catherine fox.bdo.tax provisions in the american recovery.tax update 5 13 10

BDO Seidman, LLP, a New York limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee.

2010 Mid-Year Accounting and Tax UpdateMay 13, 2010

Catherine Fox-Simpson

2010 Mid-Year Update

2010 Mid-Year Accounting & Tax Update

• Uncertain Tax Positions

• Tax Legislation

• Accounting Update

• SEC Update

Partner BD Meeting

Uncertain Tax Positions

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• January 26, 2010 IRS drops a bomb

• IRS Announcement 2010-9

• Certain Business Taxpayers to be required to report uncertain tax positions (UTP) in Tax Returns

• April 19, 2010 IRS issues draft of new form

• UTP reporting effective for 2010 tax returns



• Background

Post Enron July 2004, IRS Form M-3, Net Income(Loss) Reconciliation FASB Interpretation No. 48 (FIN 48 )—now ASC 740-10

o GAAP adoption 1/1/2007 (for Public Companies)o GAAP adoption 1/1/2009 (for Private Companies)

2010, IRS Schedule UTP for Form 1120

Comment period ends June 1, 2010



• Drive for Transparency

• Eliminate the Cat & Mouse game IRS spends too much time trying to identify issues IRS should spend time on the right issues

• Commissioner Shulman, April 12, 2010:o “… I believe the new schedule [UTP] has the potential to be a much more valuable tool

[than the M-3] for fair and effective tax administration.”



• Affected Taxpayers

Corporations filing Form 1120, U.S. Corporation Income Tax Returno Life Insurance and Property & Casualty Insurance Companieso Foreign Corporations filing U.S. tax returns

Assets equal or greater than $10 million With Uncertain Tax Positions Issuing Audited Financial Statements

o Or, related party issues audited financials And, recorded a reserve for the UTP (i.e., doesn’t recognize the full benefit of the tax

position)

Schedule UTP not yet applicable to partnerships, REITs or Tax-Exempts



• How does the IRS define reportable UTP?

“Recorded a reserve”o Report tax positions for which the entity has “recorded a reserve” under ASC 740-10

Report tax positions when no reserve recorded based on “expectation to litigate” Report tax positions when no reserve based on “IRS administrative practice”

Piggyback on the GAAP rules for UTP

“Tax Position” = A line item in the tax return that would result in an adjustment if the taxpayer treatment is not sustained



• How does GAAP define UTP?

Tax positions which do not meet the “more-likely-than-not” (MLTN) standardo MLTN is more than 50% likely

Therefore, tax positions that are 50/50 or less likely to be sustained by the IRS

Tax positions that are MLTN but less than “highly certain” may still have a reserveo Since the entity may have reserved some but not all of the tax benefit (i.e., not

recognized the full benefit of the position)

“Highly certain” not defined in GAAPo Literature states: “clear and unambiguous tax law” and “management is highly

confident” in the sustainability of tax positions as providing high certainty. o Recognize the full amount of the tax positions meeting the highly certain criteria.



• Audited Financial Statement

A Financial Statement on which an independent third party expresses an opinion GAAP IFRS Other country specific accounting Includes modified versions such as, modified GAAP



• Recorded a Reserve

An increase in a liability for income taxes payable A reduction in an income tax refund An increase in a deferred tax liability A reduction in a deferred tax asset

• Initial recording of a reserve triggers reporting of a tax position• Subsequent reserve increases or decreases are not reported



• Affiliated Groups

Consolidated Return: file a single Schedule UTP for the group No need to identify to which member the UTP pertains or who recorded a reserve Separate return filers would be required to include Schedule UTP

• Related Party 50% or more [§318]/more than 50% [§§267 & 707] Any entity included in a consolidated audited financial statement in which the subject

entity is included



• Disclose primary Internal Revenue Code sections affected• Disclose UTP as Permanent or Temporary• Compute Maximum Tax Adjustment (MTA)

An estimate of the maximum amount of potential US federal income tax liability For the tax year in which the tax position is taken—MTA determined on an annual basis Utilize a 35% tax rate for the calculation of the MTA Tax credits: estimate the total amount of credit potentially disallowed No Netting: the MTA for each item of income and deduction is treated separately Offsets allowed only for items relating to the same tax position Disclose UTP even if offset by NOLs

• Unit of Account Must be the same as used for GAAP



• Effective Date

Calendar year 2010Fiscal years beginning in 2010Not required for tax positions taken for years beginning before 12/15/2009Not required for year beginning on or after 12/15/2009 and ending before

1/1/2010

Partner BD Meeting

Tax Legislation

HIRE ACT



Hiring Incentives to Restore Employment Act

• HIRE Act Enacted March 18, 2010

• Hiring and Business Stimulus Incentives

• Foreign Compliance

• Revenue Raisers



• Payroll Tax Holiday in 2010 Social Security Tax (OASDI)—6.2% Wages paid March 19 to December 31, 2010 Holiday does not apply to the Medicare Tax—1.45% Maximum tax exemption per employee is about $6,600

o $106,800 (OASDI base) X 6.2% = $6,621.60 No minimum hours of employee work to qualify Applicable to taxable businesses and tax-exempt organizations Not applicable to public-sector employees (Federal, State and Local Government) Public colleges and universities can qualify Not applicable to household employees Applicable to new businesses Applicable if employer has been claiming COBRA premium assistance credit and

employer rehires



• Payroll Tax Holiday—Qualified Employees Begins employment after February 3 and before January 1, 2011 Unemployed: hasn’t been employed more than 40 hours

o During the 60-day period before Hireo Certification by signed affidavit (new Form W-11)o 60-day period must be continuous but can span 2009 — 2010o Does not apply to employee hired to replace an existing worker

Unless termination for cause or worker voluntarily quito Applies to Rehired Workerso Can apply to new employee essentially replacing a previously laid-off worker

Because original lay-off due to business shrinkage and new hired due to business pick-up

o Can apply to newly hired graduate who has been in school for some or all of 60-day period

o Not applicable to family members and certain other related parties



• Payroll Tax Holiday—Claiming Tax Exemption

Claimed on Form 941, Quarterly Payroll Tax Return o Beginning with 2010 Q2 filingo Exemption for March 19 to March 31 claimed on Q2 941 filing

• Revised forms W-2 and W-3 to indicate wages eligible for the exemption

• Payroll Tax Holiday—Work Opportunity Tax Credits

Wages on which employer claims the HIRE tax exemption cannot be used for the WOTC HIRE Holiday only good for wages thru December 31



• Retained Worker Credit

$1,000 Credit per employee Employed any time during the year Employed for no less then 52 consecutive weeks Wages for last 26 weeks must equal at least 80% of wages for the first 26 weeks Credit is lesser of $1,000 or 6.2% of wages paid during the 52 week period

o Wages exceeding $16,129 will generate maximum credit Applicable for any tax year ending after March 18, 2010 Calendar year taxpayer able to claim credit in 2011 when 52 week period satisfied No carryback to years beginning before March 18, 2010



• Section 179 Expensing Limits Increased for 2010$250,000 maximum expensing extended through 2010Phase out threshold remains at $800,000

• Tax Credit Bonds—holders may elect to receive direct payment from IRS instead of credit

New clean renewable energy bonds (CREBs)Qualified energy conservation bonds (QECBs)“Build America Bonds” QZABs and QSCBs



Foreign Compliance

• New anti-abuse measures to deter US taxpayers from hiding assets offshore

• New withholding requirements

• New reporting requirements


Hiring Incentives to Restore Employment Act Foreign Compliance—Withholding

• 30% withholding tax• Payments to foreign financial institution (Bank, Brokerage, etc.)• Not required if foreign bank reports information regarding its “US

Accounts”• Withholding required on

Interest Dividends Rents Royalties Compensation


Hiring Incentives to Restore Employment Act Foreign Compliance—Withholding

• United States Account Any financial account which is held by U.S. person (other than publicly traded

corporations, tax-exempts, state & local government entities, REITS, etc.)

Financial account held by a U.S. owned foreign entity (more than 10% owned by US person)

Exception: where all accounts held by a natural person do not exceed $50,000

• Withholding tax avoided by foreign bank by agreement with IRS to: Determine whether each of its accounts is a US Account Comply with verification and due diligence procedures Annually report the name, address and TIN of the US Account holder, account number,

account balance and withdrawals and payments Comply with IRS information requests Obtain waiver for each US Account holder of foreign law confidentiality provisions


Hiring Incentives to Restore Employment Act Foreign Compliance—Reporting

• Tax Return Reporting: ownership of foreign financial accounts must be reported by an individual in his/her Form 1040

• Aggregate value in excess of $50,000 Deposit or custodial account with a foreign financial institution Stocks or securities issued by a foreign person Financial contract held for investment issued by non US person Any interest in a foreign entity

• In addition to Foreign Bank and Financial Account Report (FBAR)—TD F 90-22.1

• Effective for Taxable Years after Enactment (i.e., 2011)



• New $10,000 penalty (increased for non compliance after IRS Notice)

• New 40% penalty on any underpayment of tax attributable to undisclosed foreign financial information



• New Statute of Limitations for Omission of Foreign Account Income• Six-year Statute• Omissions greater than $5,000 and the income is attributable to

foreign financial accounts• Suspension of start of Statute running for failure to timely file:

Form 5471, Controlled Foreign Corporation reporting Form 8858, Foreign Disregarded Entity Form 8865, Controlled Foreign Partnership reporting Form 5472, Foreign Related Party reporting Form 926, transfers to foreign persons Form 3520-A, Foreign Trust reporting New foreign financial asset reporting

Partner BD Meeting

Tax Legislation

Health Care


Health Care Reform

Health Care Reform

• Two Legislative Acts• The Patient Protection and Affordable Care Act• Health Care and Education Reconciliation Act of 2010

• Primarily legislative changes for the health care system, but included many revisions to the Internal Revenue Code

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Small Business Tax Credit

• Tax credit designed to increase levels of health insurance coverage • 25 or fewer employees and average annual wages of less than

$50,000• Eligible for a credit up to 50% of non-elective contributions the

business makes on behalf of its employees for insurance premiums

• 10 or fewer employees and average wages less than $25,000• Eligible for a credit of 100%

• Credit is available for tax years beginning after December 31, 2009• Included as a General Business Credit• Phased in through 2013• Maximum credit during phase-in is 35%


Employer Responsibility• An “applicable large employer” who:

• Does not offer coverage for all its full-time employees• Offers minimum essential coverage that is unaffordable• Offers minimum essential coverage that consists of a plan under which the plan’s

share of the total allowed cost of benefits is less than 60%• Is required to pay a penalty if any full-time employee is certified to the employer as

having purchased insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

• Applicable large employer – employed an average of at least 50 full-time employees during the preceding calendar year.


Employer Responsibility

• Penalty:• Calculated monthly.• Penalty – excise tax equal to the number of full-time employees in excess of 30

multiplied by $166.67 (or $2,000 annually) • Calculated without regards to how many employees are receiving a premium tax credit

or cost-sharing reduction.

• Effective for periods beginning after December 31, 2013


Prescription Drug Coverage

• Eliminates the IRC Section 139A deduction for employers who subsidize prescription drug coverage for their employees who are eligible for Medicare Part D

• Effective for tax years beginning after December 31, 2010• ASC 740 Implications


Reporting Requirements

• Insurers (including self-insured) that provide minimum essential coverage to any individual during a calendar year must report certain information to the covered individual and the IRS.

• Information to be provided: • Name, address and taxpayer identification number of the primary insured and others

obtaining benefit under the coverage• Dates during which the individual was covered under the policy during the calendar

year• Whether the coverage is a qualified health plan offered through an exchange• The amount of any premium tax credit or cost-sharing reduction received by the

individual with respect to the such coverage• Any other information that Treasury requires

• Effective for calendar years beginning after 2013


Information Reporting

• Disclosure on Form W-2 the value of the employee’s health insurance coverage sponsored by the employer.

• Effective for tax periods beginning after December 31, 2010


High Cost Employer Plans

• Excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage exceeds a threshold amount.

• Tax is equal to 40% of the excess amount• 2018 threshold amount is $10,200 for individual coverage and

$27,500 for employee coverage.• Higher limits provided for high risk professions • After 2018, the annual limitation is adjusted for inflation. • Provision is effective for tax years beginning after December 31,

2017


Medical Device Excise Tax

• 2.3% excise tax on the sale of certain medical devices • Applies to any medical device intended for humans, except eyeglasses,

contact lenses, hearing aids, and medical devices generally sold at retail to the public for individual use.

• Effective for sales after December 31, 2012


Information Reporting

• Form 1099’s required for all payments aggregating $600 or more in a calendar year to a single payee, including a corporation

• Effective for payments made after December 31, 2011


Economic Substance Doctrine

• Codification as Section 7701(o) • A transaction will be treated as having economic substance only if

the transaction changes the taxpayer’s position in a meaningful way (apart from the tax benefits) and the taxpayer has a substantial purpose (apart from the tax benefits) for entering into the transaction.

• Economic substance originally created by the courts, which has resulted in various interpretations

• Codification results in a two-part test• Failure to meet economic substance test included as a listed

transaction


Implementation Timeline

Tax Year Provision

2010 Small Business Tax Credit

2011 Prescription Drug Coverage provision eliminated and W-2 Reporting

2012 Form 1099s required for corporations

2013 Medical Device Excise Tax

2014 Excise tax on applicable large employers and Insurer reporting requirements

2018 Excise tax on high-cost employer plans


What’s next?

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