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Tax Provision Update

TEI – New Jersey ChapterSeptember 30, 2016

Provision Topics

Legislative Tax Update Affecting Provisions

Current FASB Pronouncements

Proposed FASB Pronouncements

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Legislative Tax Update Affecting Provisions

Depreciation Section 179 Extended through 12/31/2017

$500k max - $2 mil qualified additions

Bonus Depreciation Extended through 12/31/2019 2016/2017 – 50% 2018 – 40% 2019 – 30%

15-Year recovery period made permanent (QLI, QRI)

Tax Legislation Update

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Extended Business Credits Work Opportunity Credit – extended to 12/31/19

R&D Credit – made permanentNew enhancements: Less than $50 mil receipts – can offset credit

against AMT Qualified Small Business (QSB)– can elect to

offset credit against employer payroll taxes (max of $250k) QSB - $5 mil or less receipts; 4 years or

less of having any receipts


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Repair Regs Impacts Routine Safe Harbor Maintenance –

GAAP – capitalized Tax – write-off any costs that brings tangible

property back to its ordinarily efficient operating condition (includes new L/T components)

Partial Disposition – allows tax w/o even if building or component as a whole not disposed or abandoned


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Enhanced Food Inventory Contribution

Made permanent by the PATH Act

Increased contribution deduction (perm difference) for certain wholesome foods donated to the sick or needy: Up to 50% of gross $ margin (Capped at 2x basis)

Election to use 25% of FMV as basis if no inventory


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2016 Various State Updates New York:

Lower 6.5% base income tax rate 0% for qualified NY manufacturers Pre-apportion NOL conversion to post-apportion (DTA adj?)

NYC – single sales factor phase-in continues: 2016 – 87% sales – 6.5% prop/payroll 2017 – 93% sales – 3.5% prop/payroll 2018 – 100% sales

Various state rate reductions: North Carolina – corp rate reduced to 4% Indiana – corp rate cut to 6.5% Arizona – corp rate reduce to 5.5%


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Current FASB PronouncementsFor Provisions

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Share-Based Compensation

Changes to Share Based Payments Under ASC‐718

Thomas J Burger, CPA, MST

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AS-718 - Key Terminology

• Settlement of Awards - Occurs when the award has vested without restrictions and is taxable to the employee; award is also deductible by the company at this time

• Excess Tax - Benefit or Deficiency

• Benefit /Windfall -The tax deduction exceeds the cumulative book compensation expense for an award

• Deficiency /Shortfall – The tax deduction is less than the cumulative book compensation expense for an award

• ASC-718 requires a separate “APIC Pool of Windfall Benefits” be established in equity at adoption. The pool is adjusted for future increases (excess tax benefit) or decreases (excess tax deficiency). If “Pool” is insufficient, then expense is recognized in the financial statements

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Tax Accounting Basics – Book Expense

• Pre-tax Book Expense (Fair Value X Shares/Units Awarded) recorded over the life of the award until vesting

• Book expense is added back in arriving at taxable income and Deferred Tax Asset is established for US Entities and Non-US entities where a tax deduction is permitted

• The Deferred Tax Asset must be recorded on a jurisdictional basis at the appropriate enacted tax rate

• Entities where no tax deduction is permitted requires a permanent disallowance of book expense in computing taxable income - no Deferred Tax Asset established

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Tax Accounting Basics – Tax Deduction

Tax Deduction recorded when vested or settled (ie: no restrictions exist) – this also ties in with IRC Section 83 and similar rules in Non- US jurisdictions where applicable

Restricted Stock (including performance shares)

• Tax Deduction is Fair Market Value at Vesting

• Also taxable compensation to employee

Stock Options

• Tax Deduction is Fair Market Value minus the Exercise (or Grant) Price

• Options must be exercised to be taxable to the employee and deductible by the company

• Tax Deduction is comprised of two components:

o Reversal of the Deferred Tax Asset set up on the cumulative book expense on the settled award

o Excess Tax Benefit resulting from difference between the tax deduction and the DTA established on the cumulative book expense on the settled award

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ASU 2016-09 – Changes Ahead!

• Issued March 30, 2016, effective for pubic companies in 2017; early adoption permitted in 2016

• Requires Excess Tax Benefit or (Deficiency) be recognized as an income tax benefit or expense in the financial statements

• Discrete to the Quarter for Interim reporting

• Simplifies minimum withholding requirements – permits withholding where applicable up to the maximum statutory rate in the employee’s jurisdiction

o Presently, minimum W/H applies by employee by jurisdiction.

• Entity can elect to account for forfeitures as they occur

o Presently an estimate of the total awards for which the service period will not be met –typically expressed as percentage of book expense

• Cash flows

o Cash paid to tax authority in respect to shares withheld is required to be classified as a financing activity – previously either financing or operations

o Excess tax benefits from cash flows considered operating activity – previously considered financing

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Example: Accounting for Excess Tax Benefits–Current and New Guidance

Assume the following:• Company A grants a fully vested, nonqualified option with an exercise price of $40 and a grant‐date fair value of $30 to its employee in 20X1.

• The option is exercised in 20X2 when the share price is $90.• The entity has a 40 percent tax rate for both years.

The income tax journal entries for 20X1 and 20X2 are shown below. In 20X1, book expense of $30 isrecognized. The associated deferred tax asset and future benefit of $12 ($30 × 40%) is recorded in the income tax entry. This entry would be the same under the new guidance as it is under current guidance.

Income Tax Journal Entries Current Guidance New Guidance

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Example: Accounting for Excess Tax Benefits–Current and New Guidance

In 20X2, the employee exercises the award at a gain of $50 ($90 ‐ $40). The gain on the exercise exceeds the book expense by $20, ($50 ‐ $30) resulting in an excess tax benefit. The entity records two journal entries in 20X2:

• The first entry eliminates the deferred tax asset recorded in the 20X1 entry, which is the same under the new guidance as it is under current guidance.

• The second entry would differ under the new guidance: Under current guidance, the reduction to current taxes payable for $20 (gain of $50 × 40%) is offset by current tax expense of $12 ($30 x 40%) to reverse the deferred tax impact, and $8 ($20 x 40%) excess tax benefit is recorded in APIC. Under the new guidance, the $8 excess tax benefit is recorded to current tax expense.

Income Tax Journal Entries Current Guidance New Guidance

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Editorial Comment –Is “simplification” a good thing ?

Pros

• More intuitive tax accounting compliance by conforming to ASC-740 principles -eliminates confusing tax accounting mechanics to reclassify ETB to APIC pool and eliminates tracking of the APIC pool

• Standardization of Cash Flow presentation

• More practical approach to minimum withholding tax requirement

• Forfeitures process more streamlined with ability to elect accounting for forfeitures as they occur

Cons

• Volatility in the Tax Rate – must now project ETB

• Possible negative public perception of highlighting stock awards benefits in the financial statements

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Challenges Ahead !

• Projection of the Tax Deduction and Excess Tax Benefit by entity and will NOW be required to estimate the tax rate impact

• Must project the stock price at vesting/exercise

• Projection Considerations - Options

• Number of shares that will be exercised is unknown

• Exercise Price/Fair Value will vary with each grant year

• Projection Considerations – Restricted Stock

• Multi-year grants vesting over time may result in significant swings in the Excess Tax Benefits if the company’s stock price is volatile

Intra-Entity Asset Transfers

Anthony DiGiacinto, CPADirector of Tax


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Intra-Entity Asset Transfers Current and deferred taxes of an intra-entity asset

transfer are recognized when the transfer occurs. For transfer of inventory the existing guidance is retained

Effective Date: Public – periods starting after 12/15/2017 Private – periods starting after 12/15/2018

(annual) and 12/15/2019 for interim


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Intra-Entity Asset Transfers Modified retrospective transition with a cumulative

catch-up adjustment to opening retained earnings in the period of adoption.

The final ASU is expected to be released in really late Q3 or in early Q4.


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Intra-Entity Asset Transfers Example of sale of inventory U.S. Parent sells inventory to a foreign sub for

$100. The inventory had a basis of $60. At a 40% tax rate the parent will pay $16 of tax. The sub will have a tax basis of $100. In consolidation the book basis will be $60.

Deferred Tax Charge $16Current Income Tax Expense $16


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Intra-Entity Asset Transfers Example of sale of non-inventory asset U.S. Parent sells an asset to a foreign sub for

$100. The asset had a basis of $60. At a 40% tax rate the parent will pay $16 of tax. The sub will have a tax basis of $100. In consolidation the book basis will be $60.

Deferred Tax Asset (foreign sub) $16Deferred Income Tax Benefit $16


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DTA/DTL Classification All classification of deferred tax assets and liabilities

now reported under one non-current amount on balance sheet.

Effective Date: Public – periods starting after 12/15/2016 Private – periods starting after 12/15/2017

(annual) and 12/15/2018 for interim


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DTA/DTL Classification Early Application Allowed:

If prospective: disclose nature/reason of change and that prior periods not retrospectively adjusted

If retrospective: disclose nature/reason of change and also provide quantitative summary of prior periods affected


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Proposed FASB Changes forProvisions

The Board decided that more relevant information and transparency was needed regarding foreign entity operations in light of increased overseas operations: High amounts of undistributed foreign earnings from

CFC’s Special tax agreements with foreign governments Material tax expense/DTA(L) differences between U.S. and

foreign nations More detail on the basis in changes to indefinite

reinvestment positions

Proposed FASB ChangesForeign Affiliates and CFC’s (General)

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A reporting entity must disclose general rights and privileges of any agreement made with a governmental entity that either will or may reduce the company’s income tax burden. Duration of agreement Specific commitments that influences tax position

Will this eventually be known as the Apple rule?

Proposed FASB ChangesAgreements with Foreign Governments

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Applies to both private & public companies

Pre-tax income from continuing operations disaggregated between domestic/foreign entities

Tax expense/(benefit) and DTA/DTL disclosure disaggregated between domestic/foreign entities

Proposed FASB ChangesDisaggregation of Domestic and Foreign entities:

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Cash flow disclosure of income taxes paid disaggregated between domestic/foreign entities

Separate disclosure of foreign country with a “significant” (not yet defined) tax concentration

Example Cash Flow:Supplemental Disclosure of Cash PaidDomestic income taxes paid $500,000Foreign income taxes paid - India $350,000

Foreign income taxes paid - other $ 35,000

Proposed FASB ChangesDisaggregation – Taxes Paid:

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Disclosure of the circumstances that led to a company changing its policy from (or to) indefinite reinvestment of undistributed foreign earnings.

Example:During the quarter ended xx/xx/xx, the Company determined that it will require additional funds to support the planned increase of U.S. R&D activities for its X line of products. As such, management now asserts that the undistributed earnings of Eurozone, Inc. are no longer indefinitely reinvested and will be repatriated in the foreseeable future.

Proposed FASB ChangesChanges to “Indefinite Reinvestment” position:

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Disclose the aggregate of cash, equivalents, and marketable securities held by foreign subsidiaries• Interim and annual reporting

Proposed FASB Changes

Foreign Subs Liquidity Disclosure

(The Board reversed its prior proposal on disclosing indefinitelyreinvested foreign earnings for any country exceeding 10% of thetotal foreign cumulative earnings)

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Report the effects of tax law changes that are probable to affect future reporting periods of an entity:• Statutory rate increases/cuts• Tax holidays• Repeal of significant tax credits


Disclosure of enacted tax law changes

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Must now report the actual $ increases or decreases in the valuation allowance AND the explanation of the change (E.g. – reasons for releasing reserve due to sufficient positive evidence)


Valuation Allowance (Public Companies)

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Public Entities: Any item<5% of the “total difference” to be reconciled to

statutory tax can be grouped with other items If all reconciling items are <5% individually AND in the

aggregate <5%, the rate reconciliation not required. Reconciliation can be in $ or %

Non-Public Entities: No change to existing rule (material items affecting the

statutory rate without need for reconciliation)


Rate Reconciliation Changes

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Amount of federal, state and foreign gross carryforwards by expiration period for each of the first 5 years after the reporting date

DTA for carryforwards broken out by federal, state and foreign (also 5 year disclosure)

Total amount of unrecognized tax benefits that offsets DTA relating to carryforwards

Proposed FASB ChangesCarryforward Disclosure (Public Entities Only)

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Proposed FASB ChangesGross NOL Carryforward Disclosure ExampleExpiring Year Federal NOL State NOL Foreign NOL

2017 ‐ ‐ 10,000

2018 ‐ ‐ 50,000

2019 2,200,000 1,800,000 25,000

2020 1,700,000 2,000,000 ‐

2021 1,100,000 650,000 30,000

Thereafter 5,500,000 4,200,000 150,000

TOTAL 10,500,000 8,650,000 265,000

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Proposed FASB ChangesDTA Carryforward Disclosure Example

Expiring Year Federal DTA NOL State DTA NOL Foreign DTA NOL TOTAL

2017 $700,000 $125,000 $1,000 $826,000

2018 700,000 125,000 4,000 829,000

2019 600,000 200,000 5,000 805,000

2020 500,000 100,000 5,000 605,000

2021 300,000 50,000 3,000 353,000

Thereafter 1,800,000 300,000 50,000 2,150,000

TOTAL 4,600,000 900,000 68,000 5,568,000

Unrecognized Tax Benefits at 12/31/2016 (150,000)

Total tax effect of carryovers after UTB $ 5,418,000

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Statement of carryovers only by jurisdiction (similar to existing requirement), but new footnote guidance provided:

Example:The entity has $6 million, $5 million, and $1 million in federal, state and foreign loss carryforwards (not tax effected), respectively, which expire at various times between 20x1 and 20x5.

Proposed FASB ChangesCarryforward Disclosure (Non-Public)

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Disclose line items in SoFP where UTB currently being presented and related UTB amounts (if not in SoFP, disclose separately)

Disclosing amount of UTB that is offsetting DTA

Breaking out both cash and non-cash settlements in UTB roll-forward disclosure

Proposed FASB ChangesUnrecognized Tax Benefits (UTB/UTP)

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Credit Suisse - Generally against most of the proposalso Current disclosure requirements already highly comprehensive o Benefits would not outweigh the costo Some proposed items run parallel to current SEC/740 rules

NYSSCPA- Generally in favor of the proposalso Claims most of the information should be already available


Summary of Comment Letters to Proposals

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What areas can you envision your company would need the most assistance in the foreseeable future?

a) Due diligenceb) Tax provision assistancec) Transfer pricing d) Tax credits computation and analysise) State and local tax matters

Question -

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This publication is intended to provide general information to our clients and friends, It does not constitute

accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Any tax advice contained in this memorandum (including any attachments) is not intended for and cannot

be used, for the purpose of (i) avoiding penalties imposed by the Internal Revenue Code or (ii) promoting,

marketing, or recommending any transaction or matter addressed herein.

THANK YOU FOR ATTENDING!

Panelist Title Contact Information

Thomas V. Cardinale EisnerAmper LLP, Director of Tax

Phone: 732‐243‐7457email: [email protected]

Anthony DiGiacinto EisnerAmper LLP, Director of Tax


Thomas Burger Bristol‐Myers SquibbDirector of Operations


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