Disclaimer€¦ · No regrets tax reform planning timeline Filing deadline for non-auto method changes 12/31/2017 Filing deadline for auto method changes and permanent items 10/15/2018

1 Policy Perspectives | Quantitative Services

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Disclaimer

► This presentation is provided solely for the purpose of enhancing knowledge on

tax matters. It does not provide tax advice to any taxpayer because it does not

take into account any specific taxpayer’s facts and circumstances.

► These slides are for educational purposes only and are not intended, and

should not be relied upon, as accounting advice.

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Policy PerspectivesTax reform and its impact

on accounting methods and

other federal provisions

26 February 2018

Today’s presenters

Alison JonesPrincipal, National Tax

Ernst & Young LLP

[email protected]

P: (202)327-6684

Jamison MeredithPartner

Ernst & Young LLP

[email protected]

P: (214) 969-8119

mailto:[email protected]

mailto:[email protected]


Today’s agenda

► Planning during transition period

► Overview: Changes to key federal tax provisions


No regrets tax reform planning timeline

Filing deadline for non-auto method changes

12/31/2017

Filing deadline for auto method changes and

permanent items10/15/2018

METHOD CHANGES – FORM

3115

• Revenue recognition (including

exclusion of disputed revenue

from income)

• Certain UNICAP methodologies

• Specific prepaid items

• Interest capitalization

• Deferred compensation (Sec. 404)

• Estimated accruals

PERMANENT ITEMS

• Research Credit

• Section 199

• Meals & Entertainment

• Transaction Costs Analysis

• Lobbying Expense Analysis

By 10/15/2018 – Permanent items and

accounting method planning requiring automatic method changes may be

executed through 2017 tax return filing due date.

By 12/31/2017 – Accounting method planning

requiring non-automatic method changes must

be filed by 12/31/17 to be effective 1/1/18

METHODS PLANNING – NO

FORM 3115 REQUIRED

• By 12/31/2017

• Factual Changes (e.g.,

compensation liabilities,

prepaid expenses)

• By 10/15/2018

• Elections

*Assumes a 12/31 tax year end


Accounting Methods Worth Reviewing

Accounting Method

Revenue

Deferral vs.

Expense

Acceleration

Description Automatic

Advance Payments Revenue

Defer income to the extent that books defers recognition in year 1;

remaining deferred is recognized in the subsequent year. *Note,

generally an automatic change but can be non-automatic for certain

bundled payments.

√*

Gift Cards Revenue

Defer income to first year (under Rev. Proc. 2004-34) or second year

(under 1.451-5) following the year of sale. *Note, a change under

1.451-5 is a non-automatic method change. √*

Disputed Revenue Revenue

Defer revenue related to accounts receivable under dispute until

dispute is resolved. Identify dispute codes or other marker for

purposes of determining origin of dispute.

Management fee

/leasing Revenue

Defer revenue related to management fee/leasing commissions until

the taxpayer has a fixed right to the income under Sec. 451.

Prepaid Insurance and

Software MaintenanceExpense

Deduct payments on payment date using the 12 month rule as

opposed to ratably over the term of coverage or contract. Limited to

contracts of 12 months or less.√

Prepaid Sales

CommissionsExpense

Change by a dealer in property to deduct amounts paid or incurred

for sales commissions and other costs that facilitate the sale of

property in accordance with 1.263(a)-1(e)(2). √

Tangible Property

RegulationsExpense

Deduct items that may otherwise be capitalized such as repairs and

dispositions of components of buildings. √



Accounting Method

Revenue

Deferral vs.

Expense

Acceleration


Depreciation &

AmortizationExpense

Review of lives and methods for real, personal and intangible

property. Accelerate depreciation and amortization based on shorter

life.√

Property Taxes Expense

Deduct property taxes in the year in which the lien date occurs if the

tax is paid within 8.5 months of year end. Jurisdiction by jurisdiction

determination.√

Rent Expense ExpenseDeduct expenses under Section 467 as economic performance

occurs (when paid) rather than ratably over the lease term. √

IBNR Expense

Accelerate deduction for self-insured health plans from the period

when claims are paid to the period when the services are rendered;

also consider the medical portion of workers’ compensation.√

Software Expenses ExpenseDeduct expenses when incurred rather than amortizing over three

years. Consider bonus depreciation if remaining capitalized. √

State Tax Expense ExpenseDeduct amount paid rather than amount accrued on the books.

√

Accrued Bonus ExpenseDeduct bonuses paid within 2.5 months after year end. Liability must

be fixed at year end. √



Accounting Method

Revenue

Deferral vs.

Expense

Acceleration


Smallwares ExpenseDeduct costs when incurred (i.e., when received by the restaurant)

rather than when consumed. √

Bad Debt ExpenseDeduct when bad debt is wholly worthless or partially worthless and

specifically reserved. √

Safe Harbor for Ratable

Service ContractsExpense

Rev. Proc. 2015-39 provides a safe harbor which allows a taxpayer to

treat economic performance as occurring on a ratable basis over the

term of a “ratable service contract.” A ratable service contract has

three criteria: (1) contract provides for similar services to be provided

on a regular basis, (2) each occurrence of the service provides

independent value, and (3) the contract term does not exceed 12

months. When applying the safe harbor, the 3.5 month rule and

recurring item exception are available to accelerate deductions.

√

Prepaid Advertising or

PostageExpense

Expense prepaid advertising or postage if services are provided

within 3.5 months of payment.

Accrued Expenses Expense

Deduct accrued expenses that are fixed at year end and economic

performance is met. Review liabilities on the balance sheet at year

end, e.g., legal, consulting and other similar services.


Other Opportunities To Consider

Opportunity Description

Cost Segregation

Can be performed in various situations such as: 1. Large portfolio acquisitions – not only to allocate the

purchase to personal property, but to also identify the building systems in order to evaluate for repairs in

the future, 2. Traditional new construction projects – including renovations and expansions, 3. REIT

clients – to manage taxable income for distribution purposes (this can be very specific or use a statistical

sampling methodology) and assist in identifying real property and tangible personal property for Rents

from Real Property purposes, and 4. RP 2015-56 – Applying the Retail & Restaurant IIR for remodeling

to landlords that have large portfolios – apply the application to the tenant allowances.

Tenant AllowancesOpportunity to defer recognition of income if lease agreement is specific as to the use of the funds (for

property leased by the taxpayer).

Research CreditAnalyze research and experimental activities to identify which expenses qualify for the research credit;

recent final regulations make it easier for companies to claim credit for internal use software.

Section 199Domestic manufacturing deduction (DMD) applies to commercial and residential builders and

engineering & construction firms.

Meals & Entertainment

(M&E)Analyze expenses currently limited to 50% limitation.

Transaction Cost

Analysis (TCA)Analyze capitalized transaction costs to determine current expense opportunities.

Percentage of

Completion (Sec. 460)

For loss contracts, acceleration of costs incurred and inclusion of book/tax differences to increase loss

recognized in the current year.


Key business tax provisions

Corporate tax rate and corporate alternative minimum tax (AMT)

► 21% tax rate, effective 1/1/18

► Eliminates corporate AMT

Interest expense deduction

► Limits deduction to net interest expense that exceeds 30% of adjusted taxable

income (ATI). Initially, ATI computed without regard to depreciation, amortization, or

depletion. Beginning in 2022, ATI would be decreased by those items. Regulated

utilities generally excepted

Net operating losses (NOLs)

► Limits NOLs to 80% of taxable income for losses arising in tax years beginning after

2017. Repeals carryback provisions, except for certain farm and property and

casualty losses; allows NOLs to be carried forward indefinitely


Expensing of Qualified Property

• Effective date

• 100% bonus depreciation for qualifying property placed in service after 9/27/17 and before 1/1/23 general (extra placed in

service year for LPPP and certain aircraft)

• Phase down through 2026

• 80% for qualified property placed in service before 1/1/24




• Property acquired before 9/27/17 and placed in service after such date is subject to prior law rules (50% bonus in 2017

generally, 40% bonus in 2018 generally, 30% bonus in 2019 generally)

• Certain used property now bonus eligible (new property historically bonus eligible and continues to be bonus eligible)

• Qualifying property

• Added: qualified film or television production property and qualified live theatrical production property

• Removed: qualified improvement property (QIP) (effective for property placed in service after 12/31/2017)

• Excludes: certain public utility property and floor plan financing property.

Overview of the new provision

Identifying bonus eligible items that are acquired after 9/27/2017 and placed in service before

the end of 2017 allows taxpayers to accelerate 100% bonus depreciation into a 35% rate year


Depreciating non-residential building improvements

*Absent a technical correction for QIP

“Acquired” before 9/28/17 and

PIS after 9/27/17

“Acquired” after 9/27/17 and PIS

after such date, but on or before

12/31/17

“Acquired” after 9/27/17 and PIS

after 12/31/17

▪ Prior law applies.

▪ If improvements meet QIP definition

it will be eligible for bonus

depreciation at the old percentages

(50%, 40%, 30% or 0% depending

on the placed in service year).

▪ Recovery period generally 39 years

unless improvements meet either

the QLIP, QRIP or QRP definitions

and placed in service through

12/31/17 (such definitions are

repealed for property placed in

service after 12/31/17).

▪ New bonus depreciation rules apply

but old law with respect to QLIP, QRIP

and QRP definitions is still in effect

through 12/31/2017.

▪ Accordingly, QIP is subject to a 39 year

recovery period unless it meets the

definition of QLIP, QRIP or QRP, at

which point a 15 year recover period

applies.

▪ QIP, QLIP, QRIP, and QRP (to the

extent it meets the QIP definition) are

all eligible to claim 100% bonus

depreciation.

▪ New law applies in all respects.

▪ QLIP, QRIP and QRP no longer

exist.

▪ QIP subject to a 39 year recovery

period and not eligible for bonus

depreciation.

▪ Building improvements in this

category are not bonus eligible and

must be recovered over 39 years.


Section 174

• Section 174 provides that a taxpayer may:

• Treat research or experimental expenditures (R&E) that are paid or incurred during the tax year in connection with a trade

or business as deductible expenses under Section 174(a), or

• Elect to capitalize and amortize such expenditures ratably over a period of not less than 60 months, or

• Make an alternative election under Section 59(e) to amortize R&E expenditures over 10 years, to the extent the taxpayer

has a Section 174(a) election in place

• Software development costs:

• May be expensed currently under Rev. Proc. 2000-50, or

• Amortized over a period of 60 months from the date of completion of the development, or

• Amortized over 36 months from the date the software is placed in service

Pre-TCJA

Effective for expenditures in taxable years prior to 2022

• Requires R&E expenditures:

• To be capitalized and amortized over 5 years if R&E is conducted in the US

• To be capitalized and amortized over 15 years if R&E is conducted outside the US

• No reasonableness requirement for Section 174 expenses

• Taxpayers cannot recover costs of disposed R&E earlier than end of the required amortization period

• Software development costs:

• Are specifically included in the definition of an R&E expense under Section 174

• Therefore, such costs are required to be amortized under Section 174 and Rev. Proc. 2000-50 is no longer applicable to

software development costs (still applicable to software acquisition costs)

TCJA

Effective for expenditures in taxable years beginning after 2021


Section 199A

► In general, Section 199A provides a deduction for non-corporate taxpayers for certain business

income from partnerships, S corporations or sole proprietorships

► The deduction is generally equal to 20 percent of a taxpayer’s qualified business income (“QBI”) for

each of the taxpayer’s qualified trades or businesses plus 20 percent of a taxpayer’s (1) qualified real

estate investment trust dividends, (2) qualified publicly traded partnership income, and (3) qualified

cooperative dividends

► QBI for each trade or business is limited by the greater of

► 50 percent of the taxpayer’s W-2 wages, or

► 25 percent of the taxpayer’s W-2 wages plus 2.5 percent of the unadjusted basis of the

taxpayer’s qualified property immediately after acquisition for each qualified trade or business

► The deduction is generally limited to 20 percent of taxable income (minus net capital gain) of the

taxpayer for the taxable year and is available for taxable years beginning after December 31, 2017

and before January 1, 2026

Partnership

Individuals

Partner 1

Partner 2

Corporatepartner

Shareholder EXCLUDED


Base Erosion Anti-Abuse Tax (BEAT)

• None.

Pre-TCJA

• BEAT is essentially a minimum tax on base erosion payments made to related parties and is structured similar to the AMT (but

without the credit regime – permanent impact).

• Applies to “large” taxpayers (e.g., gross receipts in excess of $500m) for tax years beginning on or after 12/31/17.

• BEAT is generally equal to the excess of modified taxable income multiplied by the applicable BEAT rate (5% for 2018 tax year,

10% for 2019 -2025 tax years and 12.5% thereafter) over the regular tax liability (reduced by certain credits).

• Modified taxable income is taxable income without regard to any base erosion payments and NOL deductions attributable to prior

year base erosion payments.

• Base erosion payments are generally defined as amounts paid to foreign-related parties for which a deduction is allowable as well

as depreciation deductions on property acquired from foreign-related parties.

• Certain exceptions apply (e.g., amounts subject to certain withholding)

• Generally amounts allocable to inventory and cost of goods sold (COGS) (above the line recoveries) are excluded from the

definition of a base erosion payment.

• Potential planning ideas

• Prepaid expenses (shifting deductions from high BEAT years to low (or no) BEAT years to minimize BEAT).

• Sales based royalties, shared services payments

TCJA


New Code Section 451

• Accrual basis taxpayers include an amount in income when all events have occurred that fix the right to receive the income and the

amount is determinable with reasonable accuracy (unless an exception applies)

• Cash basis taxpayers include an amount in income when it is actually or constructively received

Pre-TCJA

• Generally requires accrual basis taxpayers to recognize income at the earlier of when recognized for tax purposes under Section

451 or when taken into account in applicable financial statements (effectively requiring tax recognition at the earlier of earned, due,

received or recognized for financial statement purposes)

• Codifies the all events test and specifies the test should be applied to items of gross income

• Applicable to special rules for bonds and other debt instruments in part V of subchapter P, including the original issue discount

rules; however, does not apply to any item of gross income in connection with a mortgage servicing contract

• Other special methods of accounting for reporting gross income (such as the installment method under Section 453 or the long-

term contract method under Section 460) not impacted

• For contracts with multiple performance obligations, the amount allocated to each performance obligation for financial statement

purposes shall be followed for tax

• Codifies the deferral method of accounting for advance payments currently in Rev. Proc. 2004-34 (one year deferral for certain

advance payments)

• Effective for tax years beginning after December 31, 2017, and implemented as a change in method of accounting

• Retains rules for cash basis taxpayers to include an amount in income when it is actually or constructively received

TCJA


Example of New 451 Application

Example

Taxpayer enters into a three-year services contract. Taxpayer receives

$200 upon signing the contract and $100 upon completion of the

contract in year 3. Assume no Topic 606 change to current book

income recognition.

Year 1 Year 2 Year 3

Cash received 200 ― 100

Book (Current and Topic 606) 100 100 100

Current Section 451 200 ― 100

Anticipated new Section 451(b) 200 ― 100


Other key business tax provisions

Section 179 expensing

► Increases to $1 million for “qualified property” placed in service in tax years

beginning after 2017, with a phase-out beginning at $2.5 million. Expands

“qualified property” to include certain depreciable personal property used to

furnish lodging, and improvements to nonresidential real property (such as roofs,

heating, and property protection systems)

Meals & Entertainment

► Modifies Section 274 by making all entertainment expenses, including facilities

used for such activities, nondeductible, even if these expenses directly relate to, or

are associated with, the conduct of business. Business meals and beverages,

however, remain 50% deductible.

Domestic production deduction (current law Section 199)

► Repeals deduction for tax years after 2017


Other key business tax provisions

Contributions to capital

► Retains Section 118 and language specifying that such contributions do not include

any contribution in aid of construction (or any other contribution as a customer or

potential customer), and clarifies that such contributions do not include any

contribution by any governmental entity or civic group (other than a contribution

made by a shareholder as such). Clarification would generally apply to contributions

made after the date of enactment, subject to certain limited exceptions.

Energy provisions

► Does not repeal any conventional energy tax credits and leaves untouched the deductibility of

intangible drilling costs, taxpayers’ eligibility to take percentage depletion and the designation of

certain natural resource related activities as generating qualifying income under the publicly

traded partnership rules

Like-kind exchanges

► Limits to exchanges involving real property only. Current law applies to exchanges if

property disposed of on or before 12/31/17 or the property received in the exchange

is received on or before such date


Tax reform – things to watch for post-enactment

► Fine-tuning will continue in the months ahead

► Technical corrections

► Implementing guidance (Treasury Department and IRS)

► Important for businesses to stay engaged

► Model provisions to understand practical effects

► Provide comments to the government

► Educate stakeholders and policymakers

Questions

Thank you!

Documents

Disclaimer€¦ · No regrets tax reform planning timeline Filing deadline for non-auto method changes 12/31/2017 Filing deadline for auto method changes and permanent items 10/15/2018