Webinar Slides: 2015 First Quarter Accounting and Financial Reporting Issues Update

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CBIZ & MHM Executive Education Series™ Q1 Accounting & Tax Update Presented by: Mike Loritz, Mark Winiarski and Bill Smith March 24 & April 2, 2015

Transcript of Webinar Slides: 2015 First Quarter Accounting and Financial Reporting Issues Update

CBIZ & MHM Executive Education Series™ Q1 Accounting & Tax Update

Presented by: Mike Loritz, Mark Winiarski and Bill Smith

March 24 & April 2, 2015

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Before We Get Started…

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CPE Credit

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The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

Disclaimer

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Today’s Presenters Mike Loritz, CPA Shareholder, MHM 913.234.1226 | [email protected] Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, financial instruments, share-based compensation, fair value, revenue recognition and others.

Mark Winiarski, CPA Shareholder, MHM 913.234.1656 | [email protected] Located in our Kansas City office Mark is a member of our Professional Standards Group (PSG). Mark's role includes instructing in our national training program, presenting as a subject matter expert at webinars and conferences, and preparing MHM publications on accounting and auditing issues. As a PSG member Mark consults with clients and engagement teams across the country in many areas of accounting and auditing. Mark has served clients as an auditor, consultant and advisor in numerous industries including manufacturing, distribution, mining, retail sales, services, and software.

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Today’s Presenters

William M. Smith, Esq. Managing Director, CBIZ National Tax Office 301.951.3636 | [email protected] 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 for business agreements.

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Today’s Agenda

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Accounting Standards Updates

Federal Tax Update

Other Financial Reporting Matters

NEW ACCOUNTING STANDARDS UPDATES

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Extraordinary Items (ASU 2015-01)

Accounting Standards Update 2015-01: Simplifying Income Statement Presentation by

Eliminating the Concept of Extraordinary Items Extraordinary items were both:

Unusual in nature, and Infrequent in occurrence

Extraordinary item concept and all related presentation and

disclosure guidance is removed from U.S. GAAP.

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Extraordinary Items (ASU 2015-01)

Items that are unusual in nature, infrequent in occurrence — or both — shall be reported as a separate component of income

from continuing operations.

The guidance on unusual or infrequently occurring items is retained. Unusual means the underlying event or transaction possesses a

high degree of abnormality or must be clearly unrelated to ordinary/typical activities of the entity.

Infrequent means the underlying event or transaction should not be reasonably expected to recur in the foreseeable future.

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Extraordinary Items (ASU 2015-01)

Effective date: Annual period (including interim periods within) beginning after

December 15, 2015 Early adoption is permitted.

Transition: Prospective, or

Disclose the nature and amount of any income statement effect on continuing operations of items previously classified as extraordinary items.

Retrospective Disclosures applicable for a change in accounting principle

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Consolidation (ASU 2015-02)

Accounting Standards Update 2015-02: Consolidation (Topic 810): Amendments to the

Consolidation Analysis Modifies variable interest entity (VIE) guidance Eliminates the voting interest model for limited partnerships and

similar entities Reporting entities will need to re-evaluate their consolidation

decisions for VIE’s, potential VIE’s, limited partnerships and similar entities.

The new guidance does not change the order in which the consolidation guidance applies. An entity will continue to evaluate whether consolidation occurs by applying the VIE model first and then the voting interest model.

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Consolidation (ASU 2015-02)

Eliminates the deferral for interests in investment companies Scopes out money market funds or similar entities

Requires additional disclosure when the scope exception applies

An investment company is an entity that: Invests in multiple substantive investments, Invests for current income, capital appreciation, or both,

and Invests with plans that include exit strategies.

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Consolidation (ASU 2015-02)

Simplifies the evaluation of fees paid to decision makers/service providers as variable interests (VI) Removes three of the six requirements in evaluating VI:

Fees are at or above the same level of seniority as other operating liabilities of the VIE

Total amount of anticipated fees are insignificant to the VIE Anticipated fees are expected to absorb insignificant variability of

the VIE Direct and indirect related party interests should be

considered in the analysis.

Retains the conditions that in order for fees to not be VI they must be commensurate, the decision maker/service provider must not hold other

variable interests, and the terms are customary for an arm’s length transaction.

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Consolidation (ASU 2015-02)

Adds a new condition for an entity to qualify as a VIE: Limited partnership, or similar entities, are VIEs if a simple

majority of limited partners lack substantive kick-out or participating rights.

Judgment must be used to determine if an entity is similar to a limited partnerships. Is the entity managed by a managing partner/member? Does the entity have separate capital accounts?

Many Limited Liability Companies (LLCs) are governed in a similar manner

to limited partnerships. Determining if an LLC is similar to a limited partnership requires significant judgment.

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Consolidation (ASU 2015-02)

Changes to determining the primary beneficiary Fees paid to decision maker/service provider that are customary

and commensurate are excluded from the economic criteria in determining the primary beneficiary.

Related-party rules were modified to reduce their applicability by using proportionate weighting of indirect relationships – except when: Entities are under common control Substantially all of the activities of the VIE are related to a single

member of a related party group

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Consolidation (ASU 2015-02)

Eliminates the guidance that a general partner of a limited partnership or similar entity is presumed to consolidate

Consolidation for limited partnerships will follow the majority voting rights guidance A limited partner that has unilateral kick-out rights will

consolidate the limited partnership entity if no other limited partner has substantive kick-out or participation rights.

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Consolidation (ASU 2015-02)

Significant Considerations: Limited partnerships, and similar entities, are more likely to

qualify as VIEs. The general partner (GP) is more likely to consolidate a limited

partnership under the VIE model. If a limited partnership is not a VIE the GP would not consolidate.

Some limited partnerships currently consolidated by a GP will not be consolidated by any investor.

Entities that receive fees as decision makers are less likely to have a VI or consolidate a VIE.

Interests held in investment companies will need to be re-evaluated to determine consolidation.

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Consolidation (ASU 2015-02)

Effective Date: Public Business Entities: Periods beginning after December 15,

2015 (calendar year-end December 31, 2016) Nonpublic Entities: Annual periods beginning after December 15,

2016 (calendar year-end December 31, 2017) Early adoption is permitted, including financial statements not yet

made available for issuance/issued.

Transition: Retrospective or modified retrospective method Evaluation is performed at the date of initial involvement or a later

reconsideration event.

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Consolidation (ASU 2015-02)

Considerations upon adoption: Deconsolidation or consolidation is performed at carryover

basis, unless impractical. Differences between existing assets and liabilities and their

carryover basis are adjusted through retained earnings (i.e. no gains or losses are recognized).

The entire consolidation analysis may need to be re-evaluated.

Systems and controls may need to be updated. Consider evaluating planned transactions under the new

guidance.

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New Private Company Alternative (ASU 2014-18)

Accounting Standards Update 2014-18: Business Combinations (Topic 805): Accounting for

Identifiable Intangible Assets in a Business Combination May be elected if the entity is not a:

Public business entity Not-for-profit entity Employee benefit plan

Refer to the definition of a public business entity (ASU 2013-12) which is discussed in MHM Messenger: Private Company Decision Making

Framework & Definition of a Public Business.

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New Private Company Alternative (ASU 2014-18)

Accounting alternative permits an entity to not recognize, for certain transactions: Customer-related intangible assets unless they are capable

of being sold or licensed independently from other assets of a business, and

Noncompetition agreements.

The impact is such that customer related intangible assets and non-complete

agreements are subsumed into the goodwill balance recognized in connection with the transaction. Therefore, goodwill must also be amortized.

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New Private Company Alternative (ASU 2014-18)

Applicable to these types of transactions: Business combinations Investments accounting for under the equity method Reorganizations applying fresh-start accounting

Once elected, the accounting alternative must be applied to

all qualifying transactions.

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Customer-Related Intangible Assets (ASU 2104-18)

Commonly Qualify Commonly

Do not Qualify Never Qualify Customer

Relationships Customer List Leases

Backlog Contract Assets

Favorable Contracts with Customers Unfavorable Contracts with Customers

Mortgage Servicing Rights

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Customer-Related Intangible Assets (ASU 2104-18)

Disclosures and Other Requirements Existing required disclosures remain unchanged: Business combinations qualitatively disclose the components

of goodwill. Equity method investments have no additional disclosures.

An entity electing this alternative must also apply the alternative on amortizing goodwill under ASU 2014-02.

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Customer-Related Intangible Assets (ASU 2104-18)

Transition and Effective Date Prospectively applied upon election to adopt, upon the first

qualifying transaction that occurs subsequent to the annual period beginning after December 15, 2015 If the first qualifying transaction is in the first annual period after

December 15, 2015 the guidance is effective at the beginning of the annual period.

If the first qualifying transaction is in a subsequent annual period the guidance is effective at the beginning of the interim period in that annual period.

Early adoption for any financial statements not yet made available for issuance is permitted.

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Customer-Related Intangible Assets (ASU 2104-18)

Considerations Upon Adoption Is the value of entities acquired heavily reliant on customer-

related intangibles that would cause the financial statements to be less useful?

Do users of the financial statements expect to see customer-related intangibles?

Are financial covenants impacted? Do plans exists that may result in the entity no longer

qualifying within the scope as a private company?

The FASB is researching changes to the goodwill impairment model and the recognition guidance of intangible assets for all entities.

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Customer-Related Intangible Assets (ASU 2104-18)

Implementation Steps: Step 1: Ensure the reporting entity qualifies to make the

election Step 2: Identify the transaction(s) that qualify Step 3: Evaluate the identifiable intangible assets that

may qualify for the accounting alternative Step 4: Ensure the transition requirements are applied

properly Step 5: Ensure the financial statement presentation and

disclosures are appropriate

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Governmental Accounting Standards Board

GASB Statement No. 72, Fair Value Measurement and Application Defines fair value Describes how fair value should be measured Describes what assets and liabilities should be measured at fair

value Describes what information about fair value should be disclosed in

the notes to the financial statements

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Governmental Accounting Standards Board

GASB Statement No. 72, Fair Value Measurement and Application Fair value is defined as:

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Investments, which generally are measured at fair value, are defined as a security or other asset that governments hold primarily for the purpose of income or profit and the present service capacity of which are based solely on their ability to generate cash or to be sold to generate cash.

Effective for financial statements for periods beginning after

June 15, 2015.

OTHER FINANCIAL REPORTING MATTERS

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Accounting for Income Taxes

EXPOSURE DRAFTS: Intra-Entity Asset Transfers Eliminates the exception that prohibits recognizing current and

deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party.

Requires that an entity recognize the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs.

Aligns with IAS 12 Income Taxes

Balance Sheet Classification of Deferred Taxes Deferred tax liabilities and assets should be classified as noncurrent in

a classified statement of financial position. Aligns with IAS 1 Presentation of Financial Statements

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Disclosures of Hybrid Financial Instruments

EXPOSURE DRAFT: Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives. The proposed amendments would require that: An entity disclose (in both interim and annual reporting periods) the

carrying amount, measurement attribute, and line item within the balance sheet and the income statement in which each bifurcated embedded derivative and its related host contract are presented.

The comment deadline is April 30, 2015.

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Disclosures of Hybrid Financial Instruments

Tabular or non-tabular disclosure

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Final Standards Expected to be Issued

Presentation of Debt Issue Costs

Affirmed as exposed

Effective date - periods after December 15, 2015. Early adoption permitted

Customer’s Accounting for Cloud Computing Arrangements

Affirmed as exposed

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Final Standards Expected to be Issued

Insurance Disclosures about Short-Duration Contracts

Includes disclosure about claim frequency and Incurred-But-Not Reported Liabilities (IBNR)

Permits the claims development table to be included as supplementary information

Effective date - periods after December 15, 2015 for public business entities. Early adoption permitted.

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Final Standards Expected to be Issued

Measurement Date of Plan Assets Includes re-measurements for significant events

Excludes employee benefit plans

Effective date - fiscal years after December 15, 2016. Early adoption permitted

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Revenue Recognition

FASB and IASB joint meetings are proposing clarifications and changes to revenue recognition: Licenses of intellectual property:

Nature of the promise in granting a license Accounting for performance obligations which contain licenses and

other goods or services Accounting for sales and usage based royalties

Identifying performance obligations: Immaterial promised goods or services Distinct in the context of the contract Shipping and handling activities

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Revenue Recognition

Transition Practical expedients for contract modifications and completed

contracts – “use of hindsight” Sales taxes

Practical expedient for net reporting Noncash consideration

Measurement date Application of variable consideration guidance

Collectability Propose clarification to the guidance contained in the standard

Decision regarding potential delay in the

effective date expected in April.

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Project: Leases

The FASB has directed the staff to prepare a final standard!!

The FASB will discuss the benefits and costs of the

new leases standard, effective date, and any issues that arise during drafting of the final leases standard.

The Board will discuss private company considerations at a future Board meeting.

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Project: Leases

Affirmed the exemption for short-term leases with terms less than 12 months

“Type A” and “Type B” leases are presented separately on the balance sheet. Principle payments on Type A leases are presented as

financing activities. Sale-leaseback transaction where the lease is a Type A

lease is not treated as a sale

Type A leases are similar to today’s capital leases, while Type B leases are recorded on the balance sheet, but have income statement presentation

similar to today’s operating leases.

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Transition will be a modified retrospective approach as of the earliest comparative period presented – full retrospective will not be permitted. Permit the election of a package of relief measures Permit the use of hindsight for renewals and purchase options Entities need not re-evaluate sale-lease backs using Topic 606

The IASB and FASB will not be fully converged, differences include: Different income statement presentation for Type A and Type B leases Accounting for reassessment of the discount rate and variable lease

payments Certain disclosures

Project: Leases

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Project: Classification of Debt

Balance Sheet Classification of Debt

The Board decided an entity should classify a debt as noncurrent if one or both of the following criteria are met as of the balance sheet date: The liability is contractually due to be settled more than 12

months (or operating cycle, if longer) after the balance sheet date. The entity has a contractual right to defer settlement of the

liability for at least 12 months (or operating cycle, if longer) after the balance sheet date.

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Project: Share-Based Payment

Proposal to Simplify the Accounting for Share-Based Payments: Minimum Statutory Withholding Requirements Accounting for Forfeitures Classification of Awards with Repurchase Features Intrinsic Value Election for All Liability-Classified Awards

(Applicable to Nonpublic Entities Only) Accounting for Income Taxes upon Settlement of an Award Presentation – Statement of Cash Flows

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Disclosure Project

Recent decisions regarding the disclosure framework for Fair Value: Remove the following existing disclosure requirements: The policy for timing of transfers between levels The internal valuation processes for Level 3 fair value measurements The amount of and reasons for transfers between Level 1 and Level 2

of the fair value hierarchy For private companies, the change in unrealized gains and losses for

the period included in earnings (or changes in net assets) related to recurring Level 3 fair value measurements held at the end of the reporting period

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Modify the following existing disclosure requirements: For private companies, no longer require a reconciliation of the

opening balances to the closing balances of recurring Level 3 fair value measurements. However, those companies would be required to disclose transfers in and out of Level 3 of the fair value hierarchy and purchases of Level 3 assets.

For investments in certain entities that calculate net asset value, require disclosure of the estimated timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated that information to the reporting entity, either directly or indirectly.

Disclosure Project

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Disclosure Project

Add the following disclosure requirement: The changes in unrealized gains and losses for the period included

in other comprehensive income and earnings (or changes in net assets) for recurring Level 1, Level 2, and Level 3 fair value measurements held at the end of the reporting period. This addition would not apply to private companies.

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Private Company Council

PCC Activities and Issues: Project to align the definition of nonpublic entities is on hold

pending potential future amendments by the FASB. Adoption of PCC accounting alternatives after the effective

date discussed Preferability

AICPA Interpretation issued for not-for-profit entities with for-profit subsidiaries

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Private Company Council

Request for Comment, Three-Year Review of the Private Company Council Seeking stakeholder input as part of an assessment of the

Private Company Council’s (PCC) effectiveness, accomplishments, and future role in setting standards for private companies. Has the PCC been successful in proposing alternatives within

GAAP that address the needs of private company financial statement users?

Has the PCC been effective as an advisory body to the FASB? What organizational or procedural improvements to the PCC are

needed? Are further changes to the standard-setting process for private

companies warranted? Comments are due by Monday, May 11, 2015.

FEDERAL TAX UPDATE

Bill Smith Managing Director

CBIZ MHM, LLC National Tax Office

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Agenda

Administrative Updates IRS Budget Woes Simplified Tangible Property Rules (Rev. Proc. 2015-

20) Penalty Relief for Employer Payment Plans (Notice

2015-17) Legislative Updates Obama Budget House Resolution Opening Days of 114th Congress

ADMINISTRATIVE UPDATES

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The 2014 year-end spending deal passed by Congress dealt $346 million in budget cuts to the IRS ($10.9 billion budget). Hiring freeze has been initiated Approximately 15,000 fewer employees by end of 2015

vs. 2010 Predicted $2 billion less in collections Only 50% of taxpayer calls will be answered during filing

season Possible refund delays – especially paper filed

IRS Budget

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Taxpayer Advocate Report, January 14 IRS Taxpayer Services is unlikely to answer even half the 100

million telephone calls it receives, and levels of service may average as low as 43%.

The IRS budget is experiencing a cut at a time when the IRS is receiving 11% more returns from individuals, 18% more returns from business entities, and 70% more telephone calls (through FY 2013) than a decade ago.

This year taxpayers are likely to receive the worst levels of taxpayer service since 2001.

Fewer audits Inability to implement taxpayer ID theft protections Obama 2016 Budget calls for funding at $12.9 billion

IRS Budget

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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)

LEGISLATIVE UPDATES

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Top tax rate on capital gains and qualified dividends increased from 20% to 24.2% starting in 2016 (Rate was 15% when Obama took office.) When NII tax added, top rate 28%

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

Obama’s Budget (Individual Reforms)

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Tax carried interests as ordinary income 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

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 five 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’s Budget (Individual Reforms)

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Reduce corporate top rate to 28% (down from 35%) 25% for domestic manufacturers

Section 179 expensing: $500,000 with phase out at $2 million No extension of bonus depreciation

Make permanent: Research credit Exclusion of gain from sale of small business stock

held for five years

Obama’s Budget (Business Reforms)

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Repeal LIFO and LCM inventory accounting methods In prior Congress, 223 Representatives and 46

Senators sent letters opposing the change. Expand small business credit for health insurance to

apply to employers with up to 50 employees 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 Similar to Feb. 2014 Camp proposal

Obama’s Budget (Business Reforms)

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Make WOTC credit permanent Expand cash method of accounting for certain small

businesses Increased deduction for start-up expenses

Obama’s Budget (Business Reforms)

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One-time 14% tax on accumulated earnings ($2 trillion) of controlled foreign corporations (CFCs) that have not previously been subject to US tax Accumulated income could be repatriated without further tax Revenues to be used for transportation and infrastructure

spending Minimum tax on foreign income of US multinationals at

rate of 19%, reduced by 85% of any foreign taxes paid Curb corporate inversions

Obama’s Budget (International Reforms)

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Spending blueprint, not law Senate working on similar resolution 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

Both House and Senate resolutions expected to move to the floor week of March 23

House Budget Resolution (March 16)

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Other Activity in Opening Days of the 114th

House adopts dynamic scoring of tax legislative proposals Intended to take into account the projected

macroeconomic effects the legislation will have on the economy

CBO and JCT will be required to estimate changes to Employment Available capital “Other economic variables”

Applies only to “large” bills – must affect ¼ of a percentage point of GDP

Senate has not signaled whether it will follow suit Potentially two sets of rules for same legislation

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Questions?

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Join us for these courses: 4/30, 5/5 & 5/6: Eye on Washington – Quarterly Business Tax Update 6/29: What’s New at the SEC and PCAOB? A Mid-Year Brief for Public

Companies

Read these related publications: MHM Messenger: Update on Bifurcated Embedded Derivatives MHM Messenger: FASB Revises Consolidation Accounting Model MHM Messenger: Leasing Project Update MHM Messenger: Extraordinary Item Requirements Eliminated Substance of the Standard: Accounting Election for Acquired

Intangible Assets 2015 Business Tax Planning Supplement

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