Robert J. PruittBKD National Tax Director

Welcome to the BKD 2016 Year-End Tax Advisor.

Solid tax planning is key to a healthy financial future. That’s why we’ve gathered valuable information for you on a wealth of topics that may affect your tax planning efforts for the remainder of this year and well into the future. From upcoming due date changes to guidance on preventing identity theft, these articles will help you navigate new tax issues and determine how they apply to your situation.

Developing an effective tax strategy often involves weighing a range of possibilities to determine the right course of action. While the following articles cover several important issues that could affect you, everyone’s tax situation is unique, and the Advisor is not a substitute for advice from your BKD tax professional. We encourage you to use this resource as a basis for discussions with your tax advisor during your year-end planning process.

Thank you for trusting us with your tax and accounting needs, and we look

forward to serving you for years to come.

Solid tax planning is key to a healthy financial future.

Jesse PalmerBKD Director of Tax Quality Control

2016 Individual Tax Year in Review // Damien Martin

Year-End Planning // Susan Jones

Taxpayer Identity Theft Changes // Susan Thiessen

Use Tax Obligations for Individuals // Kevin Kennedy

2016 Charitable Giving Guidelines // Jim Gustafson

Proposed Changes to Estate & Gift Tax Valuation Rules // Jeff Conrad

2016 Federal Business Tax Legislation Update // Damien Martin

IRS Reporting Under the Affordable Care Act // Brandon Baum

Work Opportunity Tax Credit // Bob Johnson Jr.

Tax Return Due Date Changes on the Horizon // Travis Truesdell

Information Reporting Form Due Date Changes // Rene Finco

Accounting for the Personal Use of Business Automobiles // Shawn Loader

Banking on Succession // Chris Schumann

Market-Based Sourcing Becoming Popular with States // Jeff Farrell

Complying with 501(r) // Kim Scifres

Repair Regulations Still Provide Opportunities for Taxpayers // Scott Humphrey

Significant Transfer Pricing Documentation Changes // Elizabeth Hazzard

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Individuals

Year-end planning is a must for individual taxpayers. BKD can help individuals reduce their 2016 tax bill through deductions, credits and other tax planning techniques.

• 2016 Individual Tax Year in Review

• Year-End Planning

• Taxpayer Identity Theft Changes

• Use Tax Obligations for Individuals

• 2016 Charitable Giving Guidelines

• Proposed Changes to Estate & Gift Tax Valuation Rules

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2016 Individual Tax Year in Review

With the end of 2016 in sight, individual taxpayers and their advisors should consider the effects of recent tax legislation and IRS guidance.

The PATH Act

On December 18, 2015, the president signed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which provided retroactive, temporary and permanent extensions to numerous popular individual and business tax provisions. These are some key individual provisions the PATH Act retroactively extended and made permanent:

• Deduction of state and local general sales taxes: A taxpayer may elect to claim an itemized deduction for state and local general sales taxes in lieu of deducting state and local income taxes.

• Exclusion of gain on sale of small business stock: A noncorporate taxpayer may exclude all the gain realized on the disposition of qualified small business stock held for more than five years. This is subject to a per taxpayer limit of the greater of 10 times the basis in the stock or $10 million. The excluded portion of the gain also is excepted from treatment as an alternative minimum tax preference item.

• Charitable distributions from an individual retirement account (IRA): A taxpayer who is age 70½ or older can make tax-free distributions from an IRA to a qualified charitable organization—up to $100,000 per tax year.

The PATH Act also made several taxpayer-friendly changes to the Section 529 plan distribution rules for tax years beginning after December 31, 2014:

• The definition of qualified higher education expenses that qualify as eligible, tax-preferred distributions from §529 accounts was expanded to include computer technology and equipment.

• The requirement to aggregate distributions from §529 accounts was modified to treat any distribution from a §529 account as only coming from that account, even if the taxpayer operates more than one. This change may be beneficial if some or all distributions aren’t used to pay for qualified higher education expenses.

• The treatment of refunds of tuition paid with distributions from a §529 account was modified to be treated as a qualified expense if the amount is recontributed to a §529 account within 60 days of receipt.

The following provisions only received a temporary extension under the PATH Act and expire at the end of 2016 absent future legislation:

• Exclusion of income from discharge of principal residence indebtedness

• Mortgage insurance premiums treated as qualified residence interest

• Tuition and fees deduction

• Nonbusiness energy property credit

Continued >>

Damien MartinNational Officedrmartin@bkd.com

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New Basis Consistency & Information Reporting Requirement

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 created a requirement that the tax basis of any property received from a decedent be consistent with the value reported on the estate tax return and added a new consistent basis reporting requirement. On March 4, 2016, the IRS provided additional guidance by issuing proposed regulations, which added clarification on many fronts, but also proposed several controversial provisions, including a “zero-basis” rule for after-discovered property or property omitted from the estate tax return as well as a reporting requirement on subsequent transfers of inherited property.

With the new reporting requirement, any estate’s executor with a gross estate in excess of the basic exclusion amount that was required to file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, after July 31, 2015, is required to file Form 8971, Information Regarding Beneficiaries Acquiring Property From a Decedent, to report the final estate tax value of property distributed or to be distributed to a beneficiary and furnish any person acquiring (or expected to acquire) property from the estate with a Schedule A. Importantly, for individual taxpayers, any beneficiary receiving a Schedule A from an estate also is required to file a Form 8971 and Schedule(s) A if all or any portion of property being reported—or that’s required to be reported to them—on a Schedule A is subsequently transferred to a related transferee in a transaction in which the transferee determines their income tax basis by reference to the transferor’s basis, e.g., a transfer by gift. For this purpose, a related transferee includes a family member, controlled entity or trust of which the transferor is deemed the owner. The subsequent reporting is due 30 days after the date of the distribution or other transfer, and a penalty may be imposed for failure to file.

New Self-Certification Procedure for Late Retirement Plan Rollovers

In Revenue Procedure 2016-47, the IRS established a new self-certification procedure for recipients of qualified retirement plan distributions who inadvertently missed the 60-day requirement to roll the distribution to an eligible retirement plan on a tax-free basis. With the guidance, eligible taxpayers receive relief from missing the requirement if one or more of these 11 mitigating circumstances are met:

• An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates

• The distribution, having been made in the form of a check, was misplaced and never cashed

• The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan

• The taxpayer’s principal residence was severely damaged

• A member of the taxpayer’s family died

• The taxpayer or a member of the taxpayer’s family was seriously ill

• The taxpayer was incarcerated

• Restrictions were imposed by a foreign country

• A postal error occurred

• The distribution was made on account of a levy under §6331 and the proceeds of the levy have been returned to the taxpayer

• The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information

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Susan JonesSt. Louisswjones@bkd.com

As we near year-end, individual taxpayers should work together with their advisors to identify opportunities to reduce their 2016 tax bill. These strategies may include deferring income, recognizing gains, accelerating deductions and more.

Philanthropic taxpayers can make year-end charitable gifts to lessen the 2016 tax bite. Charitable gifts can be particularly tax-efficient for high-income taxpayers with individual retirement accounts (IRAs) by using the charitable rollover provision made permanent by the Protecting Americans from Tax Hikes Act of 2015. With an IRA charitable rollover, a taxpayer age 70½ or older may transfer up to $100,000 annually from his or her IRA directly to a qualified charitable organization (the IRS provides a helpful search tool for exempt organizations).

The amount transferred will be excluded from the taxpayer’s adjusted gross income (AGI) for federal income tax purposes. This exclusion is important for all taxpayers, as AGI is used to determine everything from the amount of taxable Social Security (affecting lower-income taxpayers) to the phaseout of itemized deductions (for high-income taxpayers). The amount transferred does not generate a charitable income tax deduction, but does count toward the taxpayer’s minimum required distribution.

Taxpayers experiencing higher ordinary income in 2016 compared to future years should consider prepaying future charitable giving through a current-year contribution to a donor-advised fund. A donor-advised fund allows a taxpayer to be eligible for an immediate tax deduction based on the full value of the contribution to the donor-advised fund and then recommend grants over time to qualified charitable organizations, essentially accelerating the deduction.

Taxpayers also should consider using long-term, appreciated stock rather than cash to make year-end charitable gifts. The taxpayer’s charitable contribution deduction will equal the full fair market value of the gifted stock, and the taxpayer will not recognize gain from the contribution, providing a double tax benefit for the same gift. Stock gifts are subject to lower thresholds of AGI when determining current-year deductibility, so taxpayers should work closely with their advisors to ensure they accomplish the expected tax benefits.

Taxpayers should review realized and unrealized capital gains and losses to determine if additional transactions would be appropriate to lower taxes or provide an opportunity to restructure his or her portfolio. Taxpayers who have realized capital gains throughout the year may wish to work with their financial advisors to identify any investment assets with unrealized losses that may be sold before year-end to offset gains. Alternatively, taxpayers who have realized capital losses may wish to take the opportunity to sell certain investments and shield those gains.

Taxpayers using these techniques should keep in mind the wash sale rule, which prevents the claiming of a loss on a stock sale if the taxpayer buys replacement stock within 30 days before or after the sale.

If an unusually low income year is expected, a taxpayer may consider converting a traditional IRA into a Roth IRA. With a traditional IRA, any amounts later distributed in excess of the taxpayer’s basis in the account will be subject to tax at ordinary income tax rates. Roth IRA distributions are income tax-free.

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Year-End Planning

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In a low or negative taxable income year, this converted amount may be able to absorb itemized deductions that would otherwise be lost. Further, the effective tax rate on the converted amount may be lower than the cumulative tax had the distributions been subject to tax when paid later.

The alternative minimum tax (AMT) results in the permanent disallowance of itemized deductions for state taxes paid and miscellaneous deductions. Though often difficult to completely eliminate, there may be ways to reduce the AMT effect. Review current-year projected state tax against withholdings and estimated tax payments to determine the timing of a fourth-quarter state-estimated tax payment. If a taxpayer won’t be in AMT for 2016, making a fourth-quarter estimated tax payment prior to year-end would accelerate the deduction to the 2016 year, when the deduction will be allowed if the taxpayer itemizes deductions.

Alternatively, if a taxpayer will be in AMT, the individual can consider delaying fourth-quarter state-estimated tax payment until the early 2017 due date, since no deduction would be allowed in 2016. If a taxpayer will be in AMT and subject to the 28 percent rate, he or she may consider accelerating income until the threshold of when the regular ordinary income tax rate of 39.6 percent would apply.

While the increased estate tax exemption ($5.45 million per individual or $10.9 million for married couples in 2016) has eliminated estate tax concerns for many taxpayers, year-end planning for those who do have assets above this threshold is a key component in limiting the potential estate tax that might be due at death. This year-end planning can range from the straightforward to the complex.

Taxpayers should consider making gifts sheltered by the annual gift tax exclusion before the end of the year. The exclusion applies to each gift up to $14,000 made in 2016 to an unlimited number of individuals. Taxpayers also should consider making gifts that are exempt from the gift tax, including gifts made directly to an educational organization for

the education or training of the recipient and gifts made directly to a medical provider for unreimbursed medical expenses. For gifts made using trusts where annual exclusion use is anticipated, taxpayers should ensure all “Crummey” withdrawal powers are distributed, acknowledged and saved to protect against future IRS challenges.

In August 2016, proposed regulations were released that would make significant changes to the valuation of family-controlled entities for estate and gift tax purposes. Specifically, these regulations would limit the ability of a taxpayer to use minority interests in valuing these intrafamily transfers of these entities. A detailed discussion of these regulations is included in Jeff Conrad’s article, “Proposed Changes to Estate & Gift Tax Valuation Rules.”

As tax laws continue to be progressively complex and burdensome, an annual year-end review and analysis of available tax planning strategies that also reflects a taxpayer’s financial and nonfinancial goals is imperative to avoid paying unnecessary taxes.

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Susan ThiessenNational Officesthiessen@bkd.com

Identity theft evolves almost daily. Protecting your most important asset, your identity, is growing more complicated as scammers target numerous angles. Cybercriminals have new technology, scams and more personal data to impersonate taxpayers. The IRS indicated this is the fastest-growing crime, with a 400 percent scam increase this tax season.

Because combating identity theft is a high priority, the IRS adapts to meet its increasing threat level. The Security Summit is a partnership between the IRS, state agencies and tax industry to combat identity theft with new safeguards, making filing season more secure for taxpayers. Due to more stringent requirements set by the IRS and state agencies, your tax preparer may request additional information to file your tax return. These additional safeguards will help ensure tax refunds are dispersed to intended taxpayers. The IRS intends to process nine out of 10 refunds in 21 days; however, state refund time frames vary, allowing for additional steps to protect taxpayers from identity theft and refund fraud. Check your state tax agency’s website for details.

The Security Summit alone can’t protect your identity and refunds. You also must take steps in the battle, including safeguarding your personal and financial information online and at home. BKD’s article, “Identity Theft – A Victimless Crime?”, highlights best practices for reducing potential identity theft. BKD’s article, “Tax-Related Identity Theft: What Affected Taxpayers Need to Know,” covers the growing epidemic of tax-related identity theft and steps for affected taxpayers.

Tax-related identity theft victims understand the frustrations and numerous agencies required to resolve matters. It takes the IRS up to 120 days to resolve a typical taxpayer

identity theft matter (complex cases can take longer), resulting in delayed refunds. If you’ve been a victim of tax-related identity theft and were assigned an Identity Protection Personal Identification Number (IP PIN), provide this information to your tax preparer as it will confirm your identity on future filings. The IRS will mail you a new IP PIN prior to each filing season.

The Security Summit’s new approaches to combat identity theft and taxpayer refund fraud may invoke some minor filing inconveniences, but remember these are for your protection.

Taxpayer Identity Theft Changes

Remember: The IRS does not contact taxpayers through email to request personal or financial information. This includes any type of electronic communication, such as text messages or social media channels. The IRS also does not call taxpayers with threats of lawsuits or arrests.

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Use tax is a complementary tax to sales taxes levied on the use of property within a state. Every state with a general sales tax imposes a use tax. A use tax is due when a sales tax normally would have been charged on a taxable transaction, but wasn’t.

States have a use tax to help protect in-state businesses and make sure states don’t miss out on tax dollars from interstate commerce. Without a use tax, remote sellers in effect offer a 7 percent to 10 percent discount on their merchandise, but more importantly, the state’s tax revenue also is less. The National Conference of State Legislatures estimated that states lost $23 billion of sales/use tax revenues in 2012 from some online and catalog sales. While that projection is debatable and includes business-to-business sales, it’s a large number that’s increasing.

States have become more creative and collaborative and now have tools to uncover unpaid use taxes—primarily through routine audits. Due to the volume of their purchases and wide variety of auditable taxes, it’s cost-efficient for taxing authorities to audit businesses. Those same efficiencies don’t translate to auditing individuals—states must look for other avenues.

A common tool used by 28 states is an individual income tax return line for disclosure of use tax obligations, but the effectiveness is questionable. Minnesota, a state considering adding such a line, published a report showing that in 2012 a total of $133.3 million was collected by the states that used the tool. The actual percentage of income tax returns reporting a use tax obligation ranged from 0.2 percent in Mississippi and Rhode Island to 10.2 percent in Maine.

Colorado, Kentucky, Oklahoma, South Carolina, South Dakota, Tennessee and Vermont took a new approach: a notice or reporting requirement on out-of-state vendors. They require remote sellers without a physical presence in the state to either notify customers of their obligation to pay use tax and/or provide the states with a list of customers who received untaxed merchandise. While such laws are widely seen as an attempt to encourage remote sellers to begin voluntarily collecting and remitting sales taxes, they open the door for states with such laws to cross-check reports provided with voluntary use tax payments by residents.

States are attacking the problem of lost revenue from unreported remote sales in various ways. Most individuals who have some modest level of use tax obligation each year are encouraged to begin reporting and paying such taxes on a go-forward basis. If any individuals have significant unpaid use tax obligations on out-of-state purchases, e.g., artwork or jewelry, a voluntary disclosure program may be available to catch up on unpaid obligations. Most states offer a limited three- to four-year look back period and will waive penalties for taxpayers who voluntarily come forward. If the state discovers the liability first, the look-back period is theoretically unlimited with significant penalties and interest.

Kevin KennedyKansas Citykkennedy@bkd.com

Use Tax Obligations for Individuals

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As the year draws to a close, taxpayers look to provide support through charitable giving and are interested in the tax benefits of those contributions. However, there are issues surrounding tax-deductible charitable contributions.

Value

Establishing the contribution value is frequently the most subjective aspect of charitable giving. These are valuation methods of more common types of contributions:

• Cash contributions, including those electronically made, are valued at the figure on the supporting bank record or written acknowledgment. Cash contributions without a supporting bank record or written acknowledgment are considered to have zero value for tax purposes.

• Publicly traded stock contributions are valued using the high-low method (taking the average of the high and low price) on the contribution date.

• Mutual fund contributions are valued using the closing price on the contribution date.

• Previously used clothing and household goods contributions are valued at fair market value (FMV), often referred to as “thrift shop value,” as they provide a market establishing comparable prices of used items. Frequently, organizations that accept such donations have thrift shop value reference guides to determine the donated item’s value. Contributions of used goods must be in “good used condition or better” to be deductible.

• Contributions made by a partnership or S corporation on your behalf already were substantiated by the company issuing the Schedule K-1. The value listed on the Schedule K-1 is the value of the contribution by the partner or shareholder.

• Vehicle, boat and airplane contribution values can vary based on the ways the receiving organization uses the item. Securing Form 1098-C from the receiving organization is vital when documenting the FMV of a donated vehicle, boat or airplane.

• Real estate contributions are valued at the FMV provided in a qualified appraisal. Qualified appraisals are made by an expert in the field within 60 days prior to the contribution that meet certain IRS requirements. Consult your tax advisor for questions regarding the qualified appraisal and appraiser requirements before making the contribution.

• Paintings, art, jewelry, gems and collectible contributions are valued at FMV and frequently require a qualified appraisal due to the gift’s size.

Timing

Ensuring your charitable giving is deductible in the current tax year often is an important component of tax planning. Depending on the type of property contributed and the delivery method, a gift contributed near year-end may be considered to be donated in the following year and not the current year. Remember these deadlines when making charitable gifts near year-end:

Jim GustafsonIndianapolisjgustafson@bkd.com

2016 Charitable Giving Guidelines

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• Cash via check is considered contributed on the date of check mailing or hand delivery. The date the check is cashed or acknowledged is irrelevant if mailed by December 31.

• Cash via credit card is considered contributed on the date of the credit card charge. Credit cards are excellent vehicles for last-minute giving, as the charge date is the contribution date, not the ultimate payment date of the credit card statement.

• Securities—including stocks, bonds and mutual funds—when transferred through your broker, are considered contributed on the date the charitable organization is shown as the security’s owner. Depending on the transfer process, there can be delays (sometimes considerable) between the date a transfer is authorized and the date the charitable organization receives ownership.

• Tangible property—clothing, household goods, collectibles and real estate—is considered contributed on the date ownership has unconditionally transferred to the charitable organization.

Special Note: Most investment custodians have a year-end deadline for securities transfers to ensure the transfer of securities settles before year-end. Consult your investment professional to ensure your gift of securities is transferred and received by the charitable organization in a timely manner.

Net Amount Deductible & Personal Benefits Received

While many charitable gifts are distinct gifts, others are part of larger transactions containing both a charitable and personal benefit component. The gross value contributed has to be reduced by the FMV of the benefits received. Gross value contributed, less the FMV of benefits received equals net value contributed.

• Often, the FMV of benefits received is stated by the charitable organization or is

reasonably estimable by looking at the value of the benefit received on the open market.

• Contributions to college or university athletic programs are subject to an additional limitation of 80 percent of the net value contributed if you received preferential treatment for ticket purchases due to your contribution. See your written acknowledgment from the receiving institution for details.

• Frequently exercisable privileges and discounts (admission, parking, etc.) received as a member to a qualified organization, such as a museum or zoo, can be disregarded from the benefit computation above if the annual membership to the organization costs $75 or less.

Ineligible Organizations

Most charitable organizations are qualified recipients of tax-deductible contributions under Internal Revenue Code Section 501(c)(3) or other tax provision. However, some organizations don’t qualify, including:

• Political organizations, including candidate’s campaigns and political action groups

• Fraternities and sororities at the national or chapter level due to their tax structure as social organizations. Many fraternities and sororities have related foundations with §501(c)(3) status that qualify for tax-deductible giving. In addition, certain gifts to the educational institutions themselves, directed to support fraternity or sorority activities, may qualify.

• Foreign organizations (with some exceptions)

Continued >>

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Other Reminders

Early planning is essential.

• Investment custodians have year-end deadlines for gifts of securities.

• Qualified appraisals may be required to substantiate the contribution FMV.

• Recipient signatures on Form 8283 may be required for contributions of certain noncash property.

• Certain state tax credits and incentives require pre-approval prior to making the contribution.

Supporting documentation comes early and in various forms.

• It’s helpful to start a tax envelope early in the year so charitable acknowledgments (and various other tax documents) can be saved as received.

• Print and file email confirmations and electronic check copies when received.

• Note detailed descriptions and values of used clothing/household goods on receipts at time of contribution. Blank receipts hold zero credibility without descriptions of donated items.

• Many credit cards offer “year-end summaries” that categorize transactions assisting with identification of charitable contributions.

• If written acknowledgment is not received or lost, most organizations are helpful in providing additional copies when asked.

Charitable contributions may be limited due to your tax situation.

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The U.S. Treasury Department recently proposed major changes that could affect generally accepted estate and gift tax valuation rules. If implemented, the changes could significantly increase the transfer tax costs associated with transferring family-controlled business interests between generations and hinder the orderly transfer of control and ownership. The response to the proposed regulations has ranged from disagreement to legislative threats.

Current Law

In general, estate and gift tax valuations apply a hypothetical willing buyer-willing seller test based on the price an interest’s willing buyer and willing seller would agree to, each with no compulsion to buy or sell and knowing all facts and circumstances. Additional valuation rules also apply within certain circumstances to transfers and transactions between family members under Chapter 14 of the Internal Revenue Code §2701 to §2704.

Based on more than 50 years of judicial decisions and other guidance, the application of the willing buyer test to an operating trade or business interest has included valuation discounts for lack of marketability and minority interests. Marketability discounts reduce the purchase price to reflect that the purchaser has no readily available means (market) to sell the interest. Minority discounts reflect that the purchaser of a minority interest would have no ability to direct business operations, including distributions and liquidation. Consider this example:

Corporation X has 100 shares of stock issued and net assets worth $1,000, or $10 per share. Person A intends to purchase one share of Corporation X. Person A may demand a 20 percent discount for lack of marketability, reducing the value to $8

(10 x .8). Person A also may demand a 20 percent minority discount, reducing the value to $6.4 ($8 x .8). While the percentages have been heavily debated, the U.S. Congress, IRS and courts have generally accepted both discounts.

The Chapter 14 restrictions, first introduced in 1990, require further analysis for transfers between family members. In general, transfer restrictions that conform to state entity (partnership, LLC and corporation) laws avoid the Chapter 14 restrictions. Entity restrictions that attempt to go beyond state law and significantly increase valuation discounts tend to run afoul of this rule.

New Proposed Regulations

In August, the IRS released proposed regulations under §2704. The regulations largely eliminate marketability and valuation discounts by expanding and refining restrictions on lapsing rights and liquidation that are ignored in determining a family-controlled entity interest value. More specifically, the new proposed regulations effectively require an entity interest to include a “put right” at the fractional interest value of entity assets that must be paid no more than six months after exercise to avoid the limitation. Consider the previous example within the new proposed regulations:

Same facts as the previous example, except the new “put right” at a minimum value eliminates the marketability discount since the interest could be immediately liquidated. The minority discount also is eliminated. As a result, one share’s value would be $10.

Continued >>

Jeff ConradChicagojconrad@bkd.com

Proposed Changes to Estate & Gift Tax Valuation Rules

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Response to Proposed Regulations

Response to the regulations generally was negative. While highly unusual for legislators to involve themselves in proposed regulations, members of Congress believe these represent a major departure from current law and would significantly affect closely held businesses; they have introduced bills to nullify the regulations if finalized.

The estate planning community also negatively responded. Commentators focused on inconsistencies between the proposed regulations and legislative history, which provides Chapter 14 wasn’t intended to eliminate valuation discounts. Further, many drew parallels to Chapter 14’s predecessor, 14 §2036(c), which Congress ultimately repealed.

Many business community groups and individuals voiced objections to the proposed regulations, citing additional complexity and compliance costs.

What Should Be Done?

The proposed regulations aren’t effective until published as final. With the Administrative Procedure Act, the earliest this guidance can be finalized is January 2, 2017.

It’s difficult to predict what Treasury will do next. Based on increasing public pressure, the regulation project could be withdrawn (and effectively canceled) at any point. On the other hand, Treasury may push to finalize the regulations as soon as administratively possible. Regardless, the regulations likely are the first indicator that Treasury intends to implement changes.

Based on all factors, anyone contemplating transfers of interests in family-limited partnerships and other family-owned entities should discuss and consider executing these plans before the year’s end.

Businesses

BKD helps business owners take advantage of numerous taxpayer-friendly provisions as well as comply with important reporting requirements and filing deadlines.

• 2016 Federal Business Tax

Legislation Update

• IRS Reporting Under the

Affordable Care Act

• Work Opportunity Tax Credit

• Tax Return Due Date Changes

on the Horizon

• Information Reporting Form

Due Date Changes

• Accounting for the Personal

Use of Business Automobiles

• Banking on Succession

• Market-Based Sourcing

Becoming Popular with States

• Complying with 501(r)

• Repair Regulations Still

Provide Opportunities for

Taxpayers

• Significant Transfer Pricing

Documentation Changes

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While 2016 has been quiet on the tax legislation front, numerous taxpayer-friendly provisions included in the 2015 tax extender legislation enacted late in December 2015 will be the primary focus of 2016 year-end planning for businesses and their owners. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) eliminated uncertainty by retroactively and permanently extending many popular “extender” provisions; however, a large number of these provisions were only temporarily extended, and many are already set to expire at the end of 2016. Here are select business provisions to consider for 2016 year-end planning:

• Research credit: The research and development (R&D) credit is generally available to businesses that develop new or improved products or processes. The PATH Act made the R&D credit permanent and expanded its application by allowing eligible small business taxpayers with less than $50 million in gross receipts to apply the credit against alternative minimum tax. In addition, certain small startup businesses with less than $5 million of gross receipts may now apply up to $250,000 of the credit earned against their payroll tax liability.

• Section 179 expensing: Generally, §179 allows certain taxpayers to deduct up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in a taxpayer’s trade or business. Absent an extension, taxpayers faced a much lower §179 expensing limit and phase-out threshold. The PATH Act permanently restored these limits, with both amounts indexed for inflation for tax years beginning after December 31, 2015. For 2016, businesses or their owners can expense up to $500,000 of qualifying property. This amount is reduced dollar-for-dollar by the amount of §179 property placed in service that exceeds $2,010,000.

• Bonus first-year depreciation: Bonus depreciation is a popular provision allowing an accelerated first-year depreciation deduction on certain qualifying new (not used) assets placed in service during a tax year. With the PATH Act, 50 percent bonus depreciation is allowable for qualified property placed in service between January 1, 2015, and December 31, 2017. The bonus depreciation rate is reduced to 40 percent for 2018 and 30 percent for 2019 and won’t apply for tax years 2020 and later, absent future legislation.

• Fifteen-year, straight-line depreciation for qualified improvement property: The PATH Act made permanent the beneficial 15-year depreciable life for qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property placed in service during the tax year.

• S corporation built-in gains recognition period: S corps generally aren’t subject to an entity-level tax; however, where an S corp that was formed as a C corporation later elects to become an S corp, the corporation is subject to an entity-level tax on its net built-in gain at the time the election is made if the gain is recognized during a recognition period. The PATH Act permanently reduced the period an S corp could be subject to this entity-level, built-in gain tax from 10 years to five years.

The following business provisions granted temporary extensions under the PATH Act are scheduled to expire in December. While Congress has historically extended these provisions, their fate remains uncertain pending future legislation:

2016 Federal Business Tax Legislation Update

Continued >>

Damien MartinNational Officedrmartin@bkd.com

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• Indian employment tax credit

• Railroad track maintenance credit (including modification to qualifying expenditures)

• Mine rescue team training credit

• Qualified zone academy bonds

• Classification of certain race horses as three-year property

• Seven-year recovery period for motorsports entertainment complexes

• Accelerated depreciation for business property on an Indian reservation (including ability to elect out of acceleration rules in 2016)

• Election to expense mine safety equipment

• Special expensing rules for certain film, television and live theatrical productions

• Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico

• Empowerment zone tax incentives (including modification of enterprise zone facility bond employment requirement)

• Increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands

• American Samoa economic development credit

• Credit for nonbusiness energy property (including modification to efficiency standards requirement for windows, skylights and doors)

• Credit for alternative fuel vehicle refueling property

• Credit for two-wheeled, plug-in electric vehicles

• Second-generation biofuel producer credit

• Biodiesel and renewable diesel incentives

• Production credit for Indian coal facilities (including modification to previous credit limitations)

• Credits with respect to facilities producing energy from certain renewable resources

• Credit for energy-efficient new homes

• Special allowance for second-generation biofuel plant property

• Energy-efficient commercial buildings deduction

• Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or state electric restructuring policy for qualified electric utilities

• Tax credits relating to alternative fuels (including propane)

• Credit for new qualified fuel cell motor vehicles

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Two of the most notable Patient Protection and Affordable Care Act (ACA) health insurance mandate provisions occurred in 2015: certain individuals to maintain coverage and certain large employers to offer coverage to full-time employees. To measure compliance with these provisions and assess penalties for noncompliance, the IRS designed Forms 1095 and 1094. Employers required to furnish these forms during the inaugural 2015 reporting period can likely attest that preparing and completing the initial filing wasn’t easy. With the 2016 filing period, affected employers should remind themselves of the rules and gear up for filing.

Reporting Requirements

In 2016, reporting requirements remain largely unchanged, i.e., applicable large employers (ALEs) are required to furnish Form 1095-C to applicable employees and file Form 1094-C with the IRS. Self-insured employers not defined as ALEs will furnish Form 1095-B to covered employees and file Form 1094-B with the IRS.

See chart to right>>

Determining ALE Status

For 2016, an employer must determine its status as an ALE by calculating the number of full-time equivalent individuals it employed during 2015. For purposes of this analysis, employees of affiliated group members must be aggregated. For each month during 2015, the employer combines full-time employees (those working 30 hours a week or 130 hours a month) with full-time equivalent employees. At the end of the year, the sums of all 12 months are combined and the result is divided by 12. If the average number of employees calculated is 50 or more, the employer is an ALE.

2016 Compliance Dates

The IRS originally intended for 2016 forms to be due as outlined in §6055 and §6056 of the Internal Revenue Code. However, following consultation with stakeholders, the IRS determined that a substantial number of employers need additional time to gather and analyze information to prepare Forms 1095-B and 1095-C to be furnished to individuals.

Continued >>

Brandon BaumNational Officebbaum@bkd.com

IRS Reporting Under the Affordable Care Act

Fewer Than 50 Full-Time Equivalent Employees

50 or More Full-Time Equivalent

Employees

Fewer Than 50 Full-Time Equivalent Employees

50 or More Full-Time Equivalent

Employees

Complete Forms 1094-B and 1095-B

for all individuals who participated in your plan during the calendar year

Complete Forms 1094-C and 1095-C (Parts I, II and III) for all full-time employees and Parts I and III for any other employees or nonemployees* who

participated in your plan during the calendar year

No employer reporting required. Insurer will submit Form 1095-B to all individuals who

participated in your plan during the calendar year

Complete Forms 1094-C and 1095-C (Parts I and II) for all full-time employees.

Insurer will submit Form 1095-B to all

individuals who participated in your plan during the calendar year

Self-Insured Fully Insured

A B C D

* Nonemployees could include former employees on COBRA, retirees and board members

20

Therefore, the IRS released Notice 2016-70, which extends the due date for furnishing Forms 1095-B and 1095-C to individuals by 30 days. While this notice provides relief of the January 31 deadline, no such relief has been issued for the February 28 and March 31 due dates to the IRS. With the complexity of the reporting, employers are still encouraged to furnish 2016 forms as soon as they are able.

Failure to file or late filing of these required forms could subject an employer to significant information reporting penalties.

Social Security Number Solicitation

Missing or incorrect Social Security numbers (SSN), especially for covered dependents, was a common issue during 2015 ACA reporting. As a result, the IRS issued guidance indicating that employers generally will not be subject to penalties for failure to report a correct SSN if:• The initial solicitation is made at an individual’s first enrollment, or if already enrolled,

the next open season;

• The second solicitation is made at a reasonable time thereafter; and• The third solicitation is made by December 31 of the year following the initial

solicitationEmployers should document these solicitation requests throughout the year to help

reduce the potential risk of penalties.

“Play or Pay” Transition Relief Eliminated

Beginning in 2016, an ALE must offer minimum essential insurance coverage to 95 percent of its full-time employees or face a penalty of $180 times the number of full-time employees subtracted by 30. This penalty is calculated monthly and is triggered if just one full-time employee qualifies for and obtains subsidized Health Insurance Marketplace coverage.

An employer also may face a penalty if it doesn’t offer affordable insurance providing minimum essential value. This penalty is triggered when one full-time employee qualifies for and receives subsidized Health Insurance Marketplace coverage. The penalty is $270 per month per full-time employee who receives the subsidized coverage. In situations where both penalties apply, the penalty is limited to the lesser of the two.

BKD Solution

BKD, LLP will once again provide employers a compliance solution looking to ease their stress in meeting these reporting requirements. The BKD solution also gives clients the opportunity to closely work with an ACA advisor who will assist in determining appropriate coding for Form 1095-C, full-time employee count, electronic filing through the IRS AIR platform and other processing needs. BKD clients also will have direct access to our comprehensive reporting guide and information gathering templates designed to help ease your reporting process.

Additional information on ACA compliance is available at bkd.com.

ACA INFORMATION REPORTING FORMS

2015 TAX YEAR DEADLINES (FORMS FILED IN 2016)

2016 TAX YEAR DEADLINES (FORM FILED IN 2017)

Forms 1095-B and 1095-C due to employees (to be postmarked if mailed or sent by email if applicable conditions met)

March 31, 2016 March 2, 2017

Forms 1094-B, 1095-B, 1094-C and 1095-C due to IRS if filing on paper

May 31, 2016 February 28, 2017

Forms 1094-B, 1095-B, 1094-C and 1095-C due to IRS if filing electronically*

June 30, 2016 March 31, 2017

* Any employer filing 250 or more information returns during the calender year must file these returns electronically. For employers with fewer than 250 returns, electronic filing is voluntary.

21

Currently available through 2019, the Work Opportunity Tax Credit (WOTC) program offers employers federal income tax credits to hire individuals from a growing list of designated groups. The WOTC has been used to pump credit dollars into disaster areas, encourage residents to stay in distressed geographic areas—Empowerment Zones, Renewal Communities and Rural Renewal Counties—help disadvantaged people support themselves, encourage hiring of hard-to-employ individuals and assist groups that have served in the U.S. military.

Designated groups include:• Family members receiving Temporary Assistance to Needy Families (TANF) program

benefits

• Qualified veterans

• Qualified ex-felons

• Vocational rehabilitation referrals

• Residents ages 18 to 39 of Rural Renewal Counties, Empowerment Zones and Renewal Communities

• Long-term TANF recipients

• Qualified food stamp recipients

• Qualified summer youth employees

• Qualified Supplemental Security Income recipients

• Qualified long-term unemployment recipients

The credit amount is based on a percentage (typically 40 percent) of wages paid to the qualified employee, and for most designated categories, it’s a maximum of $2,400 per qualified employee. However, the maximum credit can be as much as $4,800 for certain qualified veterans and $9,000 for long-term TANF recipients. Unlike most other federal income tax credits, the WOTC also can be applied against alternative minimum tax. Unused credits can be carried forward up to 20 years to use against future income tax liabilities. Tax-exempt organizations also may benefit from the WOTC via a payroll tax credit for wages paid to qualified veterans.

A common concern expressed by businesses is the personal nature of questions asked on the forms, raising claims of potential discrimination. In a letter dated July 29, 2010, the Equal Employment Opportunity Commission (EEOC) Office of Legal Counsel specifically addressed whether WOTC questions conform to federal equal employment opportunity laws and the Americans with Disabilities Act of 1990. The EEOC concluded that IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, follows EEOC guidance since the form notes the information is covered by the IRS confidentiality provision; the form is voluntary, and its use is to assist individuals of targeted groups in securing employment. Therefore, an employer’s use of the WOTC forms is not discriminatory within the federal guidelines.

Employers who frequently hire new employees or are in a Rural Renewal County, Empowerment Zone or Renewal Community should consider implementing Form 8850 as part of the hiring process. Many applicants may not know they’re part of a designated group and could potentially create a credit for the employer.

Bob Johnson Jr.Kansas Citybjohnson@bkd.com

Work Opportunity Tax Credit

22

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 sets new tax return and form due dates effective for taxable years starting after December 31, 2015. The new law, which generally applies to 2016 calendar year-end tax returns prepared during the 2017 tax filing season, sets due dates based on whether taxation occurs at the business level (C corporations) or the owner level (S corporations and partnerships).

Under the new law, calendar year-end partnership income tax returns will be due March 15 (or 2½ months after year-end). Historically, calendar year-end partnerships had to file by April 15—the same date as individual income tax returns. As a result, the owner of a partnership interest often didn’t obtain the Schedule K-1 to prepare tax returns in a timely manner. The new due date changes address this issue by making calendar year-end, pass-through returns due March 15. As S corps also pass income through to their owners, the new law will retain the March 15 due date.

C corps generally pay tax at the entity level and don’t pass income through to owners. Calendar year-end, C corp income tax returns historically were due March 15; the new law pushes this back to April 15 (or 3½ months after year-end). However, the extended due date for calendar year-end C corps will continue to be September 15 until the 2025 tax year. After 2025, the extended due date will be October 15. Note: C corps with a June 30 fiscal year-end will continue to have a September 15 due date with the new law but may request an automatic April 15 extension until the 2025 tax year. After 2025, June 30 fiscal year-end C corps will have an October 15 due date and can request extensions until April 15.

Many other tax return types and forms will experience changes to their original and/or extended due dates, including foreign bank reporting forms. FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is now due April 15 with an extended October 15 due date.

See the next page for the new federal due dates generally applicable for 2016 year-end tax returns.

Tax Return Due Date Changes on the Horizon

Travis TruesdellKansas Cityttruesdell@bkd.com

Continued >>

23

State tax return due dates generally aren’t affected by the new law unless tied to federal statute; however, many states are expected to conform to the new federal due dates. States will need to enact legislation, and/or the state departments of revenue will need to issue guidance to make these changes.

TAX TYPE (FORM) Form No. Current Due Date New Due Date Current Extended Due Date New Extended Due Date

Partnership 1065 4/15 3/15 9/15 9/15

S Corp 1120S 3/15 3/15 9/15 9/15

C Corp 1120 3/15 4/15 9/15 9/15 (Until 2025) 10/15 (After 2025)

Individual 1040 4/15 4/15 10/15 10/15

Trust 1041 4/15 4/15 9/15 9/30

FinCEN 114 6/30 4/15 None 10/15

Tax-Exempt Organizations 990 5/15 5/15 8/15 (First) 11/15 (Second) 11/15 (Automatic)

Employee Benefit Plan 5500 7/31 7/31 10/15 10/15

24

Organizations that make wage payments to employees and certain payments for nonemployee compensation should know of accelerated filing deadlines that affect several common 2016 forms required to be filed in 2017. The Protecting Americans from Tax Hikes Act of 2015 includes modifications to the filing dates of returns and statements relating to employee wage information and nonemployee compensation. Affected forms include:

• Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements

• Form 1099-MISC, Miscellaneous Income, with nonemployee compensation reported in Box 7

W-2 Modified Deadlines

Beginning with the 2016 calendar year, the deadline for electronic or paper filing of Forms W-2 and W-3 with the Social Security Administration (SSA) is now on or before January 31 following the calendar year-end. The due date to furnish forms to recipients remains January 31 following the calendar year’s close. While employers can apply for a 30-day filing extension with the SSA, it’s important to note the extensions aren’t automatic and will only be granted in cases of catastrophe or extraordinary circumstances.

The deadline modification will affect all organizations with W-2 employees. The due date changes are an attempt to better equip the IRS to fight identity theft and refund fraud. Having information in the system early in the filing season will allow for timely matching and reduce the amount of fraudulent returns filed and refunds issued.

1099 Filings Modified Deadlines

Beginning with the 2016 calendar year, the deadline for paper and electronic filing of Form 1099-MISC with amounts reported in Box 7 changes to on or before January 31 of the following calendar year-end. The filing due date for Form 1099-MISC with amounts in all other boxes (except 7) is unchanged from last year—February 28 for paper filers and March 31 for electronic.

Organizations that make nonemployee compensation payments of $600 or more to an individual, partnership, estate or, in some cases, a corporation will be affected. The IRS states nonemployee compensation includes payments made to someone who isn’t your employee for services in the course of your trade or business.

Prepare for the Deadlines

There are several steps organizations can take to prepare for the new deadlines.

• Know payroll processor deadlines and provide a year-end adjustment in advance of the final payroll to avoid potential additional fees for unnecessary amendments of tax and wage reporting forms.

• Review the organization’s accounts payable procedures to ensure proper documentation is maintained for vendors. Require all new vendors to complete Form W-9, Request for Taxpayer Identification Number and Certification, prior to remitting payment.

Rene FincoChicagorfinco@bkd.com

Information Reporting Form Due Date Changes

Continued >>

25

• Review current vendor listing for incomplete information.

• Contact vendors with missing information and request a completed W-9.

• Review your general ledger and current vendor listing to evaluate your filing requirement.

Below is a summary of due dates by form and filing method:

2016 INFORMATION RETURN DUE DATES

Form Recipient Due Date* Filing Method** Notes

1099-MISC Payee January 31 Amounts Reported in All Boxes (Except 8 & 14)

1099-MISC Payee February 15 Amounts Reported in Box 8 or 14

1099-MISC/1096 IRS January 31 Paper & Electronic*** Amounts Reported in Box 7

1099-MISC/1096 IRS February 28 Paper Amounts Reported in All Other Boxes (Except 7)

1099-MISC/1096 IRS March 31 Electronic*** Amounts Reported in All Other Boxes (Except 7)

W-2 Employee January 31

W-2/W-3 SSA January 31 Paper & Electronic***

* If the regular due date falls on a Saturday, Sunday or legal holiday, file by the next business day. ** File time extension may be available.*** You must electronically file if you’re required to file 250 or more information returns.

26

The use of a company-owned vehicle for business, commuting or other purposes is a common employee benefit. Using the vehicle for business is considered a working condition fringe benefit that’s not taxable to the employee when substantiation requirements are met. However, an employee’s personal and commuting use doesn’t qualify for this treatment—it requires further employer consideration to compute additional income reported on an employee’s Form W-2 for the tax year.

The requirement to compute a fair market value income inclusion for the personal use of a business auto is driven by a need to substantiate deductions taken for business vehicles that include nonbusiness use in their daily operation. Failure to substantiate business versus nonbusiness use can result in the expenses of owning and operating the vehicle being considered nondeductible for an employer. These deductions can be disallowed upon examination.

Business use is substantiated through maintaining and enforcing a use policy that prohibits or limits the automobile’s personal use to a de minimis and/or commuting-only threshold and outlines the steps an employee must take to help determine business versus personal use amounts. These steps consist of maintaining mileage logs showing the date, destination, miles driven and business purposes of each use of the vehicle. The company needs to retain mileage logs for six years from the employee’s initial use of the vehicle. Mileage totals from the logs should be reconciled with the period-ending odometer reading, with any unexplained miles attributed to personal use and included in the employee’s income on Form W-2. The amounts reportable to an employee’s Form W-2

for personal use of the auto are based on a fair market value assignment to the personal use enjoyed and are subject to mandatory payroll and optional federal tax withholding at the employee’s discretion.

The inclusion of additional income to an employee doesn’t generate another deduction for the employer, and the expenses of ownership deduction stay with the actual vehicle owner. The income inclusion exceptions don’t apply to control employees, including certain officers, highly compensated employees and any director or employee who owns a 1 percent or more equity, capital or profit interest in the business.

The amounts included in an employee’s wage are calculated using a variety of methods, including applying an annual lease/fuel cost determination to the personal use portion, a standard rate per mile for personal use miles or a standard rate per day for a commute-only use. The applicability of these methods will vary based on the company and employee’s facts and circumstances. An application of a method or rate for determining includable income isn’t reversible, and an incorrect rule application could cause the loss of otherwise eligible deductions.

Accounting for the Personal Use of Business Automobiles

Shawn LoaderNational Officesloader@bkd.com

27

Every privately held and family-owned businesses can bank on a change in ownership and leadership. With the baby-boom generation at or near retirement, there’s an expected above-average wave of ownership and leadership changes in privately held companies in the near term—yet, studies show most haven’t developed a formal, written succession plan.

As the owner of a closely held or family-owned business, you may ponder what’s next for your business, family and future. How well you manage and prepare for a succession event may be the decisive factor in the financial success of your business and its stakeholders. Advanced planning provides multiple transition options, while no planning results in no options.

Developing a holistic succession and continuity plan that protects your family provides peace of mind and reassurance to you and stakeholders. Given the obvious need and benefits of developing a succession plan, why do so many fail to do so? Either day-to-day operational demands seem more urgent than long-term succession planning, or leadership that hasn’t been through a succession event lacks the knowledge and experience—and procrastinates.

It’s also important to remember that not all succession plans are equal, and while a well-developed succession plan can perpetuate success, a poor design can lead to failure. Here are some common reasons succession plans fail:

• Not considering the perspective of all stakeholders, including shareholders, leadership and family

• Developing a plan by starting with a review of liquidity options instead of developing goals and objectives first

• Singularly focusing on tax-driven versus goal-driven planning

• Failing to resolve conflict within the business or among stakeholders

• Failing to pick and train qualified and capable leadership for succession

An effective succession plan should include a thoughtful approach that accounts for the interplay among business, ownership and family. If done correctly, a succession plan will align with your goals while addressing contingencies, gaps and opportunities.

BKD designed a three-phase succession planning process. The process generally begins with discovery. During this phase, you and your advisor work to gather information, identify needs and stakeholders—typically not just shareholders—and clarify objectives. The second phase, integrated planning, involves comparing your current state to desired state, identifying gaps, opportunities and risks, prioritizing needs and developing a road map to meet business, ownership and family objectives. A critical component of succession planning is clarifying stakeholder objectives and reconciling differences when possible. The final phase is implementing the plan.

Banking on Succession

Continued >>

Chris SchumannIndianapoliscschumann@bkd.com

28

Some action plans developed in the first two phases may not require immediate action, e.g., if the need to enhance your business’s value prior to a sale is identified, at least two action plans may result. The first—the development and implementation of a business process improvement plan—needs immediate action. The second—going through the process of selling the business—will come several years later.

It’s also important to remember succession planning doesn’t always mean a sale to a third party—in many cases, it doesn’t. Through the planning process, it’s common for the stakeholders to decide they want the business to remain independent. In that case, succession planning is just as, if not more, critical. Developing a plan to transfer ownership and remain independent requires a thorough evaluation of facts, goals and objectives. Also, remaining independent highlights the need to develop, retain and/or attract the necessary leadership to perpetuate the business.

BKD, LLP, one of the leading CPA firms in the country, has developed BKDnext®, a consultative approach and solution for privately held businesses to address their succession planning needs. Whether your goals include perpetuating your legacy, third-party sale or gradual transfer to next level management, advanced planning allows you to maintain your options and achieve your ultimate financial goals.

29

A state income tax trend is the adoption of market-based rules for sourcing sales of services in lieu of the traditional Uniform Division of Income for Tax Purposes Act (UDITPA) cost-of-performance rule. Within UDITPA Section 17, for purposes of computing the sales factor, sales of services are assigned to the state in which the income-producing activity is performed. If a company performs the income-producing activity in two or more states, the sale is assigned to the state in which the company performs a greater proportion of the income-producing activity, based on performance costs.

State legislatures are increasingly turning to market-based sourcing to increase tax revenue from out-of-state service providers. Historically, most states used a cost-of-performance method to source these sales in the apportionment factor. This frequently resulted in out-of-state service-based businesses including few or no sales in the sales factors of nonresident states.

The fiscal effect of market-based sourcing would be less in an economy dominated by sales of tangible goods. However, sales of services are now a large part of the U.S. economy, and the cost-of-performance method would create a significant loss in state tax revenues. As a result, more than half of states imposing a corporate income or franchise tax have adopted or are investigating a market-based approach.

The differing treatment among states of the cost-of-performance and market-based methods could result in instances of double taxation. For example, consider a service provider that substantially conducts all operations in its resident cost-of-performance state. If it has income tax nexus in one or more market-based states, it could end up including revenue from the market-source states twice—once in the market state sales factor and again in its resident state sales factor.

There are variances on how to define “market” and how to source the associated revenue in state-specific authorities. Current methods to source revenue based on the market include: where the benefit of the service is received, where the service is received, where the service is delivered and the customer’s location. Whether these differences ultimately lead to varied sourcing results for taxpayers will depend on each taxpayer’s facts and circumstances. If taxpayers are unable to accurately source revenue amounts using a state’s market approach, they’re typically required to exclude the revenue from the sales factor.

Jurisdictions that more recently enacted market-based sourcing and their associated effective dates include the District of Columbia (January 1, 2015), New York City and state (January 1, 2015), Rhode Island (January 1, 2015), Missouri (optional August 28, 2015), Connecticut (January 1, 2016), Louisiana (January 1, 2016) and Tennessee (July 1, 2016). North Carolina has passed proposed amendments for market-based sourcing, with the Department of Revenue to provide proposed rules on market-based sourcing by January 20, 2017.

Jeff FarrellKansas Cityjfarrell@bkd.com

Market-Based Sourcing Becoming Popular with States

30

The IRS continues to review hospitals for compliance with Internal Revenue Code (IRC) Section 501(r) as required by the Patient Protection and Affordable Care Act (ACA). According to the September 28, 2016, Tax Exempt and Government Entities FY 2017 Work Plan, the IRS completed 692 reviews of hospitals, and 166 were referred for field examination for the 2016 fiscal year. Referrals were made for these issues:

• Lack of a community health needs assessment (CHNA) within IRC §501(r)(3)

• No financial assistance and/or emergency medical care policies within IRC §501(r)(4)

• Billing and collection requirements within IRC §501(r)(6)

Many hospital organizations recently completed their second CHNA, as required by ACA. Hospitals should note that not only does the current CHNA need to be posted on a website, but it must remain posted until the hospital facility has made two subsequent CHNA reports widely available. Hospitals should verify prior CHNA reports haven’t been removed from the hospital’s website.

Although many hospital organizations updated their financial assistance policy (FAP) in the past two years to comply with final regulations under §501(r)(4), certain FAP components must be regularly updated:

• A hospital using the look-back method must calculate its amounts generally billed (AGB) percentage at least annually

• Provider listings indicating which physicians are and aren’t covered in a hospital’s FAP must be updated at least quarterly for new information, errors and omissions to be considered reasonable steps to ensure the list is accurate and avoid failures in meeting the §501(r) requirements, as clarified with IRS Notice 2015-46

Hospitals should continue to reassess their FAP policy to make sure it addresses changes in patient mix, hospital services, how those services are delivered and changes with providers.

Kim ScifresLouisvillekscifres@bkd.com

Complying with 501(r)

Planning Tip

While hospitals update provider listings and AGB calculations, they may consider whether to add additional clarification regarding which accounts may be eligible for financial assistance. This clarification may help hospitals avoid unintended 501(r) consequences.

• Are there specific services ineligible for financial assistance, e.g., cosmetic surgery, surgical weight-loss procedures, fertility treatment or other elective procedures?

• Do you require patients to fully cooperate with providing financial information and other documents as part of the application process for financial assistance?

• Are accounts with zero balances eligible for financial assistance?• How does your FAP apply to high-deductible health plans?

31

Some taxpayers already have implemented the tangible property regulations (repair regulations) through changes in accounting methods or the 2015 small taxpayer relief provisions. In many instances, the regulations are more favorable than present accounting methods taxpayers follow and may provide current and future tax benefits.

IRS Releases FAQs

The IRS released frequently asked questions to assist with implementing repair regulations. The FAQs provide guidance on how to apply the de minimis safe harbor election, general improvement rules and the newly released small taxpayer relief provisions. The FAQs don’t offer new guidance, but do help clarify the rules in select situations.

De Minimis Safe Harbor Comments

The IRS requested comments—included in the small taxpayer relief provisions—on the appropriateness of raising the $500 per item de minimis safe harbor amount for taxpayers that don’t have an applicable financial statement. The IRS received more than 150 comment letters from taxpayer representatives, including BKD, and issued guidance that provides taxpayers without audited financial statements a safe harbor for expensing tangible property costing $2,500 or less per invoice (or per item as substantiated by the invoice). This change is effective for tax years beginning on or after January 1, 2016. For tax years beginning after December 31, 2011, the IRS won’t raise or pursue issues related to assets that fall within the $2,500 safe harbor amount if the taxpayer otherwise satisfies the requirements for the safe harbor election.

Planning Opportunities Still Exist

Taxpayers implementing the repair regulations still have time to take advantage of the favorable betterment, adaptation and restoration standards, partial dispositions and safe harbor elections, i.e., the de minimis safe harbor and the safe harbor for building improvements of small taxpayers. A closer analysis may identify instances where repairs were capitalized that should be expensed or find situations where they’re capitalizing duplicate assets, e.g., multiple roofs, heating, ventilation and air conditioning or tenant improvements.

While the repair regulations were initially viewed as a detriment to most taxpayers, many businesses have received tax benefits from implementing the new rules.

Scott HumphreyDallasshumphrey@bkd.com

Repair Regulations Can Still Provide Opportunities for Many Taxpayers

32

In October 2015, the Organisation for Economic Co-operation and Development (OECD) released the remaining draft action items for its base erosion and profit shifting (BEPS) initiative. The G20 Finance Ministers commissioned the BEPS initiative to combat perceived multinational enterprise (MNE) tax abuse through an agreeable and possible-to-implement manner for participating countries—and other countries that use the OECD transfer pricing guidelines for their transfer pricing requirements. Action Item 13, Transfer Pricing Documentation and Country-by-Country Reporting, substantially changed the historical transfer pricing documentation requirements of most countries—resulting in a three-tiered approach to documentation:

• Country-by-Country (CbC) Reporting Template• Master File (MF) • Local Country File (LCF)

The documentation changes are guidelines, and each country isn’t required to implement them.

The CbC template requests certain financial information by tax jurisdiction, including stateless income and losses, and other types of information by legal entity. Examples of required CbC report information include profits or losses before income tax, income tax paid, stated capital and accumulated earnings. Examples of requested entity information include the main operational purpose(s) of an entity, e.g., research and development, insurance, internal group financing, manufacturing and sales and distribution. Action Item 13 recommends MNEs with consolidated revenues of more than €750 million be required to prepare the CbC report.

The MF and LCF formats generally are new to countries outside the European Union. The MF provides a high-level picture of the MNE as a whole—or by distinct business and reporting unit if it’s operationally broad. The MF is expected to explain why the intercompany transactions and transfer prices are at their given point with the MNE’s particular fact pattern. Broadly, the MF contains the MNE’s organizational structure, business description, intangible property, intercompany financial activities and financial and tax positions. The LCF describes in depth the functions performed by an entity or entities in that particular country and the selection of the most appropriate transfer pricing method. It also contains the economic analysis for the intercompany transaction(s) involving the legal entity or entities in that country. The MF is a broad document to be reviewed by any country, whereas the LCF serves as a detailed document for each country.

United States

U.S.-headquartered MNEs with global revenues exceeding $850 million will need to prepare and file the Action Item 13 CbC report for tax years beginning on or after June 30, 2016. The CbC will be included in the U.S. federal tax return as Form 8975. Many U.S.-headquartered MNEs will have reporting differences among the countries where they’re located, i.e., they will be expected to prepare a CbC report by their foreign location’s jurisdiction, but the IRS doesn’t require it yet. This creates a disparity in reporting requirements. The U.S. Treasury Department has stated the IRS will accept voluntary CbC reports for tax years beginning before June 30, 2016, allowing U.S.-headquartered MNEs to meet foreign CbC report filing requirements and avoid having to file the global, and potentially sensitive, information with a foreign tax jurisdiction. The Treasury Department is expected to release voluntary CbC report filing guidance (to eliminate any CbC reporting disparity) and instructions on completing Form 8975 in late 2016 or early 2017.

Elizabeth HazzardSt. Louisehazzard@bkd.com

Significant Transfer Pricing Documentation Changes

Continued >>

33

As of November 2016, the IRS hasn’t modified the Treasury Regulations to incorporate the MF and LCF documentation format. If an MNE’s transfer pricing documentation meets the IRS’s 10 transfer pricing documentation requirements, it won’t meet the MF and LCF requirements. If an MNE U.S. subsidiary has an LCF, it will meet and exceed the IRS’s 10 transfer pricing documentation requirements when combined with the MF.

Australia

• CbC Report – It adopted the CbC report outlined in Action Item 13 for MNEs with consolidated revenues greater than A$1 billion. The CbC report is due within one year of the fiscal year’s (FY) end. It’s effective for years beginning on or after January 1, 2016.

• MF – It adopted the Action Item 13 MF format for MNEs with consolidated revenues of more than A$1 billion. The MF is due within one year of the FY end and effective for years beginning on or after January 1, 2016.

• LCF – It adopted the Action Item 13 LCF format for MNEs. Australia also allows MNEs with less than A$2 million of intercompany transactions (aggregated) to prepare the Short Form Local File. There are exceptions when determining whether an MNE can file the Short Form Local File instead of Action Item 13’s LCF format. The CbC report is due within one year of the FY end. It’s effective for years beginning on or after January 1, 2016.

CommentsMNEs headquartered in a country that doesn’t require a CbC report or MF for years

beginning in 2016 may request an exemption from the Australian Taxation Office for submitting the CbC and MF for 2016.

Canada

• CbC – The CbC report will be required for MNEs with consolidated revenues in excess of €750 million.

• MF – Not yet adopted.

• LCF – Not yet adopted.Comments

Pre-BEPS transfer pricing documentation requirements still need to be met.

China

• CbC – The CbC report should be submitted when a China-based MNE’s consolidated revenues are greater than RMB 5.5 billion, or if the MNE isn’t headquartered in China but wishes to file its CbC report with the tax authority as the designated jurisdiction. The CbC report should be filed by May 31 of the following year.

• MF – The MF is required for MNEs when related-party transactions total RMB 1 billion or more or if the MNE operates in another jurisdiction that requires an MF. The tax authority expects an MF to be available within one year of the FY’s end.

• LCF – An LCF is required if when aggregated:* Tangible good transfers exceed RMB 200 million* Financial asset transfers exceed RMB 100 million* Transfer of ownership of intangible assets exceeds RMB 100 million* Any other intercompany transaction, e.g., services, exceeds RMB 40 million

CommentsPre-BEPS transfer pricing documentation requirements still need to be met if

consolidated revenues are below the threshold.

Germany

• CbC – Germany-based MNEs with consolidated revenues of more than €750 million will be required to complete a CbC report with the tax authority.

• MF – MNEs with consolidated revenues of €100 million or more are obligated to prepare an MF.

• LCF – MNEs are obligated to prepare an LCF to maintain proper transfer pricing documentation.

Continued >>

34

CommentsPre-BEPS transfer pricing documentation requirements still need to be met if

consolidated revenues are below the threshold.

India

• CbC – The CbC report will be required for MNEs with consolidated revenues in excess of €750 million.

• MF – The MF will be required for MNEs, but it’s still to be determined if the tax authority will implement a financial threshold.

• LCF – An LCF is required as standard transfer pricing documentation for Indian entities with intercompany transactions.

CommentsIt’s anticipated that India will fully implement Action Item 13, as legislation has been put

forth. Pre-BEPS transfer pricing documentation requirements still need to be met.

Japan

• CbC – The CbC report will need to be completed by MNEs that have more than ¥100 billion in consolidated revenue. This is for years beginning on or after April 1, 2016, of the MNE. It should be prepared in English.

• MF – An MF is required for MNEs with more than ¥100 billion in consolidated revenue. This is for years beginning on or after April 1, 2016, of the MNE. It may be prepared in English or Japanese.

• LCF – An LCF is required. It’s for years beginning on or after April 1, 2017, for the Japanese entity. It’s due at the time the tax return is filed.

CommentsPer the 2016 tax reform, contemporaneous transfer pricing documentation doesn’t need

to be maintained when the total related-party transactions don’t exceed ¥5 billion. If the related parties’ transactions attributed to intangible property are more than ¥300 million, transfer pricing documentation needs to be prepared. The tax authority reserves the right to request transfer pricing documentation, no matter the amount of intercompany transactions.

Mexico

• CbC – MNEs with consolidated revenues exceeding MXN 12 billion are required to submit a CbC report.

• MF – MNEs with consolidated revenues exceeding MXN 644,599,005 will need to have an MF prepared for transfer pricing documentation purposes.

• LCF – MNEs with consolidated revenues exceeding MXN 644,599,005 will need to have an LCF prepared for transfer pricing documentation purposes.

CommentsPre-BEPS transfer pricing documentation requirements still need to be met if

consolidated revenues are below the threshold.

United Kingdom

• CbC – The CbC report will be required for MNEs with consolidated revenues in excess of €750 million.

• MF – Not yet adopted.• LCF – Not yet adopted.

CommentsPre-BEPS transfer pricing documentation requirements still need to be met.

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