is your company prepared? tangible property regulations ... · your company? a. redefining nexus...

© 2014 Grant Thornton LLP. All rights reserved.

Is Your Company Prepared?

Tangible Property Regulations &

International Tax Developments Impacting

Multinational Companies

FEI Silicon Valley

April 28, 2015

© Grant Thornton LLP. All rights reserved.

Washington Update: Tax legislative landscape

Donald A. Corbett

Tax Practice Leader

Grant Thornton LLP

April 28, 2015

© Grant Thornton LLP. All rights reserved.4

Agenda

• Where are we now?

• Where are we going?


December 2014 Legislation

• Congress waited until the last minute again, but

passed some legislation:

– ABLE Act

– A spending bill

– Tax Extenders


ABLE Act

• ABLE Act:

– Creates 529-style plans for disabled individuals

• Offsets:

– Adjusts failure to file penalties for inflation

– Raises inland waterways fuel tax rate to 29 cents

– Increases Medicare provider levies to 30%

– Excludes CFC dividends from personal holding

company income


Spending Bill (aka the CROmnibus)

• Omnibus spending bill approved before year-end:

– Funds government for FY2015

– Extends Internet Tax Freedom Act

– $346M budget cut for IRS

– Expatriates no longer need to maintain health

coverage via ACA

– Allows distressed multi-employer pensions to

reduce benefits


Extenders

• Expired provisions extended in December:

– Retroactive extension of over 50 provisions that

expired at the end of 2014

– Technical corrections

– Increase in refund threshold for C Corporation JCT

review from $2 million to $5 million

• One little problem:

– All of the extender provisions are now expired again

for 2015!


Congress has a bad track record in passing timely

tax legislation


Deadlines

• Congress has some deadlines to contend with:

– May 31 – Federal Highway Trust funding expires

– June 30 – Export/Import Bank Charter extension ends

– End of June: SCOTUS decision in King v. Burwell

expected

– August 15 – 1st GOP Presidential Debate

– September/October – Treasury "extraordinary

measures" run out, default if debt ceiling is not lifted


Tax reform in 2015?

• Comprehensive tax reform is dead

– Obama unwilling to negotiate on lower individual rates.

– Hatch and Ryan admit they can't achieve an individual

rate cut

• Will Hatch and Ryan agree to corporate-only reform?

– Asking pass-throughs what they would accept short of a

rate cut.

• Enhanced Secs. 179, 199, etc.

– Grant Thornton has advocated for a "business

equivalency rate"


Business Equivalency Rate

• Allow active business income to be taxed at the

same rate, whether earned by a C corporation or a

pass-through.


Tax reform in 2015?

• Congressional taxwriters have limited time

remaining, as Presidential campaigns kick-off.

• Can Hatch and Ryan get enough of Congress on

board to enact corporate-only tax reform?

• Ryan is willing to wait until 2017 for a new

president to work on individual rates.

– But will the new president share his beliefs?


Agenda

• Where are we now?

• Where are we going?


Dynamics will be different in 2016

© Grant Thornton LLP. All rights reserved. 17

Wait until 2017?

• GOP may have their hands full in 2016

– Presidential election year favors Democrats

• Have won 5 of 6 last elections by popular vote

– Electoral map favors Democrats

• Republicans won big in 2014, but have to

defend many more Senate seats than

Democrats

• Some of those Republican seats are in blue /

swing states that tend to vote Democratic


Wait until 2017?

Problem:

• GOP defends

24 Senate

seats in 2016

• Dems just 10


Is there anything Congress can do in 2015?

• Bipartisan House vote on taxpayer rights

– Enactment possible, but uncertain

• House passed repeal of estate tax while

maintaining basis step-up at death

– Highly unlikely to be enacted into law.

• Medical Device Excise Tax repeal?

– Hatch pushing for it, but this is ACA provision,

which Obama will fight for

© 2014 Grant Thornton LLP. All rights reserved. 20

Questions?Comments?


International tax: Changes impacting technology companies


Randy Free

Partner, West Region

International Tax Practice

Leader

949.608.5311

[email protected]

Allan Smith

Partner, International Tax

408.216.8540

[email protected]

PresentersToday's


Agenda

• Global Stage – Summary of global trends

impacting international tax law

• OECD BEPS Action 1 Overview

• FATCA

• Financial Statement Implications


Learning objectives

• Identify international tax developments impacting multinational companies

• Demonstrate how to address the shifting tax landscape for tax planning and manage the financial statement implications of foreign earnings


In the news: A global issue

"FACTS ARE THE ENEMY OF TRUTH"

- Don Quixote de la Mancha



PM TURNS TO TAX AS VIC FALLS




BRITAIN TO TARGET GLOBAL TAX DODGERS





TAX COALITION SEEKS ACCORD






NO PATIENCE FOR INDECISIVE GOVERNMENTS







POLICY HURDLES STUNT INDIA'S GROWTH







SLACK FRANCE NARROWLY AVOIDS EU BUDGET FINE










GREECE REJECTS TAX RISES, INCOME CUTS









GREECE REJECTS TAX RISES, INCOME CUTS

US SET TO FIGHT IN LOOMING TAX WAR


Audience question 1

What is your biggest internal challenge in managing

the risks from the changing global tax landscape?

A. Agility in understanding and reacting to change

B. Utilizing technology to understand big data

C. Transparency and certainty in global compliance

D. None, as we’re prepared for the challenges

E. I don't know


What does all of this tell us?

Extreme pressure, by constituents and regulators, on governments to produce short-term economic growth from aggressive tax reform.

Asked about the G20 and OECD plan to get more tax out of multinationals…,Mr. Robason said: " Ultimately it won't work. It will be a race between countries to create an advantage for themselves. It will result in countries putting in their own tax laws."

This is a global phenomenon facing MNEs


Race between countries

• Brazil – Considering tightening existing rules

• Ireland – Abolition of Double Irish from 1/1/15

• France – Contemplating special rules,

aggressive stance against tax schemes

• Mexico – New requirements for deductibility of

cross border related party payments

• United Kingdom – Diverted Profits Tax

• U.K. & Germany – Substance in patent box


OECD/G20 BEPS Project

2013 OECD/G20 15 Point Action Plan to Address BEPS

2014 OECD/G20 Adopt 1st Set of Seven Deliverables

Action 1 – Tax Challenges of the Digital Economy

Define CollaborateInfluence

Dec 2015 OECD/G20 Harmonized Report


Permanent establishment (PE)

Under most domestic law and Articles 5 & 7 of the OECD Model Tax Convention, non-resident taxed only if it has a PE in that country.

• Technology allows interaction with customers w/o physical presence

Ensure core activities cannot inappropriately benefit from the exception form PE status


Transfer pricing of intangibles

The importance of intangibles, the use of data, and the spread of global value chains, is impacting transfer pricing

• Mobility of intangibles generates substantial BEPS opportunities

Ensure profits cannot arbitrarily be allocated to low tax / no-tax jurisdictions contractually


Characterization of digital income

New digital products, cloud computing and 3 D

printing raise income characterization questions

• Characterization of income impacts application

of both income and withholding taxes

Ensure proper classification and determination of

taxation rights


MNE Action Plan

41

• Assume transparency with tax officials

• Avoid commercial artificiality and treaty shopping

• Ensure tax/transfer pricing structures mirror substance

• Expect local country audits subject to local country

laws and interpretations of the arm’s length principle

and treaty clauses (especially in non-OECD countries)

and increased enforcement from all countries

• Consider the use of APAs as a risk-management tool

• Investigate efficient documentation processes

• Think governance and corporate reputation


Audience question 2

Of the following BEPS Action 1 deliverables, which one do

you think, even if viscerally, could have the most impact on

your company?

A. Redefining nexus and permanent establishment

B. Uncertainty regarding income characterization

C. Adaptation of the CFC rules

D. Evolving transfer pricing r/e use of intangibles

E. I'm unsure; I don't know


FATCA


Foreign Account Tax Compliance Act

(FATCA)

• FATCA works on top of the "traditional" chapter 3

withholding regime

• Withholding under chapter 3 addresses income that is paid

to someone who may not be filing a U.S. tax return

– example: royalty paid to licensor located outside the U.S.

• Withholding under FATCA addresses income that may not

be being reported by a U.S. taxpayer

– example: interest paid to foreign lender located outside the U.S.


FATCA's global reach

as of 12/31/2013

Model 1 IGA

Model 2 IGA

Jurisdiction that has in

substance reached Model 1

agreement



agreement

Countries with Intergovernmental Agreements

(IGAs)



as of 2/13/2015

Model 1 IGA

Model 2 IGA



agreement



agreement

Countries with Intergovernmental Agreements

(IGAs)



• U.S. companies need to assess which payments are subject to

withholding and ensure it fulfills new documentation and withholding

requirements

– Understand the types of payments potentially subject to FATCA

withholding (including intercompany payments)

– Assess whether any exceptions apply (e.g. ordinary course of business,

grandfathered obligations) and document

– Obtain and/or update required documentation (most commonly Form W-

8BEN-E)

• As part of this, U.S. companies may need to assist non-U.S. group

entities in determining FATCA status



Determining FATCA status

• The universe primarily consists of foreign financial institutions (FFIs)

and non-financial foreign entities (NFFEs)

• In order to avoid FATCA withholding, NFFEs generally must either

disclose "substantial U.S. owners" or provide its FATCA status

certifying that it is not a "passive NFFE"

– commonly used statuses are publicly traded NFFE (and affiliates)

and "Active NFFE"



Common Issues for Technology Companies

• Broad information requests from withholding agent

– Payments for the use of property (e.g. royalties) are not withholdable

payments for FATCA purposes

– Source of income should be considered

• Determining FATCA status for foreign holding companies can be

complex

– IP holding companies generating passive income may require additional

analysis



Takeaways

• FATCA affects all companies making payments

• FATCA presents a good opportunity to run a systems check on

withholding procedures

– Withholding agents should analyze process and procedures will be

needed for identifying, withholding, paying, reporting and reconciling

accounts

– Foreign payees should analyze their FATCA status in order to position

themselves to fulfill any FATCA obligations and provide the appropriate

documentation to withholding agents or foreign financial institutions


Audience Question 3

What effect do you think FATCA will have on

your company?

A. Substantial, but we're ready

B. Potentially substantial, I'm concerned

C. Minimal

D. Does not apply or don't know


Financial statement

implications


Financial statement implications

• Transparency

• Risk management


Transparency

The issue

• Income tax information provided in the financial statements

may not be detailed enough for users to:

– Analyze earnings determined to be indefinitely reinvested in foreign

subsidiaries

– Determine what the tax effects of foreign earnings deemed to be

indefinitely reinvested would be if those earnings were repatriated to

the U.S. parent company

Source: Financial Accounting Foundation's Post-Implementation Review Report on FASB Statement

No. 109, Accounting for Income Taxes (November 2013)


Transparency

The magnitude

• Over $2 trillion of indefinitely reinvested foreign earnings of

the Russell 1000 with average annual increase of $204

billion during last 5 years (93% growth)


Transparency The magnitude with technology companies

• In the aggregate, the 100 companies in the S&P 100 index

hold approximately $1.4 trillion of the estimated $2 trillion of

permanently reinvested earnings (PRE), with technology

companies ($341 billion) and health care companies ($335

billion) having the most at stake

$341 $335

$171 $157

$146 $113

$52 $39 $38

$0 $50 $100 $150 $200 $250 $300 $350 $400

TECHNOLOGYHEALTH CAREINDUSTRIALS

CONSUMER STAPLESFINANCIALS

ENERGYCONSUMER DISCRETIONARY

MATERIALSCOMMUNICATIONS

PRE (in billions)

PRE (in billions)


Transparency The magnitude with technology companies

• In the last three years, the amount of indefinitely reinvested

foreign earnings:

– Has approximately doubled at Microsoft and Google

– Has nearly tripled at Apple

• In the five-year period from 2007-2013, the amount of

indefinitely reinvested foreign earnings increased by

427.8% at 10 major technology firms

– Apple, Cisco, Dell, Ebay, Google, Hewlett Packard, IBM, Intel,

Microsoft, and Oracle


• The SEC's Division of Corporation Finance continues to

closely review corporate disclosures on the tax implications

associated with a company's overseas earnings

• A November 2014 statement by Mark Kronforst, chief

accountant, indicated that more SEC comment letters will be

issued inquiring into the disclosure practices of U.S.

businesses with foreign operations

Transparency

What is the SEC doing about it


• Recent SEC comment letters have:

– Challenged registrants when their indefinite reinvestment

assertions appear inconsistent with the parent's liquidity needs or

disclosures elsewhere in the registrant's filing

– Requested more details of the factors and specific plans

considered in support of the indefinite reinvestment assertion

– Requested a further explanation if the statement is made that it is

not practicable to estimate the unrecognized deferred tax liability

– Asked companies with significant unremitted foreign earnings to

explain what portion of their foreign earnings is kept in cash and

cash equivalents, and provide clarity as to whether these funds

might be subject to a significant tax cost upon repatriation

Transparency

What is the SEC doing about it


Transparency

What is the FASB doing about it

• FASB met on February 11, 2015 to review proposals to

improve disclosures related to foreign earnings

• FASB tentatively concluded that a reporting entity should be

required to:

– Separately disclose income before taxes between domestic and

foreign earnings (similar to the current SEC requirement)

• The entity should also be required to further disaggregate foreign

earnings, whether indefinitely reinvested or not, by jurisdictions that are

significant in relation to the total income before taxes

– Disclose separately the accumulated amount of indefinitely

reinvested foreign earnings for any foreign jurisdiction that represents

at least 10% of the total accumulated amount of indefinitely

reinvested foreign earnings


Transparency


• FASB tentatively concluded that a reporting entity should be

required to (continued): – Disclose the following:

• Domestic tax expense recognized in the period for taxes on foreign

earnings, e.g., the incremental U.S. tax expense resulting in the current

period for foreign earnings not subject (or no longer subject) to the

indefinitely reinvested assertion

• Amounts during the current period that are no longer asserted to be

indefinitely reinvested*

• An explanation of the circumstances that caused the entity to no longer

assert that the earnings are indefinitely reinvested*

* For these items, the entity should also be required to provide separate disclosure of foreign

jurisdictions that are significant in relation to the total amounts being disclosed. Additionally,

the last item may be modified to also include an explanation of the circumstances that

caused the entity to assert that earnings, which were previously considered to not be

indefinitely reinvested, will now be indefinitely reinvested.


• Caution:– All decisions reached at FASB meetings are tentative and may be

changed at future meetings; decisions are included in an Exposure

Draft only after a formal written ballot. Decisions reflected in

Exposure Drafts are often changed in redeliberations by the Board

based on information received in comment letters, at public

roundtable discussions, and from other sources.

– Board decisions become final only after a formal written ballot to

issue a final Accounting Standards Update

Transparency



Transparency

What you can do about it

• Take a fresh look at existing MD&A discussion and footnote

disclosures

• Go beyond boilerplate language to provide as much clarity

and transparency as possible to meet the needs of

investors and analysts, including:– How indefinitely reinvested foreign earnings impact reported

earnings, foreign and domestic liquidity needs, and foreign asset

composition (including cash)

– Even in advance of any FASB changes, consider a separate

disclosure by jurisdiction, if considered individually significant, of (1)

foreign earnings and (2) accumulated amount of indefinitely

reinvested foreign earnings. • Example of Apple's disclosure regarding Ireland in most recent Form

10-K (next slide)


Example of Apple's disclosure regarding Ireland in Form 10-K

for the fiscal year ended September 27, 2014

Financial Statements Note 5

Substantially all of the Company’s undistributed international earnings

intended to be indefinitely reinvested in operations outside the U.S. were

generated by subsidiaries organized in Ireland, which has a statutory tax

rate of 12.5%. As of September 27, 2014, U.S. income taxes have not

been provided on a cumulative total of $69.7 billion of such earnings. The

amount of unrecognized deferred tax liability related to these temporary

differences is estimated to be approximately $23.3 billion.

Transparency



Transparency


• Use the income tax rate reconciliation, which shows the

effect of foreign earnings on the company’s effective tax

rate as a separate reconciling line item, as only a starting

point for the disclosure regarding foreign earnings– Review the tax workpapers to identify the various components

included in that reconciling line item for purposes of expansion of

the disclosure

– Examples of items that may warrant further disclosure include

permanent book-to-tax differences that caused a materially higher

or lower tax rate in foreign jurisdictions, significant portions of

foreign earnings generated in a particular tax jurisdiction, and

specific factors that caused any material year-over-year changes in

the percentage of pre-tax foreign earnings to total pre-tax earnings.


Transparency


• In the MD&A section, consider discussing trends and

uncertainties that will inform investors about the companies’

expectations within specific countries

– This is particularly important if a substantial portion of the foreign

earnings is generated in a particular country, and the tax laws in that

country are subject to change. In that case, the potential risks may

become sufficiently significant to merit disclosure

– Consider "early warning" to users of your financial statements

• Examples of Apple's disclosure relating to Irish tax laws and Amazon's

disclosure relating to Luxembourg tax rulings (next slides)


Example of Apple's disclosure relating to Irish tax laws in Form

10-K for the fiscal year ended September 27, 2014

Item 1A. Risk Factors

The Company could be subject to changes in its tax rates,

the adoption of new U.S. or international tax legislation or

exposure to additional tax liabilities.

The Company is subject to taxes in the U.S. and numerous foreign

jurisdictions, including Ireland, where a number of the Company’s subsidiaries

are organized…If the Company’s effective tax rates were to increase,

particularly in the U.S. or Ireland…the Company’s operating results, cash

flows and financial condition could be adversely affected.

Transparency



Example of Amazon's disclosure relating to Luxembourg tax

rulings in Form 10-K for the year ended December 31, 2014

• Background

– European Union (EU) is conducting a probe regarding Luxembourg tax

rulings; issue as to whether the rulings constitute illegal state aid

– Leaked documents show that billions of dollars in taxes have been

allegedly saved by hundreds of multinational corporations

– EU has stated it will not limit how much it seeks to claw back from

companies if the rulings are overturned

"The odds and stakes for the companies are massive…the concept of too big to fail in

terms of recovery doesn't exist"

Statement by Gert-Jan Koopman, EU's deputy-director for state aid (January 29, 2015)

Transparency



Example of Amazon's disclosure relating to Luxembourg tax

rulings in Form 10-K for the year ended December 31, 2014

Item 1A. Risk Factors

We Could be Subject to Additional Income Tax Liabilities

…in October 2014, the European Commission opened a formal investigation

to examine whether decisions by the tax authorities in Luxembourg…comply

with European Union rules on state aid. If this matter is adversely

resolved…we may be required to pay, additional amounts with respect to

current and prior periods and our taxes in the future could increase. Although

we believe our tax estimates are reasonable, the final outcome…could be

materially different from our historical income tax provisions and accruals.

Transparency



Financial statement implications

• Transparency

• Risk management


Risk management

The issue• The changes in the global tax landscape may pose financial

statement risks including ultimately impacting the amount of

taxes paid on profits being shifted to foreign countries with

lower tax rates

"The structures could be sensitive to legal challenges or to changes

in the application of the rules, if not the rules themselves, issuers

may then face cash outflows related to the tax liabilities that were

until then exempt even from being recorded as a liability"

"Offshore Corporate Profits Pose Hidden Risks,"

CFO.com (June 6, 2014)


• Identify, evaluate and respond to the changes in the global

tax landscape including the managerial and financial

reporting implications of:

– BEPS Action Plan

• Consider using as a roadmap for the evaluation of current structures and

strategies which have the effect of base erosion and profit shifting even if

currently lawful

– Proposed legislation

• May require "early warning" to users of your financial statements

Risk management



• Identify, evaluate and respond to the changes in the global

tax landscape including the managerial and financial

reporting implications of:

– New legislation and regulations

• May require adjustment to estimated annual effective tax rates and re-

measurement of existing deferred tax assets and liabilities

• Non-compliance with FATCA requirements may result in exposures for missed

withholding taxes, interest and penalties

– More aggressive enforcement, settlement experience, and judicial

decisions

• May change recognition and measurement of unrecognized tax benefits

Risk management



• Have an effective internal control process with respect to the

identification, evaluation and mitigation of resulting risks

– Including on-going communications with the audit committee

• Have resource readiness to deal with:

– The expected increase in cross-border tax disputes

– The expected compliance burden relating to country-by-country

reporting of transfer pricing

– The potential increase in scrutiny of foreign earnings by your audit

firm (see next slide)

Risk management



• Potential increase in scrutiny of foreign earnings by your

audit firm

– The Public Company Accounting Oversight Board (PCAOB)

recently expressed concerns about the audit work performed on

companies' foreign earnings

• As U.S. companies experience increasing profits in lower-taxed

jurisdictions, the undistributed earnings and cash held overseas raise

potential audit risks

• Audit work performed around significant tax structuring transactions is

a "heightened concern"

Comments by Helen Munter, director of the PCAOB Division of

Registration and Inspections, at an AICPA Conference on

December 10, 2014

Risk management



Audience question 4

A. An increase in our effective tax rate and/or taxes paid

B. The lack of resources to identify, evaluate and respond to

the changes

C. Making the necessary changes to the design or operation of

our internal controls

D. Providing sufficient transparency to the users of our

financial statements

E. Other; I don't know

What is your biggest managerial or financial reporting

concern relating to the changing global tax

landscape?


Questions?Comments?


Randy Free

Partner, West Region

International Tax Practice

Leader

949.608.5311

[email protected]

Allan Smith

Partner, International Tax

408.216.8540

[email protected]

InformationContact


Tangible Property

Regulations: Is Your Company Prepared?


Scott Hamilton

Director, Strategic Federal

Tax Services

213.596.8426

[email protected]

PresenterToday's


Learning objectives

• Determine how the new

Tangible Property

Regulations impact

your company

• Determine how to

prepare for the

Tangible Property

Regulations

Tangible Property Regulations: Is Your Company Prepared?


Agenda

• What changed?

• Highlights of new regulations

• How do I deal with this?


Big Picture


New Law

Final regulations Final procedures

• TD 9636 — September 2013

• Amounts paid to acquire, produce

or improve tangible property,

selling costs and certain

depreciation

• Five elections with varying

procedures

• TD 9689 — August 2014

• Depreciation and dispositions

• Four elections with varying

procedures

• Rev. Proc. 2014-16 — January 2014

• Method changes for amounts paid to

acquire, produce or improve tangible

property

• Rev. Proc. 2014-17 — February 2014

• Method changes for depreciation

• Rev. Proc. 2014-54 — September 2014

• Method changes for depreciation and

dispositions

Action must be

taken for the

2014 taxable

year.

Effective now – For taxable years beginning on or after Jan. 1, 2014


Rev. Proc. 2014-16

DCN

Approx. §Description §481(a)

21

10.03(1)

Treatment of removal costs in disposal of a depreciable asset,

including a partial disposition. Treas. Reg. §1.263(a)-3(g)(2)(i)Yes

184

10.11(3)(a)(vi)

10.11(3)(a)(v)

Deducting repair and maintenance costs, or capitalizing

improvements to tangible property (and related depreciation, if

applicable). Includes change(s) to unit(s) of property and

removal costs related to property not disposed of. Treas. Reg.

§1.162-4; Treas. Reg. §1.263(a)-3

Yes

185

10.11(3)(a)(xi)

Change to the regulatory accounting method for determining

whether amounts paid to repair, maintain or improve property.

Treas. Reg. §1.263(a)-3(m)

2014

Cutoff

186

10.11(3)(a)(i)

Deducting non-incidental materials and supplies when used or

consumed. Treas. Reg. §§1.162-3(a)(1), (c)(1)

2014

Cutoff

187

10.11(3)(a)(ii)

Deducting incidental materials and supplies when paid or

incurred. Treas. Reg. §§1.162-3(a)(2), (c)(1)

2014

Cutoff

188

10.11(3)(a)(iii)

Deducting non-incidental rotable and temporary spare parts

when disposed. Treas. Reg. §1.162-3(a)(3), (c)(2)

2014

Cutoff

189

10.11(3)(a)(iv)

Change to the optional method for rotable and temporary spare

parts. Treas. Reg. §1.162-3(e) Yes

190

10.11(3)(a)(vii)

Deducting dealer expenses that facilitate the sale of property.

Treas. Reg. §1.263(a)-1(e)(2)Yes

191

10.11(3)(a)(viii)

Capitalizing non-dealer expenses to facilitate the sale of property.

Treas. Reg. §1.263(a)-1(e)(1)Yes

192

10.11(3)(a)(ix)

Capitalizing acquisition or production costs and, if depreciable,

depreciating such property under Section 167 or Section 168.

Treas. Reg. §1.263(a)-2

Yes

193

10.11(3)(a)(x)

Deducting certain costs for investigating or pursuing the

acquisition of real property. Treas. Reg. §1.263(a)-2(f)(2)(iii)

2014

Cutoff

194

11.09

Change to reasonable allocation method under §263A for self-

constructed assets. Treas. Reg. §1.263A-1(f)(4)Yes

195

11.10Change to stop capitalizing §263A to OREO Yes

Numerous Accounting Method

Changes (Form 3115)Rev. Proc. 2014-17 & 2014-54

DCN

Approx. §Description §481(a)

196

6.33Late partial disposition election. Treas. Reg. §1.168(i)-8 Yes

197

6.34Revocation of a general asset account election. Treas. Reg. §1.168(i)-1 Yes

198

6.35

Partial dispositions of tangible depreciable assets to which IRS's

adjustment pertains. Treas. Reg. §1.168(i)-8 Yes

199

6.36Depreciation of leasehold improvements. Treas. Reg. §1.167(a)-4 Yes

200

6.37

Permissible to permissible method of accounting for depreciation of

MACRS property (groupings). Treas. Reg. §§1.168(i)-1, 1.168(i)-7 and

1.168(i)-8

Mix

205

6.38

Disposition of a building or structural component, includes loss on

phantom assets still being depreciated. Treas. Reg. §1.168(i)-8Yes

206

6.39

Dispositions of tangible personal property depreciable assets, includes

loss on phantom assets still being depreciated.

Treas. Reg. §1.168(i)-8

Yes

207

6.40

Dispositions of tangible depreciable assets in a general asset account.

Treas. Reg. §1.168(i)-1Yes


Numerous Elections

Elections

GT Election No. Description Implementation §481(a)

Election 1Election to capitalize and depreciate rotable, temporary or emergency spare parts (on an asset by asset basis).

Treas. Reg. §1.162-3(d)Made by doing it N/A

Election 2 De minimis safe harbor election to follow book expensing of tangible property. Treas. Reg. §1.263(a)-1(f)Annual statement

in returnN/A

Election 3Election to capitalize employee compensation and/or overhead as facilitating the acquisition of property (on

asset-by-asset basis, for either employee compensation, overhead or both). Treas. Reg. §1.263(a)-2(f)(2)(iv)Made by doing it N/A

Election 4 Election to capitalize all otherwise deductible repairs that are capitalized for book. Treas. Reg. §1.263(a)-3(n)Annual statement

in returnN/A

Election 5Small taxpayer safe harbor election to not apply improvement rules.

Treas. Reg. §1.263(a)-3(h)

Annual statement

in returnN/A

Election 6Election to recognize gain/loss on partial dispositions of assets (non-GAA property; asset-by-asset basis).

Treas. Reg. §1.168(i)-8(d)Made by doing it N/A

Election 7 General asset account election for current-year property placed in service. Treas. Reg. §1.168(i)-1(l)Annual Form 4562,

Line 18N/A

Election 8Optional termination of a GAA at disposition of all assets in the GAA.

Treas. Reg. §1.168(i)-1(e)(3)(ii)Made by doing it N/A

Election 9Optional recognition of a qualifying disposition of an asset within a GAA.

Treas. Reg. §1.168(i)-1(e)(3)(iii)Made by doing it N/A


Polling question

What have you done to prepare for the Tangible Property

Regulations?

A. Completed assessment and full study, with 3115's and

necessary elections

B. Started assessing their impact

C. Nothing, but we need to do something

D. Does not apply (are you sure?)


Highlights of the Tangible

Property Regulations


Overview of Law

De minimisMaterials and

supplies Acquisitions Depreciation Improvements Dispositions

• Annual election for de

minimis safe harbor to

expense assets

expensed pursuant to

book procedures in

place at beginning of

the year

- For assets ≤ $5,000 if

have Applicable

Financial Statements

(AFS) and if book

procedures are written

- For assets ≤ $500 if

no AFS

- Includes repairs and

materials and supplies

• Definition

- A unit of property

≤ $200

- Used or consumed

in 12 months or less

- Replacement parts

- Fuel, lubricants, etc.

or

- Identified in other

IRS guidance

• Types and timing

- Incidentals - when

acquired

- Non-incidentals,

generally - when

consumed

- Rotable and temporary

spare non-incidental

parts - when disposed

• Annual election to

capitalize a rotable,

temporary or

emergency spare part

• Capitalize costs that

facilitate acquisitions

- 11 inherently

facilitative costs

- Certain investigatory

costs for real property

are not capital

- Expense employee

compensation and

overhead

- Annual election to

capitalize employee

compensation and/or

overhead

• Capitalize costs that

defend or perfect title

• Depreciation of

leasehold

improvements is

MACRS recovery

period not over term of

lease

• Multiple asset

accounts and single

asset accounts

• General asset account

(GAA) annual election

• Unit of Property definition

- Buildings

- Plant property

- Leased property

- Network assets

- Other property, e.g.,

• Other personal

property

• Other land

improvements

• Improvement defined

- Betterment

- Restoration

- New or different use

- Routine maintenance

• Annual election to

capitalize otherwise

deductible repairs that

are capitalized for book

• Annual election for small

taxpayer to not apply

improvement rules

• Optional method for

certain regulated assets

• Dispositions

- Annual election to

recognize partial

dispositions (e.g.,

building components)

- Reasonable methods

to determine asset

disposed

- Reasonable valuation

method to determine

basis for gain or loss

- Coordination with IRS

examination of repairs

- GAA two annual

elections for

dispositions

• Differing treatment of

certain selling expenses

for property for which

the taxpayer is a dealer

versus nondealer


New annual election.

Allows taxpayers to

follow book policy in

expensing de minimis

assets.

• Procedures must be in writing for

taxpayers with "applicable financial

statements"

• Election needs to be made each year by

filing a statement with the return

• Election applies to all eligible materials

and supplies

• May need to document clear reflection of

income for amounts expensed over safe

harbor

ElectionDe minimis safe harbor


De Minimis Safe Harbor Election

• An Applicable Financial Statement (AFS) is:

– for Securities and Exchange Commission;

– certified audited financial statement that is

accompanied by the report of an independent CPA

used for credit purposes, reporting to

shareholders, partners or similar persons; or

– A financial statement required to be provided to a

government agency


De Minimis Safe Harbor Election

Requires:

• Written accounting policy in place at beginning of year

• Policy is to expense property costing less than a

certain dollar amount or property with economic useful

life of 12 months or less.

• Taxpayer actually deducts such amounts in financial

statements

• Amount paid does not exceed $5,000 or $500 per

invoice (or per item as substantiated by invoice)


Page 17

• New definition of what is

"material and supply"

• New rules and election

for rotable and temporary

spare parts

• New definition likely requires filing a Form 3115,

especially if have Balance Sheet account

• New rule that rotable and temporary spare parts

are not deductible until when disposed may

require filing a Form 3115

• Alternatively, may use optional method, which

also requires a Form 3115

• Alternatively, may elect to capitalize and

depreciate, which does not require a statement

Materials and Supplies

Form 3115 and election



• If you do not take the De Minimis election, then you must define your Materials and Supplies as:

– Components acquired to maintain, repair, or improve a unit of tangible property owned, leased, or serviced by the taxpayer that is not acquired as part of any single unit of property

– Fuel, lubricants, water and similar items expected to be consumed in 12 months or less

– Property with economic useful life of 12 months or less

– Property with acquisition cost of $200 or less



• Non-incidental supplies

– Deductible in the year in which the materials are first used or consumed in the taxpayer's operations

• Incidental supplies

– Deductible in the year in which amounts are paid

– Materials and Supplies for which there is a Balance Sheet account are not "incidental"

Incidental supplies are those for which no record of consumption is kept or physical inventories at beginning and end of year are not taken


• When acquiring new property,

TPR's list 11 "inherently

facilitative" costs that must be

capitalized

• New bright line date for

expensing certain

investigatory costs for real

property

• New annual election to

capitalize employee

compensation and/or

overhead

• New list of 11 inherently facilitative costs

may require filing a Form 3115; book may

not be including all costs in the list

• New bright line date for expensing certain

investigatory costs related to real property

may require filing a Form 3115

• Election to capitalize and depreciate

employee compensation and/or overhead

does not require a statement

Acquisition of Tangible Property



Acquisitions

• For this, a taxpayer must generally capitalize:

(1) invoice price;

(2) transaction costs;

(3) cost of work performed prior to the date placed in service; and

(4) amount paid to defend or perfect title.

• Amounts that facilitate the acquisition or production must be capitalized, including inherently the 11 inherently facilitative costs.


• Transporting the property (shipping fees and moving costs)

• Securing an appraisal or determining the value or price of property

• Negotiating the terms or structure the acquisition and obtaining tax advice on the acquisition

• Application fees, bidding costs, or similar expenses

• Preparing and reviewing the documents that effectuate the acquisition of the property (for example, preparing the bid, offer, sales contract, or purchase agreement);

• Examining and evaluating the title to property

• Obtaining regulatory approval of the acquisition or securing permits related to the acquisition

• Conveying property between parties, including sales and transfer taxes, and title registration costs

• Finders' fees and brokers' commissions, including contingency fees

• Architectural, geological, survey, engineering, environmental, or inspection services pertaining to a particular properties

• Services provided by a qualified intermediary or other facilitator in an exchange under 1031

Acquisitions


• New definition of Unit of

Property (UOP)

• New rules for determining

whether there is a capital

improvement


capitalize otherwise

deductible repairs that are

capitalized for book

• New definition of unit of property likely

requires filing a Form 3115

• New rules for determining whether there is a

capital improvement likely requires filing a

Form 3115, even if followed book in past

• Election to capitalize otherwise deductible

repairs that are capitalized for book requires

annual statement with return

Improvements



Unit of property defined

Building systems include:

- HVAC systems - Fire protection and alarm systems

- Plumbing systems - Security systems

- Electrical systems - Gas distribution systems

- All escalators - Any other structural components

- All elevators in published guidance


General Rule

A taxpayer must generally capitalize an amount that

IMPROVES a unit of property ("UOP") if the amount:

(1) Is for a betterment;

(2) Restores the UOP; or

(3) Adapts the UOP to a new or different use.


1) Betterment

– Ameliorates a material condition or defect that either

existed prior to the Taxpayer's acquisition of the property

or arose during production of the UOP;

Example: Sally buys a building knowing it has an old leaky

roof. She then has the roofing membrane redone. This is a

betterment (capitalize).

Example: Phil buys a building with a functioning roof. After

10 years, he has the roofing membrane repaired. This is not

a betterment (deduct).


1) Betterment

– Results in a material addition to or addition of a major

component to the UOP, or a material increase in the capacity of

the UOP;

Example: Bob has a warehouse. He needs more space and so

builds an expansion to the warehouse. This is a betterment

(capitalize).

– Results in a material increase in productivity, strength, efficiency,

or quality of the UOP or the output of the UOP.

Example: Fred has an old A/C system that needs a new

compressor. He replaces the old compressor with a brand new

higher rated and more efficient compressor. This is a betterment

(capitalize).


2) Restoration

An amount restores property if the amount:

1) Results in the rebuilding of the UOP to a like-new condition after

the end of its class life;

2) Is for the replacement of a part or a combination of parts that

comprise a major component or a structural part of the UOP;

3) Returns the UOP to its ordinarily efficient operating condition if

the property has deteriorated to a state of disrepair and is no

longer functional for its intended use;


2) Restoration – new examples

Restoration

(capitalize)• 1 chiller in HVAC system

• Entire sprinkler system

• All wiring in building

• All restroom fixtures

• 200 of 300 windows

• 100 of 300 windows (windows cover 90% of building)

• 40% of sq ft of flooring

Not a restoration

(deduct)• 1 of 3 furnaces

• 3 of 10 roof HVAC units

• 30% of electrical wiring

• 8 of 20 sinks

• 100 of 300 windows (300 windows cover 25% of building surface area)

• 10% of sq ft of flooring

• 1 of 4 elevators


Election to capitalize repair and

maintenance costs

• Taxpayer's may elect to capitalize amounts incurred

during the year as costs of improvements if TP

capitalizes the amounts on its books and records

• Election applies to all amounts treated as capital for

books each year

• Election made by attaching a statement to the return

each year



recognize losses on partial

dispositions

• One-time retroactive

election for partial

dispositions in prior years

• New rules for determining

reasonable method for

which unit disposed and its

basis

• Current-year election to recognize partial

disposition does not require statement

• Retroactive partial disposition requires filing a

Form 3115 and is time-limited

• New rules for determining which unit disposed

and its basis may require filing a Form 3115,

depending upon prior methods

• Unrecovered basis on certain assets disposed

in prior years requires filing a Form 3115

Dispositions



Dispositions

• Taxpayer may elect to dispose (sale, abandonment,

etc.) of a portion of an asset. Includes:

– Structural components (or components thereof) of a

building

– Components or portions of personal property assets

• Partial disposition (other than required situations) is a

not a method of accounting.

• Election is made in year of partial disposal by taking the

deduction on the year's return


Late Partial Disposition Election

• One-time retroactive election for partial dispositions in

prior years

• Retroactive partial disposition requires filing a Form

3115 and is time-limited.

• The retroactive election must be made for taxable

years beginning before Jan. 1, 2015.


Polling question

Do you think you will take advantage of the last

chance to accelerate recovery of basis for late

partial dispositions in prior years?

A. Yes

B. No

C. Not sure yet


Planning opportunities

Significant opportunities

• Section 481(a) adjustment for deducting

repairs (capture missed repairs expenses)

• Section 481(a) adjustment for retroactive

partial dispositions election (for 2014 only)

• Fixed asset scrub (clean up)

• Cost segregation study

• Identify phantom assets

• Outsource fixed asset schedule maintenance

Retroactive partial

disposition election

is a time-limited

opportunity


Assessing The Impact


Assessment

Final Regulations

are here

Look at your current

methods

Assess the

impact

Many of the accounting methods and elections are interrelated,

and therefore affect each other.


What are you doing?


Example: SuperTech, Inc.

Super Tech Inc. is a company based in Mountain View,

California. Private company with 12/31 TYE.

Super Tech has 5 office locations in the Western U.S.

The Company has not addressed the new Tangible

Property regulations. The Company has an accounting

policy in place that capitalizes tangible property above

$5,000. The Company currently follows its book for all

improvement/repair expenditures.


Deducting R&M costs and

Capitalizing Improvements


Assessment Summary Report


Implementation considerations

Compliance• Tax provision

• Current-year implementation

• Section 481(a) adjustments

• Impact on other federal computations, e.g.,

Section 199 deduction, Section 263A, etc.?

• State and local taxes

• Earnings and profits for CFCs

• Tax return disclosures

• Forms 3115

• Election statements

• When will we get this done?

• How do we efficiently comply?

• How do we efficiently document for IRS exam?

• What elections must be done annually going

forward?

Next steps Complete assessment


Polling question

A. Complexity and breadth of regulations

B. Coordination to obtain information regarding current policies

(between differing subsidiaries)

C. Amount of time needed for full implementation

D. Other; I don't know

What do you think will be the biggest challenge you

will face relating to full implementation of the Tangible

Property Regulations for your 2014 return?


Doing nothing?

• Consider the risks:

– Incorrect depreciation on tax return

– Use of improper methods

– Correlative adjustments to permanent items

– Return-signing concerns

– Potential IRS examination issues

– Financial statement implications


Summary

• Tangible Property Regulations are not optional

• Lease or own – doesn't matter

• Consider assessing the regulations first

• Then select your elections and method changes

• Could be some additional tax benefits along the way


Questions?Comments?


Scott Hamilton

Director, Strategic Federal

Tax Services

213.596.8426

[email protected]

InformationContact


Disclaimer

This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered.

For additional information on matters covered in this presentation, contact your Grant Thornton, LLP adviser.

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