Quantitative Services (QS)Lunch & LearnJuly 27, 2016
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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
Background on Quantitative ServicesMyunghee Geerts
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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
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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
Uniform Capitalization (UNICAP)
Daniel Chang
Page 8 12 July 2016
► 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?
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Potential Opportunities
► Taxpayers that capitalize accounts that are excludible for tax purposes.► Ex. Warranty, Freight out,
R&D costs, etc.
Negative 263A Costs
Research & Development CreditChristine Lafferty
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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.
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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
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Opportunities Related to R&D
1Requirements NON-Software Software
Innovative test Significant economic risk
test Not commercially
available test
Non internal-use software
Dual function softwareR&D Credit
Opportunities (IRC §41)
3
3
Technological in nature Process of
experimentation New or improved
functions
Technical uncertainty
R&D CreditOpportunities
(IRC §41)
Internal-use softwareR&D Credit
Opportunities (IRC §41)
Proposed Regulations
Deductible software development costs
Rev. Proc. 2000-50
Deductible Expense(IRC §174)
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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
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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.
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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
Accounting Method Changes
Dan Stillman
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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
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► 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
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► 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
Section 199 Deduction
Leah Rand
Page 23 Presentation title
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
Page 24 Presentation title
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
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Value for the Client
► Reduce Taxable Income► Permanent tax savings
► Reduce Effective Tax Rate► Increase Earnings & Profit► Increase Cash Flow
12 July 2016
Transactions Cost
Page 27 Presentation title
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
Tangible Property Regulations (TPR)Ariana Clarke
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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
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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
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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
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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
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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.
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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.
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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?
Q&A
1 January 2014Presentation title