Executive Breakfast Briefing - Sensiba San Filippo · Presented in Pleasanton by: Jacqueline Pruscha, Keith West and Jarret Warner Executive Breakfast Briefing. Sensiba San Filippo

Sensiba San Filippo LLP www.ssfllp.com | 1

Accounting & Taxes in the New Year

January 18, 2017 in San Jose & January 26, 2017 in PleasantonPresented in San Jose by: Justin Scripps, Katie Owen, Donna Holm

Presented in Pleasanton by: Jacqueline Pruscha, Keith West and Jarret Warner

Executive Breakfast Briefing


Learning Objectives

• Accounting Standards Updates– Prior year Updates – what are they and how are they relevant this

year?– Current year updates – what are they and when will they be effective?

• Tax Updates– Reminders – Due Date Changes– R&D Credits– Domestic Production Activities Deduction– Business Tax Extenders– Bonus Depreciation– Change to Partnership Audit Rules– Washington Agenda


Significant Accounting Standards Updates


Prior Year Updates Galore!

• ASUs issued in 2014-2015 that will be effective for 2016 or later

• Effective for calendar year-end 2016:– Identifiable Intangible Assets (2014-18)– Going Concern (2014-15)– Extraordinary Items (2015-01)– Debt Issuance Cost Presentation (2015-03 and 2015-15)– Internal-Use Software (2015-05)

• Effective for calendar year-end 2017:– Inventory Measurement (2015-11)– Business Combinations (2015-16)

• Effective for calendar year-end 2018:– Deferred Income Taxes (2015-17)


Business Combinations: Identifiable Intangible Assets (ASU 2014-18)

• Allows a private company to no longer recognize the following separate from goodwill:

– Customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business

– Non-competition agreements.

• If this alternative is elected, the entity must also adopt the private company alternative to amortize goodwill as described in ASU 2014-02 (generally straight line over 10 years).

• The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative.

• Effective for transactions occurring in fiscal years beginning after December 15, 2015, and all periods thereafter


Going Concern (ASU 2014-15)

• Evaluation period: one year from the issuance date of the financial statements (compared to balance sheet date now)

• Substantial doubt: relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due

• Updated disclosures when going concern identified:– Principal conditions or events that raise substantial doubt (before

consideration of management’s plans)– Management’s evaluation of the significance of those conditions or events in

relation to the organization’s ability to meet its obligations– Management’s plans that are intended to mitigate (or have alleviated) the

conditions or events that raise substantial doubt.

• Effective for annual periods ending after December 15, 2016; early adoption allowed


Income Statement: Extraordinary and Unusual Items (ASU 2015-01)

• Eliminates the concept of extraordinary items from GAAP.

• Effective for fiscal years beginning after December 15, 2015; early adoption allowed.


Debt Issuance Cost Presentation (ASU 2015-03 and 2015-15)

• Part of the simplification initiative and conformity with International Financial Reporting Standards (IFRS).

• 2015-03: Simplifies presentation of debt issuance costs as a direct deduction from the carrying amount of that debt, consistent with debt discounts.

• 2015-15: Due to the absence of authoritative guidance related to line-of-credit in ASU 2015-03, ASU 2015-15 Measurement of Debt Issuance costs associated with Lines-of-Credit arrangements states SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the LOC.

• Effective for fiscal years beginning after December 15, 2015; early adoption allowed for financial statements not previously issued.


Intangibles-Goodwill and Other-Internal-Use Software (ASU 2015-05)

• Adds guidance which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (guidance to determine whether the cloud computing arrangement includes a software license or should be considered a service contract).

• Arrangements that include a software license must meet both of the following criteria:

– The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty

– It is feasible for the customer to either run the software on its own hardware of contract with another party unrelated to the vendor to host the software

• For private companies, effective for annual periods beginning after December 15, 2015; early adoption allowed.


Inventory Measurement (ASU 2015-11)

• Part of the simplification initiative and to more closely align with IFRS.• Measure inventory at the lower of cost and net realizable value (NRV).

Reference to “market” had too much subjectivity and did not provide enough consistency between companies.

• FASB defines NRV as “estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.”

• Only applies to entities using FIFO or average cost. Does not apply to inventory measured under LIFO or Retail Inventory Method.

• For private companies, effective for fiscal years beginning after December 15, 2016. Changes are to be applied prospectively, with early application allowed for beginning of period balances.


Business Combinations (ASU 2015-16)

• Acquirers must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined.

• Acquirers must also record, in the same period’s financial statements, the effect on the earnings of changes in depreciation, amortization or other income effects, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date (i.e. not a prior period adjustment). This amount must be presented separately on the face of the income statement, or disclosed in the notes.

• These amendments should be applied prospectively to adjustments to provisional amounts that are identified after the effective date of this update. For private companies, effective for fiscal years beginning after December 15, 2016.


Deferred Income Taxes (ASU 2015-17)

• Part of the simplification initiative and to more closely align with IFRS.

• Requires all deferred tax liabilities and assets to be classified as noncurrent on the balance sheet for all entities that present a classified balance sheet.

• For private companies, effective for fiscal years beginning after December 15, 2017.


Current Year Updates Galore!

• 20 updates issued in 2016

• Topics not covered here:– Intangibles – Goodwill and Other; Business Combinations; Consolidations; Derivatives and

Hedging: Effective Date and Transition Guidance (ASU 2016-03)– Liabilities – Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-

Value Products (ASU 2016-04)– Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting

Relationships (ASU 2016-05)– Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments (ASU 2016-06)– Revenue Recognition and Derivatives and Hedging: Rescission of SEC Guidance Because of

Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (ASU 2016-11)

– Not-for-Profit Entities: Presentation of Financial Statements of Not-for-Profit Entities (ASU 2016-14)

– Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16)– Technical Corrections and Improvements (ASU 2016-19)


Investments – Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07)• Current GAAP

– When an investment qualifies for the equity method as a result of an increase in the level of ownership or degree of influence the equity method must be retroactively applied to the financial statements.

• This ASU– Eliminates the requirement to retroactively adopt the equity method under

these circumstances.

• Effective for fiscal years beginning after December 15, 2016 for all entities.


Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (ASU 2016-09)• Current GAAP

– Several income tax related matters are cumbersome to measure and present in the financial statements.

– Compensation cost must be reduced by a forfeiture rate estimated by management.– Required to estimate the period of time an option will be outstanding. – Nonpublic entities are allowed to measure liability-classified awards at intrinsic value (current FMV -

strike price). Common for stock appreciation rights (SAR’s).

• This ASU– Income tax related matters have been simplified to reduce cost and complexity.– Can elect to account for forfeitures as they occur. – A practical expedient is available for estimating the expected term for all awards.– Non-public entities can make a one-time election to switch from measuring liability-classified awards at

fair value to intrinsic value.

• Effective for fiscal years beginning after December 15, 2017 for private entities. Effective for public entities one year earlier.

• Early adoption is permitted. Some portions of standard must be applied retroactively while other portions can be applied prospectively.


Consolidation: Interests Held through Related Parties That Are under Common Control (ASU 2016-17)• Current GAAP

– When considering whether an entity is the primary beneficiary of a VIE, direct and indirect interests carry the same weight (“full attribution approach”). If the related party is NOT under common control then they would use the proportionate approach (based on % ownership).

– The full attribution approach can require an entity holding an indirect interest to consolidate a VIE – even in instances when the entities indirect interest in the VIE is clearly not significant.

• This ASU– Entities will only need to consider their proportionate indirect interest in a VIE held

through common control. – This will make consolidation of a VIE less likely when an entity holds only a minor indirect

interest in the VIE through a non-consolidated common control affiliate.

• Effective for fiscal years beginning after December 15, 2016 for all entities.

• Early adoption is permitted and standard must be retroactively applied.


Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)• Current GAAP

– There’s diversity in practice how certain cash receipts and cash payments are presented in the cash flow statement.

• This ASU – Addresses eight specific cash flow issues:1) Debt prepayment or extinguishment costs – should be classified as financing.2) Debt instruments with coupon interest rates – cash payments for interest classified in operating and cash

payments for principal classified as financing.3) Contingent payments relating to a business combination – contingent liability recognized at acquisition date

should be financing and excess should be operating.4) Settlement of insurance claims receivable – should be classified on the basis of the related coverage.5) Proceeds from settlement of corporate owned life insurance policies – classified as investing, however

premium payments may be classified as operating or investing.6) Distributions received from equity method investments – must make accounting policy election to classify

under cumulative earnings or distribution approach. Distributions received will be classified as either operating or investing depending on policy election.

7) Transfers and proceeds from beneficial interests in securitization of financial assets – should be noncash activity and an investing activity, respectively.

8) Transactions with aspects of more than one classification and no specific guidance in GAAP – classification should depend on the activity that is the most predominant.




Statement of Cash Flows: Restricted Cash (ASU 2016-18)

• Current GAAP– There’s diversity in practice in the classification and presentation of changes in

restricted cash on the cash flow statement.

• This ASU– Restricted cash should be included with cash and cash equivalents when

reconciling the beginning and end-of-period totals in the cash flow statement. – Cash and restricted cash should be broken out and reconciled in the notes to the

financial statements to agree with the totals in the cash flow statement.




Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)• Current GAAP

– Equity securities with readily determinable fair values must be classified into different categories (i.e. trading or available-for-sale) and changes in their fair value must be recognized through comprehensive income.

• This ASU – Targets improvements with the following:1) Changes in fair value can be recognized in net income. Also may choose to measure equity investments that

do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes from observable price changes for an identical or a similar investment of the same issuer.

2) Simplifies the impairment assessment for equity investments without readily determinable fair values by requiring a qualitative assessment (as opposed to quantitative).

3) Eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for private entities.

4) Requires an entity to present separately in other comprehensive income certain changes in liabilities measured using the fair value option for financial instruments.

5) Requires separate presentation of assets and liabilities by measurement category and form of financial asset (i.e. securities, loans, receivables).

6) Clarifies that an entity should evaluate the need for valuation allowance on a deferred tax asset related to available-for-sale securities in combination with other deferred tax assets.

7) Two additional changes apply to public entities only.


• Early adoption is permitted by one year and a cumulative catch-up adjustment to the balance sheet should be made at the beginning of the year of adoption.


Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13)• Current GAAP

– Recognition of the full amount of a credit loss is delayed until the loss is considered “probable”.

• This ASU– Replaces the incurred loss impairment methodology for assets measured at amortized cost with

a methodology that requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates (such as more forward-looking metrics like financial forecasts).

– Also requires credit losses to be presented as an allowance rather than a write-down.


• Early adoption permitted for the fiscal years beginning after December 15, 2018. A cumulative catch-up adjustment to the balance sheet should be made at the beginning of the year of adoption.


Leases (ASU 2016-02)

• Current GAAP – Two types of leases– Capital lease – Recognize asset and liability on the balance sheet. Lease payments

reduce liability and asset is amortized over its useful life. – Operating lease – Do not recognize asset or liability on balance sheet. Lease

payments are expensed on a straight line basis over lease term. Future lease commitments are an off-balance sheet liability and only disclosed in the footnotes.

• This ASU – Still has two types of leases– Finance lease (previously capital lease) – Accounted for similar to capital leases

under current guidance.– Operating lease – Recognize asset and liability on the balance sheet (measured at

present value of lease payments). Recognize single lease cost on straight line basis over lease term. All cash payments classified in operating activities in cash flow statement.

• Allowed to make policy election not to recognize assets and liabilities for leases with terms of one year or less.


Leases (ASU 2016-02) – Continued

• Impact to loan covenants:– Current Ratio - although assets equal liabilities at initial recording,

a portion of liabilities will be short term, but all assets will be long term

– Leverage Ratio - liabilities will be added without corresponding equity

– EBITDA - For certain leases a portion of expense will now be depreciation and interest expense rather than rent

• Other Business Implications:– Accounting policies and business implications will need to be

addressed for lease activity. Some areas of consideration include:• Budgeting and planning processes• Lease vs. buy decisions• Internal controls over lease transactions


Leases (ASU 2016-02) – Continued

• Lessor accounting has remained largely unchanged.




Revenue from Contracts with Customers (ASU 2014-09)• Core principle: recognize revenue upon transfer of goods or services to a

customer in the amount of consideration expected to be received from thecustomer.

• Applies to all contracts to provide goods or services to customers– Exception: Leasing transactions, insurance contracts, and financial

instruments

• Adds certain disclosure requirements and guidance to account for costs to obtainor fulfill a contract (when not covered by other standards)

• Emphasis on “judgement”

• Effective for calendar year 2019 for private companies and one year earlier forpublic companies

• Private companies can elect to early adopt by one year. No early adoption forpublic companies.


Revenue from Contracts with Customers: Principal vs. Agent Considerations (Reporting Revenue Gross vs. Net) (ASU 2016-08)• Mainly addresses whether an entity controls goods or services before they are

transferred to the customer (thus determining principal vs. agent).

• Clarifies the following:• Must determine principal or agent for each distinct good or service promised to the

customer. It’s possible to be a principal for some and an agent for others.

• Must determine the nature of each specified good or service - is it a good, a service, or a right to a good or service?

• An entity is a principal if it obtains control ofa) a good from another party that it then transfers to the customerb) a right to a service that will be provided by another partyc) a good or service from another party that the entity combines with other

goods or services to make the distinct good or service.


Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (ASU 2016-10)

• Expected to reduce the cost and complexity of applying the revenue guidance by adding the following:

– Immaterial promised goods or services don’t need to be assessed as separate performance obligations.

– Allowed to account for shipping and handling that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service (or performance obligation).

• Improves the guidance to determine if goods are “distinct”.

• Improves the licensing guidance around intellectual property.

• Improves implementation guidance around sales-based or usage-based royalties promised in exchange for a license of intellectual property.


Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (ASU 2016-12)• Clarifies the objective of the collectability criterion in Step 1 of the new revenue standard

relating to a customer’s ability and intention to pay.

• New criterion is added to Step 1 that allows revenue recognition if:– Control of goods or services has transferred– Transfer of goods or services has stopped– There’s no obligation under the contract to transfer additional goods or services– Consideration received from the customer is nonrefundable

• Can exclude amounts collected for sales (and other similar) taxes from the transaction price.

• Specifies the measurement date for noncash consideration is contract inception.

• Provides a practical expedient to reflect contract modifications in prior periods when identifying the satisfied and unsatisfied performance obligations.


Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (ASU 2016-12) - Continued• Clarifies that a completed contract for purposes of transition is a contract where all (or

substantially all) of the revenue was recognized under legacy GAAP before adoption.

• Elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete.

• Permits an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed.

• An entity that retrospectively applies the revenue recognition guidance to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption, however, is still required to disclose the effect of the changes on any prior periods retrospectively adjusted.


Revenue from Contracts with Customers: Technical Corrections and Improvements (ASU 2016-20)• Areas for correction or improvement includes 13 areas as follows:

1) Loan Guarantee Fees2) Contract Costs—Impairment Testing3) Contract Costs—Interaction of Impairment Testing with Guidance in Other Topics4) Provisions for Losses on Construction-Type and Production-Type Contracts5) Scope of Topic 6066) Disclosure of Remaining Performance Obligations7) Disclosure of Prior-Period Performance Obligations8) Contract Modifications Example9) Contract Asset versus Receivable10) Refund Liability11) Advertising Costs12) Fixed-Odds Wagering Contracts in the Casino Industry13) Cost Capitalization for Advisors to Private Funds and Public Funds


Questions


Significant Tax Updates


Reminder: Changing Due Dates!

• Partnership Returns: moved back one month from April 15 to March 15 (2 ½ months after the end of the taxable year). Partnerships will be allowed a 6-month extension.

• S corporations will not change - the due date will continue to be March 15 (2 ½ months after the end of the taxable year)



• C corporation returns: moved forward one month from March 15 to April 15 (3 ½ months after the end of the taxable year)– Note that the due date for C corporations with a June 30th fiscal

year end will not be changing until after December 31, 2025; the due date will continue to be September 15

• Foreign Bank Account Report (FBAR) / FinCen Form 114: changed from June 30 to April 15. Taxpayers will be allowed an automatic 6 month extension



California conforms to federal changes for tax years beginning on or after January 1, 2016:

March 15 (Extended due date Sept 15)– Form FTB 565 (Federal Form 1065)– Form FTB 100S (Federal Form 1120S)– Form FTB 568 (LLCs classified as partnerships)

April 15 (Extended due date Oct 15)– Form FTB 100 (Federal Form 1120)– Form FTB 568 (LLCs classified as corporations)


R&D Credit: Overview

• The R&D Tax Credit is designed to incentivize companies in the advancement of new technologies and to encourage hiring of employees to perform R&D activities in the United States. The credit was made permanent in December, 2015.

• Most States, including California, allow for a state-specific R&D Tax Credit for qualified expenses related to R&D activities conducted in the State.

• The credit can be claimed for all open tax years. Generally there is a 3 year statute of limitations for federal purposes and 3 or 4 year statute of limitations for most states. Unused federal R&D credits carry back 1 year and forward 20 years.


R&D Credit – What Industries Qualify?

The R&D Tax Credit is available for most industries. Any taxpayer developing a new or improved product, process, technique, formula,

invention, or software, could qualify for the R&D Tax Credit.

Manufacturing Aerospace engineering

Software companies/game

developers

Medical device companies

Utility companies Athletic footwear companies

Pharmaceutical companies

Wineries and Vineyards


R&D Credit: What Activities Qualify?

Permitted PurposeThe activity must be intended to develop or improve a business component’s (product, process, technique, formula, invention, or software):• Functionality• Performance• Reliability, or• Quality

Technology in NatureThe activity performed must not rely on any social sciences and instead, must fundamentally rely on principles of:• Physical science• Biological science• Computer science, or• Engineering

Elimination of UncertaintyThe activity must be intended to discover information to eliminate technical uncertainty concerning the capability or method for developing or improving a product or process, or the appropriateness of the business components design.

Process of ExperimentationSubstantially all of the activities must be elements of a process of experimentation:• The activities must involve the evaluation of one or more alternatives to achieve a result where the method of achieving that result is uncertain. • Activities should include designing experiments to evaluate and test alternatives through process of systematic trail and error, simulation, or modeling.

The Four Part Test


R&D Credit – Common Qualified Activities

Concept Development

Feasibility Evaluation

Specification Design

Experimental Prototype

Development

Design, Test, and Execution

Technical Design Reviews and

MeetingsTechnical Writing

Compiling Research Data/Preparing

R&D Documentation

Directly Supervising or Supporting R&D


R&D Credit – What Expenses Qualify?

There are ONLY 3 categories of expenses that qualify for the R&D credit. These expense categories are referred to as Qualified Research Expenditures (QRE)

WagesContractor Expenses(@ 65%)

Supplies


R&D Credit – Non-Qualified Activities

TrainingRoutine or

Maintenance Activities

Activity Conducted Outside the U.S.

Activities in the Social Sciences,

Arts, or Humanities

Research after Commercial Production

Advertising or Marketing Activities

Reverse Engineering

Routine Data Collection

Activity related to a Management

FunctionMarket Research

Other General and Administrative

(G&A) Tasks


R&D Payroll Tax Credit Election

New for tax year 2016 and later

Election can be made by “eligible small business,” which is defined as one with <$5 million in gross receipts for year claiming election, and no more than 5 years with gross receipts

Election can be made a maximum of 5 years


R&D Payroll Tax Credit Election

Can elect up to $250k of credit from current year only towards payroll tax

Can be used to offset only employer portion of SSA (6.2%), with unused amount carried-over to future quarters

Can only elect credit amount that would otherwise be carried forward


R&D Payroll Tax Credit – How is Election Made?

Make election on Form 6765

After electing up to $250k of credit towards payroll tax on Form 6765, the client or payroll tax provider will file Form 8974 with the Form 941 for the first quarter following return filing

Any unused amount will be carried over (waiting for clarification on C/O time limit)


R&D Payroll Tax Credit – Common Questions

“I use a Professional Employer Organization (PEO) for my employees, do I still qualify?”

“I’m not currently performing an R&D Study, should I start?”

“How do I know if I qualify in (2016, 2017, etc.)?”

• 2 Questions: When was first year of gross receipts, and do you expect GR > $5 million for current tax year?


Domestic Production Activities Deduction

Incentives for keeping production inside the U.S.

• A deduction up to 9% of net income• Qualified activities include: manufacturing, production, growth or

extraction of tangible personal property, computer software, real estate (MPGE)

• Court cases and proposed regulations may affect how IRS will handle issues surrounding DPAD.


Domestic Production Activities Deduction

• Qualified activities include: – Manufactured– Produced– Grown– Extracted

• Of tangible personal property, computer software, sound recordings, film production, electricity, natural gas, water, real estate construction (including engineering and architectural services related to such construction)


Business Tax Extenders: Permanent Changes

Built-In Gains

• The five-year holding period for purposes of computing built-in gain on the conversion of a corporation from a C corporation to an S corporation is permanent. A maximum tax rate of 35% is applied to any recognized built-in gain.


Business Tax Extenders: Permanent Changes

Enhanced Section 179 deductions

• Businesses may immediately deduct up to $500,000 of the cost of qualifying asset acquisitions; indexed to inflation

• Applies to purchases of computer software and qualified leasehold, retail and restaurant improvements

• Heating and air conditioning units are now eligible property

• Certain improvements do not qualify: Enlargement of the building, escalators, elevators, internal structural framework of the building or any improvement to the common area of the building.


Business Tax Extendersthrough December 31, 2019

Bonus Depreciation– 50% in 2015, 2016, 2017– 40% in 2018– 30% in 2019

• Definition of Qualifying Property has been expanded– New law continues to follow prior rules, including:

1. Property must be tangible depreciable property with a recovery period of 20 years or less

2. Qualified leasehold improvement property3. Original use must commence with the taxpayer; used

machinery doesn’t qualify.


Business Tax ExtendersBonus Depreciation

• New law now includes as a qualifying category of property “qualified improvement property” instead of “qualified leasehold improvement property”, with a broader definition:– Improvement to an interior portion of a building that is nonresidential

real property– Does not include:

• The enlargement of the building• Any elevator or escalator• The internal structural framework of the building

– Must be placed in service after the date the building was first placed in service (placed in service by other taxpayers is OK)

• In a win for agricultural interests, the new law also permits certain trees and vines to be eligible for bonus depreciation when planted or grafted, rather than when placed in service


Repair Regulations Capitalize or Expense?

• Capitalization policy –not required without AFS but recommended; if AFS* applies, the policy must be written

• $5,000 per invoice may be expensed if the business has AFS

• If no AFS, effective for tax years beginning on or after January 1, 2016, the de minimis safe harbor threshold increased from $500 to $2,500 per invoice

• Annual election to be made with the tax return

*Applicable Financial Statements defined as Reviewed or Audited financial statements


Change to Partnership Audit Rules

Bipartisan Budget Act of 2015 clarified “Partner” definition and repealed the TEFRA Audit Provisions.

Background: TEFRA• Increased partnership audit efficiency• Difficulty obtaining statute of limitation waivers• Difficulty obtaining partnership/partner information• Most partnerships subject to TEFRA (except small partnerships and

Electing Large Partnerships)• Tax Matters Partner is primary interface with the IRS


Change to Partnership Audit Rules

TEFRA now replaced.• New Partnership Representative• New Audit and Collection options• New Administrative procedures• Effective for tax years beginning after 2017

Recommendation: review existing Partnership Agreement to consider amending in consideration of the new rules for auditing partnerships.


Potential 2017 Legislative Agenda Items

President-elect Trump Priorities

• Tax Reform• Infrastructure• Immigration Reform• Affordable Care Act Repeal and Replace• Veterans issues• Regulatory Reform• Trade Issues


Tax Reform: Legislative Update

State of Play: President-Elect Trump

• 15% business income rate, 25% pass-through rate• Elective expensing for manufacturers with loss of interest expense

deduction (choice)• Eliminates DPAD and business credits except R&D• 10% mandatory tax on accumulated foreign earnings• Taxes repatriation of foreign profits at 10%• Eliminates corporate AMT• Retains credit for employer-provided child care, increases cap.


Tax Reform: Legislative Update

State of Play: House

• Reduced individual tax rates• Replace corporate income tax with 20% cash-flow tax• 25% business income tax for pass-through entities• Territorial system of taxing future foreign earnings• Mandatory tax on accumulated foreign earnings• Destination-basis tax system exempts exports while taxing imports


Tax Reform: Legislative Updates

State of Play: Senate

• Senate Finance Committee Chairman Hatch: readying corporate integration proposal to eliminate double taxation of corporate income

• Senate Majority Leader McConnell: insists that any tax reform be comprehensive

• Incoming Senate Democratic Leader Schumer: international tax reform to fund infrastructure spending


Questions


Contact Information

Keith WestSenior Audit [email protected]

925-271-8700

Jarret WarnerSenior Tax [email protected]

Justin ScrippsAudit [email protected]

Jacqueline PruschaAudit [email protected]

650-358-9000

Donna HolmSenior Tax [email protected]

Katie OwenExperienced Senior Audit [email protected]

Documents

Executive Breakfast Briefing - Sensiba San Filippo · Presented in Pleasanton by: Jacqueline Pruscha, Keith West and Jarret Warner Executive Breakfast Briefing. Sensiba San Filippo