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{P & C Tax Update}. DOUG YOUNGREN CPA , JD , Tax Partner. - PowerPoint PPT Presentation

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Page 1: {P & C Tax Update}

 

{P & C Tax Update}

Page 2: {P & C Tax Update}

 

DOUG YOUNGRENCPA, JD, Tax Partner

Doug is a tax partner in Plante Moran’s insurance practice who oversees all aspects of the firm’s insurance tax practice. He started his accounting career as an auditor; he has a unique hands-on style that incorporates his knowledge and experience as a CPA as well as an attorney. He has written articles on subjects ranging from offshore captive reinsurance to how a P & C company can convert its capital losses into ordinary losses. He has spoken on numerous occasions including at the Federal Bar Associations Insurance Tax Seminar as well as at the Farm Bureau Insurance Accounting conference.

Page 3: {P & C Tax Update}

I. Items Specific to P & C Insurance

II. SSAP 101: A Refresher

III. Tax Sharing Agreements

IV. The New Repair Regulations

V. Foreign Reporting

A Brief Agenda

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Page 4: {P & C Tax Update}

PLANTE MORAN

P&C Tax Updates

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Page 5: {P & C Tax Update}

• Fifth circuit finds that premium payments that were held by an insurer as a deposit against future deductibles that were to be refunded to a business at the end of the term of the policy are not deductible as an insurance premium.

• The ultimate holding in this case is related to risk shifting since any excess premium would have been refunded and if there had been a need for more, then an additional payment would have been made.

F.W. Services Inc. v. Commissioner

5

Page 6: {P & C Tax Update}

• In State Farm v. Commissioner, the U.S. Court of Appeals for the Seventh Circuit decided to treat a bad-faith damage award which was punitive as not a portion of loss reserves.

• The court held that while the portion of the award for compensatory damages should be included in loss reserves, the punitive portion should not.

• The court relied heavily on guidance issued by the NAIC. According to that guidance, compensatory damages for bad faith awards are taken into consideration for calculating unpaid loss reserves, not punitive damages.

Punitive Damages Treated as Regular Business Expense Deductible When Paid

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Page 7: {P & C Tax Update}

Foreign Company Qualifies as a Domestic Insurance Company and Reinsurance Premiums Paid to it Are Deductible Business ExpensesIn PLR 201224018 the IRS ruled that a foreign captive insurance company qualified as a domestic insurance company for income tax purposes, and that reinsurance premiums paid to a reinsurance pool are deductible.1. The insurance is offered to 6 related insured corporations and other

entities;

2. To try to achieve risk distribution the Company takes part in a reinsurance pool with 14 other non-related insurers;

3. The company cedes its risks to the pool and then through another reinsurance agreement assumes a quota share back from the pool;

4. The IRS determined that none of the companies is paying for a significant portion of their own risk and therefore there is risk distribution.

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Page 8: {P & C Tax Update}

The IRS has ruled that a policy of insurance that insures against a market decline is not insurance.The logic of the IRS under this TAM was twofold:1. The risks under the contract were related to investment risk as

opposed to insurance risk.

2. Secondarily, the IRS concluded that the risk was one of a universal nature (a market decline) as opposed to one in a group of large numbers that might fortuitously happen to one insured rather than to all. Therefore they concluded there was no way to have risk distribution.

TAM 201149021 Can You “Insure” Against a Market Decline?

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Page 9: {P & C Tax Update}

Acuity used in-house actuary to compute total loss reserves for 2006

• 900 pages of analysis

• 8 separate actuarial methods

• $660 million

Acuity also used an outside consulting actuary to independently review loss reserves each year

• Narrow range of reasonable reserves

$577 million to $661 million

• Loss reserves within range, so independent actuary signed a statement of actuarial opinion stating so.

Acuity filed Annual Statement showing loss reserves of $660 million

Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo 2013-209

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Page 10: {P & C Tax Update}

IRS issued notice of deficiency for 2006 stating Acuity’s loss reserves were overstated by $96 million.

• Argued that the annual statement controls only what is includible in the loss reserves, not the amount of reserve itself

Tax court relied on Seventh Circuit case law to the effect that the NAIC-approved annual statement is the starting point for computing unpaid losses

• Court disagreed with IRS’s argument, holding that the annual statement should be the source of unpaid losses for federal tax purposes

• Acuity produced substantial evidence in support of its position that the loss reserves are fair and reasonable

• IRS did not produce persuasive evidence to the contrary

Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo 2013-209

10

Page 11: {P & C Tax Update}

What does this case mean?

• Memorandum decision, precedential value limited

• However, it demonstrates what documentation and processes are necessary to prevail when the IRS claims unpaid loss reserves are not fair and reasonable

• Makes it more difficult for the IRS to dispute ‘fair and reasonable’ loss reserves just because they exceed the amount that the IRS’s own actuaries would have determined

Acuity Mutual Insurance Co. v. Commissioner, T.C. Memo 2013-209

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Page 12: {P & C Tax Update}

2013 Tax Rate Changes

12

Many changes for 2013• Most at the individual level

• Top individual rate: 39.6% (up from 35% in 2012)

• Maximum capital gains rate: 20% (up from 15% in 2012)

• Medicare contribution tax: .9% on earned income (new for 2013)

• Net Investment Income tax: 3.8% on net investment income (new for 2013)

• Top rate could be as high as 43.4%

• No change to C corporation income tax rates

• Graduated scale to maximum 35% corporate rate

Page 13: {P & C Tax Update}

2013 Considerations

13

Compensation structure of key employees

• In light of .9% Medicare Contribution tax

• Reasonable compensation issues

Depreciation

• 50% bonus expires December 31, 2013

• Section 179 expensing

• 2013: $2 million qualifying property limit, $500,000 maximum deduction

• 2014: $200,000 qualifying property limit, $25,000 maximum deduction

Page 14: {P & C Tax Update}

PLANTE MORAN

SSAP 101 Refresher

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Page 15: {P & C Tax Update}

SSAP 101: A Refresher

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Admissibility Test, Part 1 11.a. Companies can admit DTAs to the extent that they have paid federal income taxes in prior years that can be recovered during a timeframe corresponding with IRS tax loss carryback provisions, not to exceed 3 years

• P & C Federal carryback period for ordinary items is 2 years

• Life Federal carryback period for ordinary items is 3 years

• Federal carryback period for capital items is 3 years• Year one of the carryback period is the current period

Page 16: {P & C Tax Update}

Admissibility Test, Part 2

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Paragraph 11.b. After the application of paragraph 11.a., companies may admit DTAs expected to be realized within the applicable period, as determined by the Realization Threshold Limitation tables, not to exceed a percentage (as determined by the same Realization Threshold Limitation table) of statutory capital and surplus

• RBC levels determine the reversal period as well as the capital and surplus limitation percentage

• Non-RBC filers have their own table to determine admissibility

• Apply the percentage limitation to current period adjusted capital and surplus, excluding EDP, DTAs, etc.

Page 17: {P & C Tax Update}

Admissibility Test, Part 2

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The December 31 RBC ratio is calculated using the end of year ExDTA ACL RBC ratio. Same calculation as the ratio computed in the annual RBC Report.

TAC (Total Adjusted Capital) does not include any DTAs of the reporting entity.

Page 18: {P & C Tax Update}

Admissibility Test, Part 2

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Interim periods (March 31, June 30, September 30) will use the following for the RBC ratio:Total Adjusted Capital ExDTA for the current quarter as the numerator

Authorized Control Level as filed for the most recent calendar year as the denominator

Page 19: {P & C Tax Update}

Admissibility Test, Part 3

Paragraph 11.c.

Any remaining DTAs can be admitted to the extent that they can be offset by any DTLs

Must consider character (ordinary vs. capital)

Must consider reversal patterns of temporary differences

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Page 20: {P & C Tax Update}

Tax Loss Contingencies

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• SSAP 101 replaced “probable” with “more likely than not” (50%) in SSAP 5R in relation to tax loss contingencies

• If it is more likely than not that a tax position will not be sustained upon examination, must establish a tax loss contingency

• Tax loss contingencies are included in the definition of current income taxes under paragraph 3.a. of SSAP 101 (also includes related penalties and interest)

Page 21: {P & C Tax Update}

Tax Loss Contingencies

21

• Assumes an examination with full knowledge of all relevant information

• If loss contingency is more than 50% of the benefit, must record contingency at 100%

• If the loss contingency relates to a temporary difference, do not record the contingency until an event occurs. Receive a Notice of Proposed Adjustment from the IRS

Page 22: {P & C Tax Update}

Possible Outcomes and the Probability of Occurring

Tax Benefit Cumulative

To Be Realized Probability Probability

$500 10% 10%

$400 10% 20%

$300 25% 45%

$200 10% 55%

$100 45% 100%

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Page 23: {P & C Tax Update}

P & C Example Multiple Year Carryover Gross Deferred Tax Assets

Timing of Temporary Differences 2013 2014 2015

Gross DTA Turning in 2013 Turning 2014 Turning in 2015

OTTI $50,000,000 $50,000,000 - -

LRD 190,000,000 60,000,000 45,000,000 85,000,000

Other 5,000,000 - - -

Total $245,000,000 $110,000,000 $45,000,000 $85,000,000

Temporary Benefits Reversing in One Year $110,000,000 Temporary Benefits Reversing in Two Years $45,000,000Temporary Benefits Reversing in Three Years $85,000,000

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Page 24: {P & C Tax Update}

P & C Example Multiple Year Carryover   2013 2014 2015

Temporary Differences Without

Reversing With Without

Reversing WithWithout

Reversing With

Projected Taxable Income $150,000,000 $150,000,000 $70,000,000 $70,000,000 $140,000,000 $140,000,000Reversing Temporary Differences  

(110,000,000)  

(45,000,000)  

(85,000,000)

Adjusted Taxable Income 150,000,000 40,000,000 70,000,000 25,000,000 140,000,000 55,000,000

Regular Tax 52,500,000 14,000,000 24,500,000 8,750,000 49,000,000 19,250,000 Tax Savings if Regular Tax Applied (at 35% Rate) 38,500,000

15,750,000 29,750,000

Taxable Income for AMT 150,000,000 40,000,000 70,000,000 25,000,000 140,000,000 55,000,000

AMT/ACE Adjustment 280,000,000 280,000,000 60,000,000 60,000,000 120,000,000 120,000,000

Adjusted Taxable AMT 430,000,000 320,000,000 130,000,000 85,000,000 260,000,000 175,000,000

AMT at 20% 86,000,000 64,000,000 26,000,000 17,000,000 52,000,000 35,000,000

Greater Tax 86,000,000 64,000,000 26,000,000 17,000,000 52,000,000 35,000,000 Actual Tax savings (at 20% Rate) 22,000,000   9,000,000   17,000,000  Reduction in Tax Savings as a Result of AMT (16,500,000)   (6,750,000)   (12,750,000)  

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Page 25: {P & C Tax Update}

SSAP 101 – Tax Planning  2013 2014 2015

Temporary Differences Without

Reversing With Without

Reversing WithWithout

Reversing With

Projected Taxable Income $589,215,000 $589,215,000 $164,117,647 $164,117,167 $328,235,294 $328,235,294

Reversing Temp Differences   (110,000,000)   (45,000,000)   (85,000,000)

Adjusted Taxable Income 589,215,000 479,215,000 164,117,647 119,117,647 328,235,294 243,235,294

Regular Tax 206,225,250 167,725,250 57,441,176 41,691,176 114,882,353 85,132,353Tax savings if Regular Tax Applied (at 35% Rate) 38,500,000   15,750,000   29,750,000  

Taxable Income for AMT 589,215,000 479,215,000 164,117,647 119,117,647 328,235,294 243,235,294

AMT/ACE Adjustment 0 0 0 0 0 0

Adjusted Taxable AMT 589,215,000 479,215,000 164,117,647 119,117,647 328,235,294 243,235,294

AMT at 20% 117,843,000 95,843,000 32,823,529 23,823,529 65,647,059 48,647,059

Greater Tax 206,225,250 167,725,250 57,441,176 41,691,176 114,882,353 85,132,353Tax Savings Before Tax Planning 22,000,000   9,000,000   17,000,000  Tax Savings After Tax Planning $38,500,000   $15,750,000   $29,750,000  

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Page 26: {P & C Tax Update}

Valuation Allowance Stat and GAAPA valuation allowance is required under GAAP if it is determined that a gross deferred tax asset cannot be realized, in whole or in part. The standard is the more likely than not standard:1. Based upon all available evidence unless it is more likely

than not that a deferred tax asset will be realized a valuation allowance is required.

2. Sources of taxable income that can be used to support a conclusion that a DTA will be realized include:

a. reversals of existing DTLs;

b. carryback capacity under the tax law;

c. projections of future taxable income;

d. income from tax planning strategies.

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Page 27: {P & C Tax Update}

Valuation Allowance Stat and GAAP

I. For statutory purposes the valuation allowance reduces “gross deferred tax assets” resulting in “adjusted gross deferred tax assets” which are then subjected to the admissibility tests;II. In the Q&A to SSAP 101 it is emphasized that the stat valuation allowance is determined on a separate company basis;III. For internal control purposes it is important to note that the four sources of taxable income used to support a conclusion that no valuation allowance is required must be properly documented.

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Page 28: {P & C Tax Update}

AMT Impact with NOL carryoverRegular Tax 2014 2015 2016Book income 3,000,000 4,000,000 3,760,000 20% of UEP BOY (2,000,000) (5,000,000) (6,000,000)20% of UEP EOY 5,000,000 6,000,000 5,500,000 LRD BOY (3,000,000) (2,000,000) (3,000,000)LRD EOY 2,000,000 3,000,000 2,850,000 Taxable income B/4 NOL 5,000,000 6,000,000 3,110,000 NOL Carryover (25,000,000) (20,000,000) (14,000,000)Taxable income after NOL - - - AMTRegular taxable income 5,000,000 6,000,000 3,110,000 AMT adjustments 750,000 650,000 650,000 AMT Taxable income B/4 NOL 5,750,000 6,650,000 3,760,000 AMT NOL Limited to 90% (5,175,000) (5,985,000) (3,384,000)AMT Taxable income 575,000 665,000 376,000

Times rate 20.00% 20.00% 20.00%AMT Tax 115,000 133,000 75,200

Total 323,200 28

Page 29: {P & C Tax Update}

PLANTE MORAN

Tax Sharing Agreements – A Brief Overview

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Page 30: {P & C Tax Update}

Three Basic Reasons for the agreements:

I. Earnings and profits

II. Stock Basis

III. To determine how to split the actual liability in $$$

- the only limitation here is really the extent of the tax advisor’s imagination

Tax Sharing Agreements

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Page 31: {P & C Tax Update}

Earnings and profits:

1. Basic Method 1 - Contribution to consolidated taxable income;

a. This method is the default method if the company doesn’t elect;

b. This is really the companies share of taxable income;

c. no members separate taxable income is treated as being less than zero under this method;

d. no credit given for credits or losses or other tax attributes.

Tax Sharing Agreements

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Page 32: {P & C Tax Update}

Earnings and profits:

2. Basic Method 2 – Separate return tax liability;

a. Ratio of all members separate return tax liabilities;

b. Intercompany transactions must be taken into account;

c. No dividends received deduction for dividends between the members of the consolidated group;

d. No members separate tax return liability is treated as being less than zero. .

Tax Sharing Agreements

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Page 33: {P & C Tax Update}

Earnings and profits:

3. Basic Method 3 – Allocation of tax increases from consolidation;

a. First you allocate the tax liability to each member under basic method 1;

b. Any tax increases of a member arising from the consolidation are then apportioned to each other member that has a reduction in tax liability. This is determined by comparing the tax liability calculated under Basic Method 1 with what would have been allocated under basic method 2.

4. Other Basic Methods with the approval of the secretary.

Tax Sharing Agreements

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Page 34: {P & C Tax Update}

Tax Sharing Agreements

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Earnings and profits:

5. Tax attribute absorption methods;

a. Wait and see method causes a member who uses the tax attribute of another member to only pay for that usage when the member who originated the tax attribute loses the use of it when it could actually reduce its own liability;

b. The “percentage method” permits the group to allocate to loss and credit members the consolidated tax benefits attributable to the use of their losses and credits without taking into account (as you would in the wait and see method) the ability of a member to absorb these attributes itself. It is also known as the immediate payment method;

c. Any other method approved by the secretary.

Page 35: {P & C Tax Update}

Tax Sharing Agreements

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Stock Basis:

For purposes of calculating stock basis there is only one method. The federal income taxes of the group are allocated among the members by applying 1552 and the percentage method of Treas. Reg. Section 1.1502-33(d)(3) using 100% as the percentage;

There are no other options…

Page 36: {P & C Tax Update}

Tax Sharing Agreements

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Sharing the liability for state law or payment purposes between the member:

While there may be advantages to having the same methods for E & P, Stock basis and for sharing actually $$ between the entities it is not required.

No reasonable method of sharing the actual dollars paid and shared of taxes as between the entities is off limits.

Page 37: {P & C Tax Update}

PLANTE MORAN

Repair and Maintenance Regulations

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Page 38: {P & C Tax Update}

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Repairs and Maintenance

Final regulations issued September, 2013

• Simplify and refine some of the temporary regulations and create new safe harbors

• Move away from facts and circumstances and subjective nature of current standards

• Taxpayer friendly

Effective for years beginning on or after January 1, 2014

• Option to apply to 2012 or 2013

Page 39: {P & C Tax Update}

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Basics

Code Section 263

• Capitalization of amounts paid to acquire, produce, or improve tangible property

Code Section 162

• Deduction of all ordinary and necessary business expenses, including certain supplies, repairs, maintenance

New Regulations

• General framework for distinguishing capital expenditures vs deductible supply, repair, maintenance costs

Page 40: {P & C Tax Update}

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Five Main Areas

• Materials and Supplies (1.162-3)

• Repairs and Maintenance (1.162-4)

• Capital Expenditures (1.263(a)-1)

• Amounts paid for the acquisition or production of tangible property (1.263(a)-2)

• Amounts paid for the improvement of tangible property (1.263(a)-3)

Page 41: {P & C Tax Update}

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Five Main Changes

• Revised/simplified de minimis safe harbor for capitalization of amounts paid to acquire or produce property

• Extension of the safe harbor for routine maintenance to buildings

• Annual election for buildings that cost $1M or less to deduct up to $10,000 of maintenance costs

• New annual election to capitalize repair costs that are capitalized on taxpayers books and records

• Refinement of the criteria for refining betterments and restorations

Page 42: {P & C Tax Update}

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De Minimis Capitalization

Temporary Regs:

• Safe harbor to deduct certain tangible property up to aggregate ceiling

• This approach is allowed for 2012 and 2013

Final Regs:

• Safe harbor at the invoice or item level

• $5,000 per invoice or item, if applicable financial statement

• $500 per invoice or item, if no applicable financial statement

Page 43: {P & C Tax Update}

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De Minimis Capitalization

• Applicable Financial Statement

• Certified Audited Financial Statement

• Not a review or compilation• Financial Statements required to be submitted to a federal or

state agency

• Includes insurance company Annual Statements• In general, entities included in consolidated audited financial

statements are eligible for the larger de minimis option

Page 44: {P & C Tax Update}

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De Minimis Capitalization

Accounting Policy

• To take advantage of the $5,000 de minimis rule, taxpayers must have written book policies in place at the start of the tax year that specify a per-item dollar amount (up to $5,000) that will be expensed for financial accounting purposes.

• The policy can set different thresholds for each asset class.

• Previous Years

• The IRS has declined to grant transitional relief for taxpayers who would otherwise have been able to apply the de minimis rule under the temporary regulations to their 2012 /2013 tax year.

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De Minimis Capitalization

Example: Taxpayer N purchases 50 computers for $400 each.

• N has applicable financial statements and an accounting policy to expense amounts paid for units of property costing less than $500

• Computers are expensed for financial accounting purposes

Page 46: {P & C Tax Update}

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Routine Maintenance

Cost of certain routine maintenance need not be capitalized

• Recurring activities

• More than once during the life of the property• Expect to perform to keep property in ordinarily efficient

operation condition

Final regulations now include buildings and structural components

• More than once over 10 year period

• No need to consider treatment of costs on financial statements

Page 47: {P & C Tax Update}

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Safe Harbor for Small Buildings

• Allows taxpayers to deduct amounts paid for repairs, maintenance, and improvements

• Gross receipts must be less than $10 million

• Unadjusted basis must be less than $1 million

• Deduction can’t exceed the lesser of:

• $10,000 or• 2% of the unadjusted basis

• De minimis rule and routine maintenance count towards the $10,000

Page 48: {P & C Tax Update}

• Annual election to opt out of expensing repair and maintenance costs

• Must be capitalized on books and records as well

• Depreciate expenses

Election to Capitalize Repair and Maintenance Costs

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Page 49: {P & C Tax Update}

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Improvements

• Generally: if a unit of property has been improved, the improvement must be capitalized.

• The UOP is determined to be improved if after it is placed in service, the activity performed on the property exceeds the BAR standard.

oBetterment

oAdaptation

oRestoration

Page 50: {P & C Tax Update}

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Unit of Property

Group of functionally interdependent components

• Parts of a machine, the machine is the unit of property

Buildings are units of property

• Major systems are separate units of property• HVAC

• Plumbing

• Electrical

Page 51: {P & C Tax Update}

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Betterments

A betterment is an expenditure that:

• Fixes a material condition or defect that existed prior to the taxpayer’s acquisition of the UOP or arose in the production of the UOP

• Is for a material addition to the UOP (including physical enlargement, expansion or extension)

• Is reasonably expected to materially increase in capacity, productivity, efficiency, strength, or quality of the UOP or the output

Page 52: {P & C Tax Update}

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Adaptation

• Adapting a unit of property for a new or different use

• Inconsistent with the taxpayer’s intended, ordinary use at time placed in service

• No major changes with final regulations

Page 53: {P & C Tax Update}

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Restorations• Repair for casualty loss where a basis adjustment or loss has

been taken

• Return a UOP to ordinary efficient operating condition, if deteriorated and no longer functional for intended use

• Results in rebuilding the UOP to like new condition at end of class life

• Final regs permit deduction for amount spent in excess of adjusted basis of the damaged property, provided they would otherwise be considered deductible repair expenses

• Still required to capitalize amounts paid to restore property that would be capitalized without regard to the casualty loss rule

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Dispositions

No final regulations

• Re-proposed and temporary regulations

• Changes were substantial enough that the IRS decided it needed to give taxpayers another opportunity to comment

Revenue Procedure 2014-17 provides guidance for automatic changes in method of accounting

• Once final the regs will apply to January 1, 2014

• Should apply to 2012 as well

Page 55: {P & C Tax Update}

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Dispositions

Old rule:

• If a structural component of a building was retired, can’t dispose

• Continue depreciating old AND new component

Proposed & Temporary Regs:

• Take loss for retirement of structural component

• Depreciate new component

• Statistical sampling allowed (see Rev. Proc. 2014-17)

• Partial distribution elections

Page 56: {P & C Tax Update}

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Transitional Guidance

• IRS expects that nearly all companies will have a change in their accounting method

• Transition guidance was issued in early 2014 in Revenue Procedure 2014-16 and 2014-17

• How to apply the regulations for years prior to 2014

• Change of accounting procedures

Page 57: {P & C Tax Update}

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Key Takeaways

• Ensure written accounting policy is in place by the end of the year to take advantage of de minimis capitalization

• Certain items are elective

• Consider reverse tax planning• Tight timeline for compliance

• Be prepared!

Page 58: {P & C Tax Update}

PLANTE MORAN 58

Foreign Reporting

Page 59: {P & C Tax Update}

Report of Foreign Bank and Financial Accounts (FBAR)• Not a “tax return”

• Bank Secrecy Act of 1970

• Fin Cen Form 114

• Filed by United States Persons with a financial interest in or signature authority over a foreign financial account

• Aggregate value of accounts must exceed $10,000 at any time during a calendar year

Reporting Foreign Assets –Current Requirements

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Report of Foreign Bank and Financial Accounts (FBAR)Financial Account

• Bank account

• Securities account

• Insurance or annuity policies with cash value

• Commodities or futures options

• Mutual or other comingled funds

• With determinable asset value

Foreign Determination

• Location as opposed to nationality of institution is determinative

Reporting Foreign Assets –Current Requirements

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Report of Foreign Bank and Financial Accounts (FBAR)Financial Interest – U.S. person is owner of record or has legal title

Owner or legal title holder defined as:

• Person acting as agent for U.S. person

• Corporation with 50% of vote or value owned by U.S. person

• Partnership with 50% of profits or capital owned by U.S. person

• Trust

• U.S. person is grantor and has ownership interest, or

• Greater than 50% interest in assets of trust, or

• U.S. person has appointed protector subject to U.S. persons instruction

Reporting Foreign Assets –Current Requirements

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Report of Foreign Bank and Financial Accounts (FBAR)Signature Authority

• Authority of an individual to control the disposition of money, funds, or other assets held in financial account by direct communication

• Authority can be alone or in conjunction with another individual

Personal financial managers often have such authority

Limited exceptions for public companies/certain banks

Reporting Foreign Assets –Current Requirements

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Page 63: {P & C Tax Update}

Report of Foreign Bank and Financial Accounts (FBAR)FBAR filings

• Must be received by June 30

• Mailbox rule does not apply

Potential Penalties

• Up to 50% of account value for each failure to file

• Criminal penalties may include prison

Reporting Foreign Assets –Current Requirements

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Page 64: {P & C Tax Update}

Form 8938Required by IRC Section 6038D

Tax form filed with annual income tax return

Filed by “Specified Individuals” with an interest in “Specified Foreign Financial Assets”

Reporting Foreign Assets –Current Requirements

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Page 65: {P & C Tax Update}

Form 8938Specified Individuals• U.S. citizen or resident alien• Nonresident alien spouse electing to be taxed as US resident• Individuals not required to file U.S. tax return are NOT required to file

8938Reporting thresholds• Unmarried taxpayers living in U.S.

• $50,000 on last day of year or $75,000 at any time during year• Married filing joint return living in U.S.

• $100,000 on last day of year or $150,000 at any time during year• Unmarried taxpayers living outside U.S.

• $200,000 on last day of year or $300,000 at any time during year• Married filing joint return living outside U.S.

• $400,000 on last day of year or $600,000 at any time during year

Reporting Foreign Assets –Current Requirements

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Page 66: {P & C Tax Update}

Form 8938Specified Foreign Financial Asset

• Financial accounts with a foreign financial institution

• Stock or securities issued by non-U.S. entity

• Financial instruments with non-U.S. issuer or counterparty

• Interest in non-U.S. entity

• Interest in foreign trust or estate

• Interest in foreign pension or deferred compensation plan

Definition of “Interest” in

• Any income, gains, losses, deductions, credits, gross proceeds, or distributions would be reported on annual tax return

Reporting Foreign Assets –Current Requirements

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Page 67: {P & C Tax Update}

Form 8938Specified Foreign Financial Asset - Exceptions

• Assets held through US or foreign custody account

• Foreign custody account must be reported

• Assets held by non-disregarded entities

• Interest in entity may be reportable

• Look through applies to disregarded entities

• Real estate if not held through foreign entity

• Foreign social security

• Assets reported on certain other forms

Reporting Foreign Assets –Current Requirements

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Page 68: {P & C Tax Update}

Form 8938Form must be filed with income tax return

Penalties

• $10,000 for failure to file timely

• If IRS provides notice of failure, and report is not filed within 90 days

• Additional $10,000 for each 30 day period, up to $50,000 maximum

Reporting Foreign Assets –Current Requirements

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Entity Reporting – Periods beginning after December 31, 2011Specified Domestic Entities

• Corporation, Partnerships, Trust meeting certain criteria

• Must be formed or availed of for purposes of holding specified foreign financial assets

Reporting Foreign Assets –Future Requirements

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Entity Reporting – Periods beginning after December 31, 2011Specified Domestic Entities

• Corporations and Partnerships

• Foreign financial assets meeting the $50,000/$75,000 threshold

• Entity is “closely held”• At least 50% of gross income is passive or 50% of assets

generate passive incomeOr

• At least 10% of gross income is passive or 10% of assets generate passive income in situation where entity is formed to avoid reporting obligations under 6038D

Reporting Foreign Assets –Future Requirements

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Entity Reporting – Periods beginning after December 31, 2011Specified Domestic Entities

• Trusts

• Foreign financial assets meeting the $50,000/$75,000 threshold

• Specified person is beneficiary

Reporting Foreign Assets –Future Requirements

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Reporting Foreign Assets

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FBAR and Form 8938 – ComparisonThresholds

Interest in asset/account

Balance reported

Filing mechanics

Penalties

Indirect ownership

Entity interests

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Reporting Foreign Assets - FATCA

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Attempts to prevent tax evasion through foreign entities or financial institutions Potential withholding imposedApplies toForeign Financial Institutions (FFI)

Non-Financial Foreign Entities (NFFE)

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Reporting Foreign Assets - FATCA

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Foreign Financial InstitutionsAccepts deposits in the ordinary course of business

Holds financial assets for the account of others as a substantial part of its business

Is engaged primarily in the business of investing or trading in securities, commodities, or partnerships

ExemptionsCompanies holding subsidiaries engaged in a trade or business

Hedging centers of non-financial group

Start up companies in non-financial business

Non-financial entities in liquidation or bankruptcy

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Thank you.Thank you for attending

Doug Youngren, CPA, JD, Tax [email protected]

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Disclaimer

This presentation is part of Plante Moran marketing of professional services, and is not written advice directed at the specific facts and circumstances of any person and/or entity. This written advice is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

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