discourage excessive borrowing Would apply to roughly 100 firms with assets over

$50 billion Reduce potential bailout costs to government Similar to Camp proposal

Obama 2016 Budget – Businesses

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Tax carried interests as ordinary income WOTC made permanent Reform and expand the low income housing

tax credit Retirement Workers who have worked 500 hours/year for three

years eligible to participate in employer’s plan Automatic IRA enrollment for worker’s of

companies without plans Expanded tax breaks to assist companies in setting

up plans

Obama 2016 Budget – Businesses

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Estates Current rate 40% -- proposal would increase to 45% Current exclusion $5 million indexed for inflation ($5.43

million for 2015) – proposal would reduce to $3.5 million Effective for decedents dying in 2016

GRATs No zero value GRATs Minimum term: 10 years Maximum term: life expectancy plus 10 years Remainder value must be greater of $500,000 or 25% of

the value of the assets Means you have a minimum taxable gift of $500,000

Obama 2016 Proposal – Estates

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Estates House set to pass law to repeal estate tax Not concerned about veto -- “Doing so is a matter of

principle,” according to House Ways and Means Committee Chairman Paul D. Ryan (R-Wis.)

Cost $269 billion State and local sales tax deduction House to make permanent Cost $42 billion

No revenue offsets

Obama 2016 Proposal – Estates

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One-time 14% tax on earnings accumulated in CFCs and not previously subject to U.S. tax. Credit for foreign taxes paid on earnings Future repatriation without additional tax Payable ratably over 5 years U.S. companies including General Electric Co., Microsoft

Corp. and Pfizer Inc. would pay $506 billion over the next decade

GE to repatriate $36 billion Revenue to fund infrastructure projects

Minimum tax of 19% on foreign earnings of domestic C corporations and their CFCs Complex calculation for foreign taxes paid Replace Subpart F and foreign tax credit regime Repatriation without further tax

Obama 2016 Proposal – Foreign

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House Ways and Means Committee Chairman Paul D. Ryan (R-Wis.) “Taken a few steps in the right direction” -- “It's progress—

not a lot, but we'll take it” Likes the one-time 14 percent tax on the foreign earnings of

U.S. multinational corporations to help pay for surface transportation projects – but tax is higher than some would prefer and that the toll must be “set at a reasonable level.”

Likes cash method of accounting for businesses, although he asked if Treas. Sec. Lew would work toward expanding that benefit for pass-through businesses

Doesn't like the president's proposed tax increases, including on higher earners

Lew testified that the budget would achieve $1.8 trillion of deficit reduction over 10 years

Obama 2016 Proposal – Congressional Reaction

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Spending blueprint, not law Calls for lower corporate and individual rates Breaks with recent tradition by not specifying top rates

Repeal of AMT “Reconciliation Instructions” to Ways and Means to

identify $1 billion of deficit cutting measures over next decade No specifics

House 2016 Budget

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Repeal and replace Obamacare “Budget Facts”: Balances the budget in 10 years. Reaches a $3 billion surplus in the 10th year. Achieves $4.4 trillion more in deficit reduction than President

Obama’s budget request. “Senate Budget Resolution allows Congress to”: Reform the Internal Revenue Code. Amend the Internal Revenue Code to extend certain expiring

tax relief provisions for innovation and high quality manufacturing jobs.

Repeal the 2.3 percent excise tax on medical device manufacturers.

No specifics

Senate 2016 Budget

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Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) said he doesn't expect a budget being negotiated by House and Senate Republicans to become the spark that lights a big tax overhaul (April 14) Remains focused on the committee's working groups,

which are to make recommendations on tax changes in late May that would lead to a legislative proposal

House Speaker John Boehner (R-Ohio) isn't ready to commit to the idea of using reconciliation to advance tax reform

Congressional 2016 Budget Rhetoric

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ADMINISTRATIVE UPDATES

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In 2014, the IRS issued implementation guidance on how to change existing accounting methods to comply with the final tangible property regulations (TPRs) — an expansive set of rules governing the capitalization and deduction of costs incurred to acquire, maintain, repair, replace and dispose of tangible property

The TPRs impact virtually all taxpayers with tangible business property (real or personal), materials and supplies, or repairs and maintenance expenditures

Rev. Proc. 2015-20 which allows qualifying small taxpayers on 2014 tax returns to implement the (TPRs) on a cut-off basis and without filing Form 3115

A qualifying small taxpayer is a taxpayer with one or more separate and distinct trade(s) or business(es) that has: Total assets of less than $10 million as of the first day of the 2014 tax year, or Average annual gross receipts of $10 million or less for the three prior taxable

years (2011–2013).

Simplified Tangible Property Rules (Rev. Proc. 2015-20 )

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Employers that offer health coverage through arrangements where insurance premiums on individual plans are reimbursed or paid by employer (an “EPP”) violate ACA market reform rules, subjecting employer to $100/day penalty for each employee violation (Notice 2013-54). Treating payments as taxable offers no protection.

“Small employers” (not a large employer for ACA shared responsibility payment) will not be penalized for 2014 for EPPs through June 30, 2015.

Reimbursing a 2% S corporation shareholder/employee will not subject corporation to penalty until further guidance is issued.

Penalty Relief for Employer Payment Plans (Notice 2015-17)

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Overview

Domestic production activities deduction (DPAD) Allows a 9% deduction of the lesser of taxable income

or qualified production activities income (QPAI). QPAI: Taxpayer's domestic production gross receipts

(DPGR), reduced by (1) the cost of goods sold that is allocable to DPGR, and (2) other deductions, expenses and losses that are properly allocable to DPGR.

DPGR: Taxpayer's gross receipts derived from one or more of qualifying production activities.

DPAD

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Issue #1: Who can claim the deduction when ownership is unclear:

IRS tax examiners are challenging companies’ claims that they have the benefits and burdens of property ownership and, therefore, are entitled to a Code Sec. 199 deduction when they dispose of the property

New IRS Directive: Where the ownership of property is unclear, the two parties with a claim to ownership are allowed to certify who will claim the deduction However, auditors are not respecting taxpayers’ certification of ownership

and are still requiring them to demonstrate that they, in fact, have the benefits and burdens of ownership

Examiners should not be auditing a taxpayer’s certification of ownership that complies with the IRS directive according to former IRS attorney who wrote regulations

DPAD

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Issue # 2: What activities qualify? Taxpayer must determine if it has manufactured, produced, grown, or

extracted (MPGE) qualified property in whole or in significant part within the United States

Taxpayers have struggled in distinguishing activities that constitute MPGE from activities that do not qualify as MPGE, such as packaging, labeling and minor assembly

New IRS directive: Provides examples of activities that do not meet the definition of MPGE Cutting blank keys to a customer’s specification; Mixing base paint and a paint coloring agent; Applying garnishments to a cake that is not baked where sold; Storing agricultural products in a controlled environment to extend

shelf life; and Maintaining plants and seedlings

DPAD

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IRS released final rules on Feb. 26 regarding use of the Alternative Simplified Credit (ASC) method (temporary regs had been issued in June, 2014)

Taxpayers may make an election on amended returns to use the ASC method for calculating the credit for increasing research activities Only if regular method not previously used on it’s original or amended return

Simplified Controlled Group Credit Allocation Regulations issued Apr. 9 that follow previous interim guidance Notice 2013-20 method: allocating the group credit to group members

based on each member’s share of qualified research expenditures (QREs), without regard to whether the member would have a stand-alone credit or what the amount of that credit would be

Temporary Regs: Members are no longer required to calculate a stand-alone credit

Research and Experimentation Credit

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IRS has reversed course and is beginning to work on guidance related to tax code Section 469 passive loss rules as they pertain to the net investment income tax

Tax practitioners have struggled with how to classify income from a family business owned by a trust under Section 469

Two recent IRS private letter rulings involving similar cases — individual retirement accounts with charitable beneficiaries — resulted in different outcomes

NIIT and Passive Losses

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The IRS will continue its offshore voluntary disclosure program (OVDP) "for an indefinite period until otherwise announced."

The IRS first opened the program in 2009 and has maintained it continuously since reopening it in 2012

50,000 disclosures IRS has collected more than $7 billion since the OVDP

opened in 2009

OVDP

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No deduction by any publicly-held corporation for compensation paid to the chief executive or 4 highest paid officers that exceeds $1 million for the year Does not apply to compensation that is paid solely for attaining one or

more performance goals Compensation attributable to stock options or stock appreciation

rights (SARs) satisfies the requirements if the plan specifies the maximum number of shares for which options or SARs can be granted to any individual employee for a specified period

The 2015 final regs provide that a plan satisfies the per-employee limitation if the plan specifies an aggregate maximum number of shares for all types of equity-based awards to a specific employee

Also, clarification of RSUs/Phantom Stock payouts to meet the transitional relief for companies that become public: must be paid not merely granted before earliest of certain events

$1 Million Compensation Deduction Limit

CASES

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King v. Burwell, 114 AFTR 2d, 2014-5071 (4th Cir. July 22)

DC Circuit –Federal [health insurance] exchange is not an “Exchange established by the State.” As a result, the premium tax credits under Code §36B are unavailable if the individuals purchase their insurance through a federal exchange.

Fourth Circuit – Concluded the plain language and context of the relevant statutory sections, along with the ACA’s legislative history made it unclear if Congress intended to limit the premium tax credits to state exchanges. Giving deference to the IRS’s determination in the regulations (and applying the Chevron Doctrine of statutory interpretation) the Court concluded the statute permitted the IRS to decide whether the tax credits would be available on federal exchanges.

U.S. Supreme Court: Heard oral arguments for King v. Burwell on March 4, 2015 – commentators say questions split along party lines

Supreme Court to Rule on Premium Tax Credits Under ACA

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Andrew v. U.S., (M.D. NC)

Kardash v. Commissioner, T.C. Memo. 2015-51

Feldman v.Commissioner ( 7th Cir.)

Stuart v Comm’r, 144 TC No. 12

Transferee Liability

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Pilgrim’s Pride Corp. v. Comm’r, 2015-1 U.S.T.C. ¶50,211 (5th Cir. 2015)

Section 1234A(1) only applies to the termination of contractual and derivative rights, and not to the abandonment of capital assets

The government argued that Section 1234A prevented Pilgrim's Pride from taking an ordinary abandonment loss deduction of $98.6 million for shares its predecessor was obligated to purchase after the issuer's public offering fell through

Court said that by it’s plain terms, law applied to the termination of rights/obligations in capital assets, not to the termination of ownership in the CA itself!

Also, gov’t argued 165(g) would require capital loss treatment Court disagreed since 165(g) requires the asset to be worthless

and both parties had stipulated that the securities were worth at least $20M at time of abandonment

Note, Regs issued in 2007 states that an abandoned security is per se “worthless”, therefore any loss capital

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Two buildings designed to be retail stores were placed in service when the buildings were substantially complete Buildings were ready and available for their intended

use – to store and house equipment, racks, shelving and merchandise

Certificate of Occupancy had been issued, but it limited occupancy and did not allow customers

The court rejected the government’s argument that the buildings were not placed in service until they were open to the public for business

No authority exists for “open for business” requirement

Court found there was a marked difference in the treatment of buildings versus equipment

Stine, LLC v. U.S., 2015-1 U.S.T.C. ¶50,172 (W.D. La. 2015)

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Several LLCs that regularly purchased tax liens on real properties, acquired the properties, and then sold them in a short period, were engaged in the trade or business of selling real estate to customers

Accordingly, such gains from the sales were ordinary income, not capital gain.

Key Question: Were properties held “primarily” for sale to customers in the “ordinary course of business”?

The income was subject to self-employment taxes and could not be reported on the installment basis since the sales of properties were an integral part of taxpayers’ trades or businesses, therefore subject to SE tax

Sales were deemed “dealer dispositions”, thus taxpayer could not use the installment method

SI BOO, LLC v. Comm’r, TC Memo. 2015-19

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Questions?

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Join us for this course:

Eye on Washington: Quarterly Business Tax Update 1st Quarter – Offered on July 30th, and August 4th and 5th

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