ledger 01, 2018 · not only survive, but will also emerge ... retailers who hope to thrive and...

LEDGER

MARCH/APRIL 2018 Mazars USA LLP is an independent member firm of Mazars Group.

IN A CLIMATE OF DISRUPTION

RETOOLING RETAIL

2 | Mazars USA Ledger

CONTENTS

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March/April 2018 | 3

CONTENTS

4 | Retooling Retail in a Climate of Disruption

6 | For CRE Tax Act a Cause for Celebration but Questions Linger

8 | Top Cybersecurity Concerns for Manufacturers

10 | 6 Reasons Starting a Private Foundation May Be Right for Your Philanthropic Giving

13 | U.S. Senate Approves Bipartisan Banking Regulatory Reform Bill (S.2155)

16 | Changes for Exempt Organizations Under the Tax Cuts and Jobs Act and the Bipartisan Budget Act

20 | Understanding Unrelated Business Income Tax

24 | Impact of the Tax Cuts and Jobs Act and Bipartisan Budget of 2018 on the Energy Sector

27 | Shifting Reimbursement Models: Value-Based vs. Fee-For-Service

29 | Stormy Forecast

30 | 6 Costly Accounting Mistakes NYC Commercial Real Estate Pros Make

32 | Industries are Moving Past the Millennials and Preparing to Recruit Generation Z

34 | How to Answer a U.S. Customs and Border Protection Survey to Help Minimize the Chance of an Audit

36 | Fee Disclosures and Fiduciary Responsibilities Under ERISA

38 | Everything You Need to Know About GDPR!

40 | The Importance of Complying with Minimum Wage, Overtime and Tipping Regulations

41 | Worn in the USA: An Analysis

42 | Overview of the US Stress Test Scenarios vs. the European Scenarios

44 | Mazars USA Tax Alerts

MARCH/APRIL 2018

*The Mazars USA Ledger contains articles and alerts published from February 1, 2018 - March 31, 2018.


RETOOLING RETAIL IN A CLIMATE OF DISRUPTION

The world is awash in disintegration—systems that have been in place for decades have lost cohesion—and they are causing major disruption. Retailing as we know it is a prime

prototype. Traditional brick-and-mortar stores have lost both market share and market cap, wit-nessed by Amazon’s purchase of Whole Foods. WeWork’s acquisition of Lord & Taylor’s flagship Fifth Avenue store speaks to how retailers are rethinking their real estate. Other retailers may soon follow suit as they scramble to adapt to shoppers’ shifting preferences to purchase products online.

Although worldwide retail sales are growing, how they are being transacted is undergoing a sea change. Online sales on a global basis have mushroomed—50% of China’s purchases now are made online, and 75% of them are transacted via smartphones. Retailers are struggling to confront and adapt to that change by investing in the tools needed to turn it to their advantage.

Walmart and Target are tackling the challenge in aggressive ways. Walmart has courted the dis-ruption with its purchase of jet.com, which allows it to compete head to head with the likes of Am-azon, and more recently, Parcel, which promises same-day delivery in New York City. Target just announced its purchase of Shipt, a grocery deliv-ery service, and hopes to be making same-day deliveries from half its stores within six months. It could give a badly needed boost to Target’s stock price, which has shed 13% this year. Target is signaling its recognition that it must adjust to the new reality of retailing. “Retailers who adapt to consumers’ changing shopping preferences will not only survive, but will also emerge stronger,” notes Stuart Nussbaum, Consumer Products Sector Leader at Mazars USA.

Consumers are the driving force, and savvy retailers must step up communications to under-stand what is behind the change in purchase be-havior, how best to get end products to purchas-ers, and how best to please those who do shop

in stores. What is it about the Amazon shopping experience that causes a consumer to buy online versus in a store? An obvious answer is the promise of next-day delivery is more satisfying than looking for limited inventory with the aid of fewer (and overburdened) customer service staff. Getting buyers in the door demands it be a more gratifying encounter, something the pressure on retailers’ falling profit margins may preclude. The consumer’s insistence on faster and quicker trumps retailers’ preference for dictating what they sell and at what price.

Nor are wholesalers immune to the new trend—consumer purchasing behavior decrees what is produced, where it is sourced, and how it is manufactured. A new reality has emerged. Big-volume orders encompassing a cumbersome supply chain delivered a few times a year from big factories have given way to more nimble processes to distribute small orders several times a week, and at competitive prices.Even the production process has undergone

BY JOSEPH C. FERRONE

CONSUMER PRODUCTS


a revolution, among which is software automation. For example, robotic sewing can produce volume at a lower price. Optitex, leaders in 3D design (now part of EFI), offers digital product solutions for the textile industry that streamline the process, resulting in virtual sampling, fit, and ordering.

Retailers who hope to thrive and flourish must adjust their supply chain to the new reality by making technology investments needed to support it, and take a hard look at their business and determine whether they have the wherewithal to make them. If not, they may need to examine their business in a different light, perhaps opting to stock less inventory and fewer designs. Or, they can opt for digital designs, simplify logistics, and take advantage of drop shipping. The role between the manufacturer and the consumer is being redefined, and although retailers are playing a lesser part, they can overcome obstacles by having the proper strategy and a solid financial plan to achieve it.

It may be that a strategic acquisition, or even an outright sale, is the answer. In a marketplace suffering from continued fragmen-tation, mass consol-idation is inevitable. For example, Whole Foods appealed to a high-end customer, yet was perceived to be a laggard in the shift to on-line purchases, making it ripe for Amazon to acquire it. Amazon Prime’s members make more than $100,000 a year, of whom more than 50% already purchase groceries through its website. This helps explain why the key to success is having a platform that can be leveraged—something Amazon continues to demonstrate in spades.

Another key to retailers’ pivoting their business is adjusting their use of real estate, as Lord & Taylor’s $850 million transaction demonstrates. Having held court on Fifth Avenue since 1914, it is the oldest department store in the country. Yet its decision to consolidate operations in a smaller space within its landmark Italian Renaissance marble edifice was the right thing to do in an era of changing consumer buying behavior. After all, if buyers are eschewing stores for the ease of shopping with a computer from the comfort of their living room sofa, retailers can put the operations and carrying costs associated with maintaining an expensive prime location to better use. They will want to take a sharp pencil to the numbers and determine whether it makes sense to keep expensive properties or if the better approach may be “creating value through creative transactions with our real estate,” says Richard Baker, chairman and interim chief executive of Hudson’s Bay, Lord & Taylor’s parent, in the above-quoted Wall Street Journal article.

In adapting to the changing landscape in retailing, companies must embrace attracting workers from a significant employee segment: Millennials. By definition, Millennials are different from the norm. Raised in the era of smartphones, they operate in distinctive ways, and they will prosper only in an environment that recognizes those differences. Ping pong tables may not be required, but a fun and flexible work/life balance is at the top of their list. According to a survey conducted by Wells Fargo, Millennials rate having satisfactory family relationships and intellectual pursuits at a higher level than work (56%, 52%, and 40%, respectively), and prefer (by a wide margin) being happy every day to financial success and recognition (34% versus 11%). They also are used to a collaborative decision-making process, so companies must be realistic about structuring a work environment that ap-peals to them. “Where Millennials may be weak is in understanding account-ing and cash management, so modeling it and showing the effects decisions have on variable and fixed costs and working capital should receive special emphasis,” says Stuart Nussbaum. In turn, incorporating Millennials into the company provides powerful insight into a brand’s uniqueness and can

revolutionize a path to uncovering the consumer’s motiva-tion to purchase it.

In summary, the dis-ruption in retailing is monumental, as consumers the world over transform their buying patterns. Rather than hiding

their heads in the sand, successful retailers must reinvent themselves by retooling their approach and embracing the shift to the consumer driving the process. It demands making new technology investments to lower manufac-turing and distribution costs and to quickly respond to what the consumer wants and when. It may involve equipping supply chains with digital design capabilities and streamlining delivery logistics. If making these investments is unrealistic, retailers can explore realigning the company through a strategic acquisition or sale, and re-evaluate the best use of its real estate. And embracing Millennials into the work force, and their ability to harness technology, can transform a company’s perspective and vision for capitaliz-ing on changing consumer behavior. Joseph is a Partner in our New York Practice. He can be reached at 212.375.6567 or at [email protected].

“ANOTHER KEY TO RETAILERS’ PIVOTING THEIR BUSINESS IS ADJUSTING THEIR USE OF REAL ESTATE, AS LORD & TAYLOR’S

$850 MILLION TRANSACTION DEMONSTRATES. HAVING HELD COURT ON FIFTH AVENUE SINCE 1914, IT IS THE OLDEST DEPARTMENT STOREIN THE COUNTRY. YET ITS DECISION TO CONSOLIDATE OPERATIONS IN

A SMALLER SPACE WITHIN ITS LANDMARK ITALIAN RENAISSANCE MARBLE EDIFICE WAS THE RIGHT THING TO DO IN AN ERA OF

CHANGING CONSUMER BUYING BEHAVIOR.”


FOR CRE, TAX ACT A CAUSE FOR CELEBRATION, BUT QUESTIONS LINGERBy Bisnow, sponsored by Mazars

REAL ESTATE


When Congress, at long last, passed the embat-tled Tax Cuts and Jobs Act Dec. 20, commercial real estate professionals celebrated the bill and its favorable provisions for the industry. But upon reading the fine print, many are left wondering how the government will implement the legislation.

Even tax experts, who have called the changes to the tax regime the most pervasive since 1986, are unsure how certain rules will be applied and calculations made.

Bisnow caught up with Mazars partners George Moffa and John Ohannessian to hear their best predictions for how tax legislation will impact CRE.

Transaction Rate And Dollar Volume Will Increase

The TCJA has brought rate slashes and more favorable treatment of rental income and REIT dividends, leading to extra market liquidity.

”Even tax experts, who have called the changes to the tax regime the most pervasive since 1986, are unsure how certain rules will be applied and

calculations made.”

“In general, taxes will be lower, and more free cash translates to more deals,” Moffa said. “Still, we find people tend to re-examine their transac-tions any time there is tax reform, to figure out what effect it will have on their deals.”

Some big boons to CRE include the new bonus depreciation rule, which used to be 50% of the improvement dollar value and only apply to new equipment. Now, it is 100%, and applicable to new and used equipment, as long as the equip-ment is new to the specific taxpayer.

Lower effective rates for REIT dividends, which

will be taxed at an effective rate of 33% rather than 43%, also favor CRE and are expected to encourage investment. Investors qualifying for the 20% deduction will see their net income from rents taxed at 29.6%, down from 39.6%.

“Any time you lower the tax rates and put more money in the pockets of real estate investors, they are likely going to put that money back into real estate,” Ohannessian said. “For this reason, I see the tax act stimulating the economy, and, at least in the real estate world, a net positive.”

Uncertainty Lingers

Many sections of the legislation, which was drafted in a rushed and secretive manner, remain ambiguous, according to Moffa.

“We finished off 2017 in a hasty haze of tax reform,” Moffa said. “It was meant to simplify things, but it has done the opposite. The industry will be doing financial modeling for the next six months.”

For example, carried interest only receives capi-tal gains treatment if the asset has been held for three years, instead of one year, and this change has executives wondering if they can restructure to circumvent the longer holding period.

“It says in the law that if you hold an interest through a corporation you are not subject to the rule,” Ohannessian said. “Practitioners are asking whether they can set up an S corporation to avoid this rule.”

Since this loophole was likely unintentional, law-makers may issue a technical correction to close

it. Interest limitations are also a gray area with the potential to complicate planning and filing.

“There is some confusion as to how interest limita-tions will be implemented, the interplay at the entity level to the taxpayer level, and whether you can aggregate different business activities,” Moffa said. “Section 163(j) is up in the air until the IRS releas-es guidelines, likely at the end of the summer.”

Tax pros are looking to the IRS to clarify and issue guidance that addresses both specific definitions and broad terminology.

“When there are so many unclear positions, we re-ally need guidance to understand how calculations will work,” Ohannessian said. “For example, for qualified improvements, they left out the number of years that constitute useful life.

We expect such urgent items to be addressed by summer, although a technical correction is unlikely since it requires 60 votes to avoid a filibuster in the Senate.”

To view all Mazars sponsored pieces for Bisnow, visit https://www.bisnow.com/blogs/mazars

George is a Partner in our New York Practice. He can be reached at 212.375.6759 or at [email protected].

John is a Partner in our New York Practice. He can be reached at 212.375.6722 or at [email protected].


Regardless of the form of the IP, the theft of it is typically a targeted attack conducted as a form of cyber-espionage. Attackers attempt to gain a foothold within the organization by attacking the “carbon layer” – sending a phishing email to an employee with either a malicious link or attachment. When the employee clicks the link or opens the attachment, an initial foothold is established in the form of installed malware. The goal of the attacker at this point is to remain undetected, spread through the IT infrastructure, discover the crown jewels, then slowly exfiltrate the data for as long as possible.

While theft of IP is typically a targeted attack, there are also attacks on IP and operations that can be more opportunistic in nature. Ransomware is a type of malware that extorts money from a victim by preventing the use of a system or access to data until a ransom is paid. With the advent of crypto currencies, hackers can request funds for ransoming IT systems that are nearly untraceable. Usually, ransomware is not targeted at specific organizations, opportunistically relying on infected websites, phishing attacks, and other traditional malware delivery mechanisms. This means that any manufacturing organization, regardless of size, could become a victim. Such an attack could create significant negative impacts to sales, production, and distribution systems. These impacts were realized for Mondelez International, Inc. in 2017, resulting in $84 million spent on the recovery effort and an estimated negative impact of 0.4% on net revenue and Organic Net Revenue growth. The profitability of ransomware has led to its continued evolution, including the

TOP CYBERSECURITY CONCERNS FOR MANUFACTURERSBY ADAM YANASAK, BRIAN BROWNE AND DAVID RIM

A manufacturing company’s crown jewels, or most valuable data assets, are typically considered to be intellectual property (IP), internal operational information (OI), and the associated operations. Though difficult to quantify or translate into financial gain, the theft of intellectual property is estimated to account for at least a quarter of the worldwide cost of cybercrime.2 In addition, the theft of IP may go undetected, with the corresponding financial impacts unrecognized and appearing to be revenue decline due to increased competition.

There are always competitors that seek to make similar products better or more cheaply. A nefarious approach to making something cheaper is to let someone else invest in the research, then steal the resulting IP. As production facilities in other parts of the world become more sophisticated, it is easier to re-create products with symmetry to the original if blueprints or other schematics are stolen from the owner of the IP, which in 2011 was estimated to be valued at $8.1-$9.2 trillion in the U.S. economy.3

Other proprietary data that can be valuable and susceptible to attack includes any information that could give a competitor an advantage, such as customer lists and product pricing, business plans such as expansion into new markets, and new product offerings with estimated future release dates.

A 2018 report by McAfee and the Center for Strategic and International Studies estimates that cybercrime costs the world almost $600 billion annually, or 0.8% of global GDP, which is up 35% from an estimated $445 billion in 2014. New technologies have made attackers more

efficient and effective, and the low risk-to-high payoff ratio has incentivized cybercriminals. The manufacturing sector is not immune from these risks - it ranked third on IBM X-Force’s list of the most frequently attacked industries in 2016.1 And, the IT infrastructure and production lines of manufacturing are at an increased risk of cyber-attack because it is expected that they will not have the same cybersecurity protection of more regulated industries such as financial services.

MANUFACTURING & DISTRIBUTION


emergence of more targeted attacks based on factors such as company size, number of network nodes, and criticality of data and/or operations. Attackers attempt to maximize their financial gain by focusing on larger companies that would be more willing to pay significant amounts of money to restore operations and data.

“As an organization, we are focused on protecting ourselves against potential theft of our intellectual property (IP) as well as the continued operation of our manufacturing lines and the business processes that support it. We are also preparing ourselves to be more resilient and limit the impact should we suffer a successful attack.” Orphee Paillotin, IT Manager, Poclain Hydraulics Inc. There are a variety of ways to protect your business from cyber risks. Some of these are outlined in the National Institute of Standards and Technology’s Cybersecurity Framework: Manufacturing Profile.4 The first step would be to have a cybersecurity assessment performed on your business and its operations to identify existing vulnerabilities, assess the current cybersecurity posture, and identify remedial actions to improve cybersecurity defenses. Then, options can be considered to address the identified threats, including:

• Phishing countermeasures – Many attacks are initiated via phishing. Train your employees to recognize and respond appropriately to potential phishing emails, and provide them with a quick and easy way to report them.

• Formalized patching process – Defining and implementing a formalized and centralized patching process that prioritizes and tracks the deployment of patches is an important aspect of reducing the organization’s attack surface.

• Network segmentation – If the organization’s crown jewels in terms of IP and critical operations are known, leveraging network segmentation to provide additional protection can make it more difficult for attackers to succeed, should they gain an initial foothold.

• Endpoint detection and response – As users and their endpoints are typically the initial target of attackers, implementing enhanced endpoint protection, detection, and response is critical.

• Data leakage prevention (DLP) – The implementation of a DLP solution to prevent the exfiltration of sensitive data such as IP is an important mitigating control to disrupt the success of attackers that have gained an initial foothold and discovered the organization’s crown jewels.

• Organizational resilience – Performing a business impact assessment (BIA) and appropriate business continuity (BC), disaster recovery (DR), and incident response (IR) planning is critical for minimizing the impact of a successful attack.

If you haven’t assessed the risks to your IT environment in the last year, or are unsure if your assessment is comprehensive enough to cover the risks identified above, consider reaching out to a trusted advisor on developing or implementing an IT assessment.

Adam is a Manager in our Chicago Practice. He can be reached at 312.863.2408 or at [email protected].

Brian is a Principal in our Pennsylvania Practice. He can be reached at 267.532.4368 or at [email protected].

David is a Manager in our New Jersey Practice. He can be reached at 732.475.2160 or at [email protected].

1 https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=WGL03140USEN&

2 https://www.mcafee.com/us/resources/reports/restricted/economic-impact-cybercrime.pdf

3 http://www.sonecon.com/docs/studies/Value_of_Intellectual_Capital_in_American_Economy.pdf

4 https://www.nist.gov/publications/cybersecurity-framework-manufacturing-profile


6 REASONS STARTING A PRIVATE FOUNDATION MAY BE RIGHT FORYOUR PHILANTHROPIC GIVINGBY ISRAEL TANNENBAUM

As technology continues to advance, and the world continues to “shrink,” stories of social injustice, sickness, poverty, and many other important causes are increasingly prevalent.

One of the most effective ways to make an impact is to provide assistance through charitable giving. And, while giving can take many forms, "private foundations" have taken on a key role, with approximately 15% of all charita-ble gifts (about $60 billion) coming from such foundations in 2016, according to Charity Navigator. Use of this giving vehicle has continued to expand to in-clude families of moderate wealth, in addition to more traditional foundation backers, such as corporations and very affluent individuals.

PRIVATE CLIENT SERVICES


WHAT IS A PRIVATE FOUNDATION?

The primary distinction between a private foundation and a public charity is the source from which they derive their financial support. While a public charity gets its funding from the general public, a private foundation usually has one source of funding, typically an individual, family, or corporation.

It is important to note that the term “foundation” is often used interchangeably to describe many different types of nonprofits, not all of which are private foundations. A private foundation is its own distinct classification of charitable entity. Additionally, while there are different types of private foundations, such as private operating foundations (which generally run their own programs and are comparable to public charities), for purposes of this discussion we will focus on traditional private non-operating/grant-making foundations.

Charitable giving done through a private foundation can offer several key tax advantages compared to giving as an individual donor.

1. Tax Deductions Contributions to private foundations are generally tax deductible by the donor. The amount that will ultimately be deductible is determined by the donor’s adjusted gross income and the types of property contributed. For cash contributions, the deductible amount is limited to 30% of the donor’s adjusted gross income, whereas contributions of capital gain property, including gifts of appreciated stock, are generally deductible to the extent of 20% of adjusted gross income. Any unused amounts can be carried forward for five years to offset future taxable income.

2. Tax Savings Private foundations are exempt from federal income tax because they are charitable, section 501(c)(3) organizations. As such, donors can receive a double benefit. In addition to receiving a deduction for a contribution to the foundation, they can further reduce their taxable income through the donation of appreciated property, as no capital gain is realized when appreciated property is donated to a foundation and the deduction is based on the fair market value, as long as the property was held more than one year prior to the contribution; if held for less than one year, the deduction will be limited to the donors cost basis. In addition, assets transferred to foundations are generally not subject to estate taxes, which may provide an additional level of tax savings.

3. Timing of Taxes Donations to a private foundation are deductible the year in which they are contributed. This is quite significant, as individuals who

have decided to contribute to philanthropic causes, but have not yet determined the organizations they would like to support, can lock in their deduction for the current tax year by contributing to their foundation. This allows for a tax deduction to be received up front, while the actual charitable gift payout can be executed at a later date.

4. Control Donors can act as foundation trustees, remaining in control of the investment and management of donated funds, as well as the final disposition of the gifts. Furthermore, instead of making a gift directly to a public charity (at which point you no longer control how it is distributed), you can actively monitor your favorite charities. If a supported organization changes its mission, or if a more meaningful cause is discovered, you can reallocate your foundation's support appropriately.

5. Legacy and Family Many individuals find it important to encourage family involvement in charitable giving. Because foundations are their own separate legal entities, by establishing a foundation, the donors' charitable legacy continues and will be associated with the foundation's charitable activities in perpetuity or for as long as the foundations assets are maintained. A private foundation also provides an opportunity for multiple generations to work together on a meaningful endeavor. Family members can participate in implementing the charitable objectives, thereby continuing their engagement with the community. Family members may even receive reasonable compensation for their services, as well as serve on the Board of Directors.

6. Flexibility Individuals may not claim charitable deductions for grants made to other individuals, foreign nonprofit organizations, or non-charitable organizations. However, an individual may achieve these expanded giving objectives by first making tax-deductible donations to a foundation, which may in turn make such grants, subject to specific Internal Revenue Service requirements.

A WORD OF CAUTION

While private foundations do offer many advantages, it is also important to note that such organizations are subject to strict IRS rules, and that violation of those rules can result in severe excise taxes meant to curtail the risk of abuse. This is necessary because control of foundations usually rests with interested parties rather than an independent board, which makes abuse easier.


Additionally, foundations are required to pay an annual 1% or 2% excise tax on their net investment income depending on the value of their assets and the amount distributed to charities each year.

Private foundations also have additional compliance requirements; most significantly, they must generally make annual qualifying distributions of an amount based on a minimum investment return of 5% of average assets.

Furthermore, private foundations are required to file annual information returns with the Internal Revenue Service using Form 990-PF. This form requires comprehensive reporting of the foundation’s operations, so it’s important that detailed books and records are kept throughout the year of contributions, disbursements, expenses, sales of assets, capital gains and other comparable items. If a foundation has over $1,000 in unrelated business income in a specific year, it must also file a Form 990-T.

A private foundation is also required to file a copy of its 990-PF with the state in which it maintains its principal office. Many states also require

private foundations to register and file annual reports with the state attorney general. The state rules can be complex, and each state has its own requirements, so it’s important to do an analysis of the foundation’s nexus and related state rules.

CONCLUSION

Private foundations are an important giving tool that can have substantial advantages. However, it is critical to understand the rules and regulations associated with these entities to ensure that your “good deeds” go “unpunished.”

Please do not hesitate to reach out to our experts with any questions you may have in deciding if a private foundation is the appropriate vehicle for you, and for assistance in implementing one.

Israel is a Senior Manager in our New York Practice. He can be reached at 646 225 5915 or at [email protected].

FEATURED SURVEYS

2018 Mazars Global Water Risk Survey Conducted at the beginning of 2018 in seven countries: United States, France, United Kingdom, China, Spain, Germany and India, our survey considers the major economies and entities facing key water challenges. A growing number of stakeholders are becoming more and more sensitive to water risks, partially as a result of media coverage of water related events that have affected the lives of millions along with concerns that this critical resource is under tremendous pressure due to an ever-increasing global population. As an active stakeholder in global water management and sustainable development, Mazars hopes to add to the discussion of water as a business risk - its materiality, assessment, and means of reporting on it. Scan the barcode to view the survey results.

2018 Global Media Barometer Study Our Technology, Media and Information group is excited to present our 5th edition of our Global Media Barometer Study. Each year we analyze the financial performance and the risk factors disclosed on the annual reports of the 100 largest publicly-listed media companies in North America and Europe. This year’s barometer focuses on the impacts of GDPR and e-Privacy for media companies. Specifically, how GDPR affects multinational companies, with a special focus on the USA. Scan the barcode to view the study's results.

2018 Food & Beverage Industry Survey We are seeking the views of leaders and decision makers in the food & beverage industry! Click on the barcode to participate in our annual survey. #MazarsFB

PRIVATE CLIENT SERVICES


U.S. SENATE APPROVES BIPARTISAN BANKING REGULATORY REFORM BILL (S.2155)

By Charles V. Abraham

THIS ARTICLE IS PART OF A SERIES OF MAZARS USA ARTICLES REGARDING BANKING REGULATIONS. REFER TO THE JUNE 2017 MAZARS USA FINANCIAL SERVICES TRENDS ARTICLE ON THE FI-NANCIAL CHOICE ACT AND IMPLICATIONS FOR COMMUNITY BANKS, AND THE AUGUST 2017 FINANCIAL TRENDS ARTICLE ON SYSTEMI-CALLY IMPORTANT FINANCIAL INSTITUTIONS.

S.1255 the Economic Growth, Regulatory Relief, and Consumer Protec-tion Act (the “Senate Banking Bill”) was passed on March 14, 2018 after a strongly bipartisan 67-31 vote. Introducing a number of important changes that banks and other financial companies need to be aware of, it is now being reviewed by the House.

MODIFICATIONS TO THE DODD-FRANK ACT.

Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) set a statutory asset threshold for automatic designa-tion of nonbank financial companies and bank holding companies as systemi-cally important. This asset threshold is currently set at a static $50 billion. The

Senate Banking Bill would increase this threshold to $250 billion, significantly reducing the number of banks that are deemed to be systemically important and, therefore, subject to enhanced supervision and regulation.

The new bill allows for the Board of Governors to apply the prudential stand-ards established for systemically important financial institutions for any bank holding company with total assets equal to or greater than $100 billion if: (a) it determines that it is necessary to prevent or mitigate risks to the financial stability of the United States or (b) to promote the safety and soundness of that institution.

The Senate Banking Bill would also:• Increase the threshold for a mandatory risk committee for bank holding

companies from consolidated assets of $10 billion to $50 billion.• Remove the requirement for semi-annual stress tests for certain non-

bank financial companies and bank holding companies, and state that such tests would be done on a “periodic” basis.

• Increase the threshold for stress tests for financial companies regulated by a primary Federal financial regulatory agency from $10 billion of

FINANCIAL SERVICES


consolidated assets to $250 billion, and remove the requirement for annual stress tests, replacing it with “periodic” tests.

• Reduce the conditions for stress tests from three to two – the “baseline” and the “severely adverse.”

• Allow institutions with less than $10 billion in assets and total trading assets and trading liabilities that are less than 5% of total consolidated assets to be exempt from the “Volcker Rule.” The exemption from this rule would allow the applicable institutions to (a) engage in proprietary trading, and (b) acquire, retain interest in, or sponsor hedge funds or private equity funds.

MODIFICATIONS TO LEVERAGE RATIOS FOR CUSTODIAL BANKS

Custodial banks (defined as any “depository institution holding company predominantly engaged in custody, safekeeping, and asset servicing activi-ties, including any insured depository institution subsidiary of such a holding company”) will have their supplementary leverage ratios (“SLRs”) relaxed under the Senate Banking Bill. Specifically, funds that are deposited with certain qualifying central banks (i.e. the Federal Reserve or the European Central Bank) shall not be taken into account when calculating the SLR as applied to the custodial bank. Any amount deposited with central banks that exceeds the total value of the deposits of the custodial bank that are linked to fiduciary/custodial/safekeeping accounts shall be taken into account when calculating the SLR.

CHANGES TO REAL ESTATE LENDING

The Senate Banking Bill also provides for:• Exemption from appraisals of real estate located in rural areas as long

as the transaction value is below $400,000 and the loan is kept on the books of the originating financial institution.

• Exemption from collection of loan data under the Home Mortgage Dis-closure Act of 1975 if the institution originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit in the preceding two calendar years.

• Exemption from escrow requirements for mortgages for financial institu-tions with less than $10 billion in consolidated assets, as long as the financial institution originated 1,000 or fewer loans with a first lien on a principal dwelling in the preceding calendar year.

MODIFICATIONS TO CREDIT REPORTING AGENCY RESPONSIBILITIES

Under this bill, the credit reporting agencies would be required to provide security freezes to consumers at no cost. Consumers can select between a security freeze or a fraud alert. If the consumer is a victim of identity theft, they would become entitled to an extended fraud alert which lasts 7 years.

The bill also has provisions for the protection of veterans’ credit related to

the reporting of medical debt on a veteran’s credit report due to delayed pay-ments for hospital care or medical services.

WHAT’S NEXT?

• Now that the Senate Banking Bill has been submitted to the House of Representatives, the House will have an opportunity consider the bill (as well as any reconciliation they might try to do against the Financial CHOICE Act).

• Although this bill did pass the Senate, there appears to be a division in the Democratic party regarding this regulatory reform. If the House considers further roll-backs to the Dodd-Frank Act (as contemplated by the Financial CHOICE Act), the likelihood of regulatory reform will decrease significantly.

Stay tuned for future updates on the status of the Senate Banking Bill, any changes or amendments made, and the potential effects it will have on finan-cial institutions. For more information contact Mazars USA’s banking practice at [email protected].

Charles is a Partner in our New York Practice. He can be reached at 516.620.8526 or at [email protected].

FINANCIAL SERVICES


UPCOMING EVENTS

Mazars presents the New York Commercial Real Estate Summit | April 24, 2018 | New York, NY The 7th annual New York Commercial Real Estate Summit, presented by Mazars USA, is the leading conference

for commercial real estate owners, investors and developers as well as large and fast growing corporate and retail tenants. The program has been curated to be high-value and high-impact by moving beyond self-serving

presentations and instead diving into real world challenges and opportunities that impact our businesses today.

This year’s forum will feature keynote speaker David Weinreb, Chief Executive Officer of the Howard Hughes Corporation, the developer behind the South Street Seaport project. Don’t miss the opportunity to join him along

with over 40 other CRE industry leaders, market experts and corporate and retail end users, as we discuss what is really happening in today’s commercial real estate marketplace.

Bisnow Multifamily Annual Conference Tri-State | April 25, 2018 | New York, NYMazars USA will be sponsoring Bisnow’s first all-day Multifamily event in New York City on April 25th. Please join

our Real Estate Partners and the Tri-State’s top multifamily executives at this event.

TMPAA Mid-Year Conference | May 7-9, 2018 | Baltimore, MD Position yourself to grow and improve your business by attending the 2018 Mid-Year Meeting, providing access to

60+ program carriers, elite service providers, the London Markets, reinsurance support, program development and distribution resources and a myriad of networking opportunities.. Visit us in booth 13!

Mazars USA 2018 New Jersey Food & Beverage Executive Forum | May 8, 2018 | West Orange, NJThe Mazars Food and Beverage Forum is the premiere Food & Beverage Industry event in the New Jersey/New

York metropolitan market. Last year’s 2017 New Jersey event brought together over 100 food and beverage senior executives for an evening to network and to hear from leading industry panelists. Past speakers have included food

company executives from AeroFarms, Banza, Deep Foods, Gary’s Wine and Marketplace, Gellert Global Group, Goya Foods, Imperial Bag & Paper, Schreiber Foods International, Villa Restaurant Group, and Wakefern Food

Corp. to name a few.

New Jersey Bankers Association Annual Conference | May 16-18, 2018 | Marco Island, FL Join us at the 114th Annual New Jersey Bankers Association Conference.

IASA Annual Meeting | June 3-6, 2018 | Nashville, TN IASA is a non-profit, education association that strives to enhance the knowledge of insurance professionals, and

participants from similar organizations closely allied with the insurance industry by facilitating the exchange of ideas and information. IASA is one of the insurance industry’s largest, and most well represented trade associations.

Bank Director – Audit & RIck Committees Conference | June 12-13, 2018 | Chicago, IL Partner Peter Schablik will be speaking on Tuesday, June 12 at 2:00pm on Fintech and Banking:

The Challenges and Opportunities.


CHANGES FOR EXEMPT ORGANIZATIONS UNDER THE TAX CUTS AND JOBS ACT AND THE BIPARTISAN BUDGET ACT

THE RECENTLY PASSED TAX CUTS AND JOBS ACT (TCJA) AND BIPARTISAN BUDGET ACT (BBA) INCLUDE A NUMBER OF PROVISIONS THAT DIRECTLY AFFECT TAX-EXEMPT ORGANIZATIONS.

Unrelated business taxable income separately computed for each trade or business activity

Prior to the passage of the TCJA, when determining unrelated business taxable income (UBTI), an organization that operates multiple unrelated trades or businesses aggregated income from all those activities and subtracted the aggregated deductions from the aggregate gross income. As a result, an organization was able to use a deduction from one unrelated trade or business to offset income from another, thereby reducing total UBTI.

The TCJA requires organizations operating one or more unrelated trades or businesses to compute UBTI separately for each trade or business (without regard to Section 512(b)(12) which provides a specific deduction equal to the lower of $1,000 or the gross UBTI).

The result is that a deduction/loss from one unrelated trade or business may not be used to offset the income from a different, unrelated trade or business. Net losses may be used to offset income from the same trade or business in another taxable year. Under a special transition rule, net operating losses arising in a taxable year before January 1, 2018 that are being carried forward are not subject to this new provision.

However, it remains unclear what separates lines of businesses under this fragmentation rule. For example, will all investment income reside in a single UBIT silo? If a tax exempt entity invests in several partnerships, does each investment constitute a single line of business? These questions may result in additional planning opportunities, pending further guidance.

Mazars Insight

Many exempt organizations generate some unrelated business income. The inability to offset losses from one unrelated trade or business against gains from another (or against gains and losses from alternative investments or pass-through entities) would likely increase a tax-exempt organization's overall UBIT burden. On the positive side, if UBIT is triggered, it will now be taxed at the lower corporate rate of 21% instead of the higher corporate tax rates in effect prior to the TCJA .

Unrelated business taxable income increased by amount of certain fringe benefit expenses for which deduction is disallowed

Prior to the passing of the TCJA, tax-exempt organizations, like taxable entities, were able to provide their employees with transportation fringe benefits and

BY ISRAEL TANNENBAUM

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on-premises athletic facilities in a tax efficient manner. There were no tax consequences to the tax exempt organization and the employees did not have to recognize taxable income equal to the value of the benefit.

The TCJA amends the unrelated business income provisions by adding Section 512(a)(7) to the Internal Revenue Code (IRC), which imposes tax on exempt entities with respect to qualified transportation benefits, and any athletic facilities. The provision is intended to replicate the effect of a similar provision for taxable entities, which makes certain benefits non-deductible.

It should be noted that although employers may be taxed on the cost of providing these fringe benefits, employees can continue to receive them on a tax-free basis, as Internal Revenue Code Section 132(f) which excludes

qualified transportation fringe benefits from gross income remains mostly untouched by the TCJA.

Recently, the IRS released the 2018 update of Publication 15-B, which includes information clarifying the changes to the tax treatment of commuter benefits and the suspension of qualified bicycle commute.

The publication states that “no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after December 31, 2017.”

A Compensation Reduction Agreement provides qualified transportation


benefits on a pre-tax basis. Employees are offered a choice between cash or a qualified transportation benefit. Publication 15-B clarifies that the employer deduction for qualified transportation benefits is not available whether provided directly by the employer or through a Compensation Reduction Arrangement.

As such, although employees continue to receive the full tax savings for any pre-tax deductions for qualified transportation, employers must reduce their wage expense by the amount of the pre-tax employee deductions. The employer, however, does see payroll tax savings on the reduced payroll expense.

It should also be noted that it remains unclear if these amounts will be considered unrelated business income and taxed at the state level.

Mazars Insight

This provision of the TCJA introduces an additional tax burden and other complexities for tax-exempt entities, particularly for those that have specifically avoided engaging in activities which would subject them to unrelated business income tax (UBIT), but have been providing employees with transportation fringe benefits or access to gyms and other athletic facilities.

Furthermore, several jurisdictions such as New York City and Washington, D.C. require employers with 20 or more full-time employees to provide this benefit to employees. As such, for organizations operating in these jurisdictions, it is virtually impossible to avoid this tax.

Organizations should take steps to track the expenses related to these programs, such as a portion of salary of the individual responsible for administering the program and any other expense directly related to the generation of this “income,” as these can be used as a direct offset to any taxable income.

Excise tax on excess tax-exempt organization executive compensation

Prior to the passage of the TCJA, taxable employers typically could deduct reasonable compensation as a business expense; however, compensation exceeding specific levels was not deductible.

Additionally, a corporation generally could not deduct part of the aggregate present value of a "parachute payment" (typically compensation that is contingent on a change in corporate ownership) made to an officer, shareholder or highly compensated individual, if the aggregate present value of all payments equaled or exceeded three times the individual's base amount.

These deduction limitations were not applicable to tax-exempt organizations.

Under the TCJA, a tax-exempt employer is liable for an excise tax equal to 21% of the sum of: (1) remuneration (not including any an excess parachute payments) over $1 million paid to a covered employee, and (2) any excess parachute payment paid to a covered employee.

For purposes of this provision, a covered employee is an individual who was one of the five highest-compensated employees of the organization for the tax year or were a covered employee of the organization (or a predecessor) for any preceding tax year beginning after December 31, 2016.

It should be noted that the provision exempts compensation paid to non-highly compensated employees from the definition of parachute payment, and also exempts compensation attributable to medical services of certain qualified medical professionals from the definitions of remuneration and parachute payment; however, compensation to these individuals for non-medical services would still be taxable.

Mazars Insight

The provision has a substantial financial impact on tax-exempt organizations that have highly-compensated individuals paid in excess of the relevant amounts noted above. Organizations should review their employees' total compensation arrangements to assess when they may become subject to the excise tax, and should closely monitor the amount and timing of compensation payments to their executives.

“IT SHOULD BE NOTED THAT THE PROVISION EXEMPTS COMPENSATION PAID TO NON-HIGHLY COMPENSATED EMPLOYEES FROM THE DEFINITION OF PARACHUTE PAYMENT, AND ALSO EXEMPTS COMPENSATION ATTRIBUTABLE TO MEDICAL SERVICES OF CERTAIN QUALIFIED MEDICAL PROFESSIONALS FROM THE DEFINITIONS OF REMUNERATION AND PARACHUTE PAYMENT; HOWEVER, COMPENSATION TO THESE INDIVIDUALS FOR NON-MEDICAL SERVICES WOULD STILL BE TAXABLE.”

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Excise tax based on investment income of private colleges and universities

Prior to the passage of the TCJA, only 501 (c)(3) private foundations had an annual excise tax on their net investment income.

Under the TCJA, a new 1.4% annual excise tax is imposed on the net investment income of an "applicable educational institution." Net investment income would be determined using rules similar to those for private foundations.

An "applicable educational institution" is described in Section 25A(f)(2) (Which discusses the Hope and Lifetime Learning credits) that:

1. Has at least 500 tuition-paying students during the preceding tax year, more than 50% of whom are located in the US;

2. Is not a state college or university and 3. Has assets with an aggregate fair market value of at least $500,000

per student at the end of the preceding tax year (other than those used directly in carrying out the organization's exempt purpose).

The BBA further provides that the “at least 500” and “more than 50 percent” of students tests above both refer to tuition-paying students. This provision is effective for tax years beginning after Dec. 31, 2017, as if it were a part of the original enactment of the TCJA.

Mazars Insight

This provision effectively treats certain private colleges and universities as private foundations subject to an excise tax on their net investment income, even in instances where the university itself is a public charity.

Exception from excess business holding tax for independently-operated philanthropic business holdings

Formerly, under section 4943 a private foundation that has any excess business holdings is generally subject to an initial tax equal to 10% of those excess holdings. As such, foundation ownership above certain percentages of a business would be required to be disposed of by the private foundation in order to avoid this excise tax.

The BBA added the “Newman’s Own” exception (named for the prime example of this case, the Newman’s Own Foundation, which receives 100% of the after-tax profits from the sale of Newmans Own products) to the private foundation excess business holdings rule, allowing business owners to make a charitable contribution of 100% of a business to their private foundation, and have it remain there.

Specifically, a new subsection (g) is added to section 4943, providing an exception from this tax for certain holdings of a private foundation in any business enterprise which meets the following requirements for the tax year:

1. The foundation owns all of the businesses voting stock at all times during the tax year.

2. The foundation acquired all of its interests in the for-profit business other than by purchasing it.

3. The business enterprise distributes all of its net operating income for any given tax year to the private foundation within 120 days of the close of that tax year.

4. The directors, executives, etc. of the business enterprise are not substantial contributors to the private foundation.

5. At least a majority of the board of directors of the private foundation are persons who are not directors or officers of the business enterprise or family members of a substantial contributor to the private foundation.

This new subsection was initially a part of the bill presented by the House of Representatives in Nov. 2017 as a part of the TCJA, but was removed from the final version that was signed into law in December 2017. It is effective for tax years beginning after Dec. 31, 2017.

Mazars Insight

This provision opens up the opportunity for other private foundations to fully own a for-profit business.



UNDERSTANDING UNRELATED BUSINESS INCOME TAXBY ISRAEL TANNENBAUM

Facing increased competition for donor dollars and a growing charitable base, many tax-exempt organizations have set their sights on income diversification. As part of this quest for alternative revenue streams, non-profits are expanding into businesses traditionally dominated by tax-able entities. While this can be a boon to an organization’s resources, it can potentially subject tax-exempt entities to reporting and paying taxes, the most common of which is the tax on unrelated business income.

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Why UBIT?

Congress added the Unrelated Business Income Tax (UBIT) provisions to the IRC in 1950 in an attempt to eliminate “unfair competition” between for-profit businesses and tax-exempt organizations conducting similar activities. Under UBIT, an organization could no longer qualify for exemption from taxation merely because its profits were destined for charitable purposes. This served to effectively level the playing field, as otherwise tax exempt organizations would have had a built in market advantage (tax free net income).

What is UBIT?

To explain it (not so) simply, UBIT is the tax paid on Unrelated Business Taxable Income (UBTI), which results when Unrelated Business Income (UBI) exceeds Unrelated Business Losses (UBL).

In order to qualify as UBIT, an activity must be • a trade or business• that Is regularly carried on• and is not substantially related to exempt purpose.

While these seem simple enough, each of these individual components have specific nuances that need to be considered when making a determination as to whether the income from an activity is taxable.

Trade or Business:

IRC section 513(c) defines a trade or business as “any activity which is car-ried on for the production of income from the sale of goods or the perfor-mance of services.”

One of the key factors to consider when determining if an activity is a trade or business is the presence of a “profit motive.” In order to fall into this category, the activity must be undertaken to produce a profit. That said, an activity will not automatically be excluded from being classified as an unrelated trade or business because it ultimately doesn’t produce a profit, but the intention to make one must be present.

Regularly Carried On

Treasury Regulations section 1-513-1 (c) indicates that in order to determine if an activity is “regularly carried in,” one must consider the frequency and continuity with which the activities producing the income are conducted and the manner in which they are pursued.

In applying this, the IRS generally compares the time span of comparable commercial activity to the time span of activity conducted by the exempt organization.

It’s important to note that activities engaged in only discontinuously or periodi-cally will not be considered regularly carried on if they are conducted without the same level of effort typical of a similar commercial endeavor. Income-producing or fundraising activities lasting only a short period of time on an an-nual basis would also not be considered regularly carried on. For example, an organization’s annual gala dinner would not be considered regularly carried on, and therefore any income received from this event would not be taxable.

Not Substantially Related

IRC section 513(a) states that “not substantially related” activities include any trade or business, the conduct of which is not substantially related to the performance of the organization’s charitable, educational, or other purpose that constitutes the basis for tax exemption under IRC section 501 (c)(3).Generally, whether a trade or business is substantially related to an organiza-tion’s purpose depends on the facts and circumstances of each organization’s mission and activity; however, in order to be considered “related,” an activity must contribute importantly to the accomplishment of the exempt purpose.It’s important to note that the destination of the income from the activity does not factor into this determination. Even if 100% of all income goes to directly support the organization’s charitable mission, it can still be considered unre-lated business income.

Common Unrelated Business Income Sources

Although exempt organizations can generally enter into the same business ventures as for-profit entities, certain activities maybe prove more easily accessible than others. Some of the following are the common types of unre-lated business income streams that we see among nonprofit organizations:

Advertising/Corporate Sponsorship Payment:

Payments received for advertising are generally characterized as UBI.

“Advertising” is defined by the IRC as any language that is an inducement to purchase a product or service. Some of the variables that would be used to make this determination include whether the advertisement contains qualita-tive or comparative language, price information, or any endorsements or call to action.

In direct contrast to advertising are “Qualified Sponsorship Payments,” which are specifically excluded from the definition of UBI. These are payments to the organization in exchange for which the corporate sponsor neither gets nor expects any substantial return benefit other than: • goods or services, or other benefits, the total value of which does not

exceed 2% of the sponsorship payment (safe harbor) or • recognition (i.e., use or acknowledgment of the sponsor’s name, logo,

or product lines in connection with the nonprofit’s activities).


As such, an organization can acknowledge the sponsor’s payment, as long as it is not considered “advertising” income, which would be considered UBI.

Sales of Merchandise

In general, sales of merchandise directly related to the nonprofit’s charitable mission, such as educational items sold at a university bookstore, would not be taxable, while all other sales would be considered unrelated business income.

There are a few key exceptions to this rule, which—if met—will preclude sales from being unrelated business income:

Volunteer Labor: Any trade or business in which 85% or more of the work is performed for the organization without compensation. Some fundraising activities, such as a bake sale run by volunteers, might meet this exception.

Convenience of Members: Any trade or business of a IRC section 501(c)(3) organization for the convenience of its members, students, patients, officers, or employees. A typical example of this is a school cafeteria. Sales to the general public do not fall within the “convenience exception” and would still be taxable.

Selling Donated Merchandise: Any trade or business is excluded that con-sists of selling merchandise, 85% or more of which the organization received as gifts or contributions. Many thrift shop operations of exempt organizations meet this exception.

Alternative Investments:

Alternative investment vehicles such as partnerships, private equity funds, real estate investment trusts, and hedge funds can afford an organization a significantly larger return on its investment than traditional stocks, bonds, or money market funds.

For these types of alternative investments, the character of any item of income or loss of a partner's share of partnership income is generally determined as if the partner realized or incurred the item from its source. IRC section 512(c) (1) provides that the income derived by a tax-exempt organiza-tion from a partnership's trade or business is included in the calculation of the organization's UBTI if the trade or business is unrelated to its exempt purpose.

Exclusions from Unrelated Business Income

Although this provision appears all encompassing, the IRC excludes many categories of income from UBTI, including most types of passive income. IRC section 512 excludes from taxation interest, dividends, rental income from real property, and gains or losses from the sale, exchange, or disposition of

property other than inventory. As often is the case when dealing with the tax code, however, there is a very significant exception to the exception.

Under IRC section 512(b), investment income from stocks, bonds, and real estate is not generally subject to UBTI. Thus, to the extent that a tax-exempt organization or trust acquires real estate in a straight cash transaction, the income derived from the property is not subject to UBTI.

Such income, however, can be taxable if derived from debt-financed property. Debt-financed property is property that is acquired with borrowed funds. Thus, if an exempt organization purchases corporate securities or commercial or rental real estate with borrowed funds, all or part of the dividends or rental income from the property might be subject to the unrelated business income tax. This distinction applies whether the organization uses debt financing directly or indirectly through a partnership.

Tax Compliance

The UBIT rules generally impose an income tax at corporate rates (or at trust rates for exempt organizations that are created as trusts) on an exempt organization’s net income derived from an unrelated business.

Federal:

The information needed to file and pay the UBIT is reported annually to the investor on Schedule K-1, which is required to contain certain disclosures of UBTI for exempt organizations. The organization files a Form 990-T to report and pay any UBIT that might be owed at the federal level and must also make quarterly estimated tax deposits if it incurs UBIT in excess of $500 during its tax year.

State:

Generally, any unrelated business income is taxable in the state where it originated—simple enough if the organization merely operates an unrelated business in its state of residency.

Pass-through income, however, can be attributable to many different jurisdic-tions, and it requires the filing and payment of state taxes. For example, part-nership investments might generate unrelated business income from activities in many states through its underlying holdings. In this case, organizations need to be especially careful not to simply report all of its income in its state of residence.

Presently, most states have provisions for the taxation of UBI, and each has its own method for the taxation of UBI including tax forms, minimum UBI subject to taxation, and estimated tax requirements, which can add additional complexity to the organization’s tax reporting.

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Tax Cuts and Jobs Act:

The recently passed Tax Cuts and Jobs Act (TCJA) include a number of provi-sions that would directly and indirectly affect tax-exempt organizations. One of the most impactful of these changes affects the calculation of net UBTI.

Prior to the passage of the TCJA, in determining UBTI, an organization that operates multiple unrelated trades or businesses aggregates income from all those activities and subtracts the aggregate of deductions from the aggregate gross income. As a result, an organization was able to use a deduction from one unrelated trade or business to offset income from another, thereby reduc-ing total UBTI.

As a result of the TCJA, taxpayers are required to compute UBTI separately with respect to each trade or business. Specifically, the Act amends the UBTI provisions by adding a new IRC section 512(a)(6), which requires organiza-tions operating one or more unrelated trades or businesses to compute UBTI separately for each trade or business (without regard to IRC section 512(b)(12), which provides a specific deduction equal to the lower of $1,000 or the gross UBTI).

The result is that a deduction or loss from one unrelated trade or business may not be used to offset the income from a different unrelated trade or business. Net losses from a specific unrelated business activity may be used to offset income from the same trade or business in another taxable year. Under a special transition rule, net operating losses arising in a taxable year before Jan. 1, 2018 that are being carried forward are not subject to this new provision.

How Much Is Too Much?

Exempt organizations are set up with a mission, and that mission should always be its primary focus. The presence of too much unrelated business income has, in the past, been used to disqualify organizations from tax-exempt status—and as such, it’s critical that organizations limit their unrelated business activities. But what is the limit?

Unfortunately, the limit does not exist, and there is no specific guidance as to what percentage of unrelated business activity is acceptable. The IRC states that a non-profit organization must “operate exclusively for” charitable pur-poses, while the regulations expand upon this to instruct that an organization should have not more "than an insubstantial part of activities (that) are not in furtherance of an exempt purpose.”

Ultimately, there is no magic number, and the facts and circumstances of each specific activity would need to be considered in making this determination. In fact, some private letter rulings have allowed more than 50% of an organiza-tions activity to be an unrelated business. Lacking any other guidance, the generally accepted “safe zone” has been no more than 10%-20% of an organization’s activity.

Conclusion

Although organizations should always be mindful that they are utilizing their assets first and foremost to advance their organizational objectives and that they are not generating an excessive amount of UBIT, unrelated business income can be an extremely valuable revenue source for non-profits to the extent there is a well thought-out and vetted strategy behind it.


“AS A RESULT OF THE TCJA, TAXPAYERS ARE REQUIRED TO COMPUTE UBTI SEPARATELY WITH RESPECT TO EACH TRADE OR BUSINESS. SPECIFICALLY, THE ACT AMENDS THE UBTI PROVISIONS BY ADDING A NEW IRC SECTION 512(A)(6), WHICH REQUIRES ORGANIZATIONS OPERATING ONE OR MORE UNRELATED TRADES OR BUSINESSES TO COMPUTE UBTI SEPARATELY FOR EACH TRADE OR BUSINESS (WITHOUT REGARD TO IRC SECTION 512(B)(12), WHICH PROVIDES A SPECIFIC DEDUCTION EQUAL TO THE LOWER OF $1,000 OR THE GROSS UBTI).”


IMPACT OF THE TAX CUTS AND JOBS ACT AND BIPARTISAN BUDGET OF

2018 ON THE ENERGY SECTORBY MICHAEL PAPPAS AND THEODORE WESTHELLE

ENERGY & UTILITIES


The passage of The Tax Cuts and Jobs Act (the “TCJA”) on Decem-ber 22, 2017 brought about significant changes that affected many industries. As part of our quarterly newsletters, beginning with this one, we will discuss how the TCJA impacts various sectors of our

M&D practice. This quarter’s newsletter will focus on Energy.

The Bipartisan Budget Act of 2018, signed into law on February 9, also affected the energy industry by extending many applicable, expired tax provisions.

Provisions Under the TCJA That Could Impact the Energy Industry

Corporate Tax RateMany energy companies are C-Corporations, and could realize a substan-tial tax savings from the reduction of the corporate tax rate to 21% (from a top rate of 35%), which is effective January 1, 2018. Calendar year tax-payers with December 31, 2018 year end will utilize the full tax rate change benefit. Taxpayers whose fiscal year ends in 2018 will have to calculate their tax using a blended rate for the straddle year by applying each tax rate to the taxpayer’s income for the respective year.

Net Operating Losses (“NOLs”)Losses arising in tax years beginning after 2017 are limited to 80% of taxable income and the carryback provisions are repealed. Additionally, an indefinite carryforward of NOLs is allowed.

ExpensingFirst year bonus depreciation has increased from 50% to 100% for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. Under the TCJA, qualified property is defined as tangible personal property with a recovery period of 20 years or less. The TCJA also eliminates the original use requirement if not acquired from a related party. In addition, Section 179 expensing increased from $500,000 to $1,000,000 for assets placed in service in 2018, with a phase-out beginning at $2,500,000. Equipment-intensive energy companies could gain significant tax benefit with these accelerated deductions.

Interest Limitations The amended Section 163(j) limits the deduction of interest expense. For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. For tax years beginning after December 31, 2017 and before January 1, 2022, adjusted taxable income is computed without regard to NOLs, business interest income and expense, deductions allowable for depreciation, amortization, or depletion. For taxable years beginning on or after January 1, 2022, adjusted taxable income will take into account a deduction for de-preciation, amortization, and depletion without regard to NOLs and business interest income and expense.

Repatriation of Foreign Earnings Internal Revenue Code (IRC) Sec. 965, as newly enacted by the TCJA, imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of US companies by deeming those earnings to be repatriated. IRC Sec. 965(a) provides that, for the last tax year of a deferred foreign income cor-poration (“DFIC”) that begins before January 1, 2018 (the “inclusion year”), the subpart F income of the corporation (as otherwise determined for that tax year under IRC Sec. 952) is increased by the greater of (1) the accu-mulated post-1986 deferred foreign income of such corporation determined as of November 2, 2017, or (2) the accumulated post-1986 deferred foreign income of such corporation determined as of December 31, 2017. This could have a significant impact since many energy companies are global and own foreign subsidiaries.

Income Tax Accounting As a result of the reduction of the corporate tax rate, companies must adjust the value of their deferred tax assets and deferred tax liabilities as of December 31, 2017. Cumulative temporary differences in book and tax assets and liabilities must be revalued to reflect what their benefit or tax burden will be upon their recognition or realization. Also, companies with an international presence must perform a detailed analysis to determine the effect of the deemed repatriation tax under IRC Section 965, the Global Intangible Low Taxed Income (“GILTI”) provisions and the Base Erosion and Anti-Abuse Tax (“BEAT”). These and other changes to international tax law were enacted as part of the TCJA.

BEATBEAT is a new tax intended to apply to companies that significantly reduce their US taxable income by making cross border payments to foreign affil-iates thereby lowering their ultimate US tax due. The BEAT tax functions as a minimum tax measured as 5% of a taxpayer’s modified taxable income base (“MTI”) over its regular tax liability. While the tax rate is 5% of MTI in 2018, it increases to 10% in 2019 through 2025, and 12.5% in years after. The Production Tax Credit (“PTC”) and the Investment Tax Credit (“ITC”) are available to offset a company’s US tax liability. However, the Act only al-lows 80% of the PTC and ITC to be excluded from the BEAT calculation, but only through 2025 after which these credits may no longer be used as an offset to BEAT. This will impact the benefit of the tax credits for multinational equity investors by decreasing the PTC and ITC value by 20%.

Provisions Under the TCJA Affecting Specific Energy Sectors

Mining & Metals Percentage depletion was retained. It enables a miner to claim depletion deductions equal to the lesser of 50% of net mining income or a fixed statu-tory percentage of gross income, which varies with the mineral being mined.

Oil & Gas The deductibility of intangible drilling costs (“IDC”) was retained. This en-


ables a company to deduct expenses that are incidental to, and necessary in, the drilling and preparation of wells for the production of oil and gas. The Section 199 deduction was repealed, which may negatively affect certain oil and gas companies.

The TCJA did not repeal any conventional energy tax credits such as the enhanced oil recovery tax credit and the credit for producing oil and gas from marginal wells.

Power & Utilities The TCJA modifies IRC Section 451 to require accrual method taxpayers to recognize income items no later than the time they recognize the same items for financial accounting purposes. This has a potential impact on power purchase agreements (“PPAs”). Advance payments from PPAs must be taken into income on an accrual basis when payment is received. Many PPAs call for upfront payment, but the seller takes the payment into income only as, and when, performance occurs and power is delivered. Under the new rule, advance payments must be accrued when received, unless the taxpayer makes an election for a partial deferral of one year. The new income recognition provisions related to PPAs with pre-payments may alter pricing and structure of such agreements.

Cross-border sales are now to be sourced by location of production. The TCJA revises IRC Section 863(b) to provide that the source of income from the sale of inventory is based solely upon the location of the production activities with respect to the property. This means that, for example, sales of electricity and oil or gas extracted in Mexico and sold in the US will no longer be partially sourced to the jurisdiction where title passes and, instead, will be sourced solely to Mexico.

Bipartisan Budget Act of 2018

The Bipartisan Budget Act of 2018 retroactively reinstated to January 1, 2017 many tax provisions that had expired at the end of 2016. A full list is available in our previous Tax Alert.

Some of the highlights relating to the energy industry are as follows:

• Mine rescue team training credit• Election to expense advanced mine safety equipment• Empowerment zone tax incentives• Alternative fuel vehicle refueling property credit• Second generation biofuel producer credit• Income tax credits for biodiesel fuel, biodiesel used to produce a

qualified mixture, small agri-biodiesel producers, renewable diesel fuel and renewable diesel used to produce a qualified mixture

• Credit for construction of new energy efficient homes• Extension of special rule for sales or dispositions to implement Federal

Energy Regulatory Commission (“FERC”) or State electric restructur-ing policy for qualified electric utilities

• Extension of excise tax credits and outlay payments for alternative fuel, and excise tax credits for alternative fuel mixture

If you would like to discuss any of these topics in more depth, please con-tact our M&D tax department.

Theordore is a Director in our New Jersey Practice. He can be reached at 732.475.2117 or at [email protected].

Michael is a Senior Manager in our New York Practice. He can be reached at 646 225 5994 or at [email protected].

UPCOMING WEBCASTS

We are pleased to announce our Mazars Online Insights webcasts! These informative sessions, led by our service line and industry segment leaders, are designed to educate our connections on the latest developments in the accounting industry and the technical resources needed in today’s business environment. Scan the barcode below to view the 2018 schedule and register!

APRIL 26THIntroduction to IFRS 9-Financial Instruments and IFRS 17- Insurance ContractsTime: 11:00 AM – 12:30 PM EDTSpeakers: Florie Bourrel-Heleine and Laurence Karagulian

MAY 16THIntroduction to VAT: What companies should know when doing business in Europe today and in the futureTime: 10:00 AM – 11:30 AM EDTSpeakers: Birgit Juergensmann and Tifphani White-King

ENERGY & UTILITIES


Shifting Reimbursement Models: Value-Based vs. Fee-For-Service

It is widely believed that regardless of the future state of the Affordable Care Act (ACA), the pressure to reduce cost of care will undoubtedly remain. And no matter what re-imbursement model is utilized, healthcare providers will be required to employ both

clinical and non-clinical staff members with a high degree of analytical, critical thinking, and people skills in order to sustain continued organizational growth throughout this

transformative period.

The two models generally practiced around the US are fee-for-service (FFS) and val-ue-based (VB) payment, which are in direct conflict. The fee-for-service payment model is the unbundling of services, thus encouraging physicians to generate high productivi-

ty, while the value-based payment model is outcomes-driven, encouraging physicians to focus on quality of care metrics.

By Peter J. Avellino

HEALTH CARE


The Centers for Medicare and Medicaid Services (CMS), along with the insurance industry as a whole, have made many attempts over the years to move away from a FFS model because it adversely rewards healthcare pro-viders based on the number of clinical services provided, rather than quality of outcomes. The pushback from physicians demanding greater autonomy when delivering care, coupled with resistance to change from patients, did not allow alternative models to gain any real traction.

However, today’s healthcare landscape is experiencing increasing pressure to shift reimbursement models to some form of VB due, in part, to patients wanting to be more involved in their care decisions and being burdened with a greater cost-share responsibility. In addition, CMS is detailing specific targets for transitioning to a value-based payment model which will likely further accelerate the transition.

This trend is likely to continue over the next three to five years, giving healthcare providers the opportunity to acquire extensive data analytics knowledge and a deeper bench around population health management programs. More specifically, healthcare providers will need to implement expanded solution sets in the areas of: • Business Intelligence – the ability to collect and analyze data; • Return on Investment – the ability to monitor VB managed care

contract revenue opportunities, as compared to the cost of implemen-tation;

• Interoperability – the ability to aggregate clinical information between hospitals and physician practices;

• Real-Time Data Access – the ability to provide meaningful clinical data to care providers and point-of-service;

• Care Standardization – the ability to provide an environment that allows for the use of standardized care process data;

• Chronic Care Management – the ability to provide systems and processes that support wellness and management of patients with high volume, high cost chronic diseases;

• Post-Discharge Follow-Up – the ability to provide ongoing support to post-discharge patients requiring ongoing clinical assistance (e.g. home health services, structured patient follow-up protocols); and,

• Physician Compensation – the ability to compensate physicians both for FFS and VB payment models.

There are a number of complexities around value-based payment models (e.g. capitation, bundled payments, shared savings, and hybrid payments) that must be considered. It will be incumbent upon healthcare providers and third party payers to fully understand the intricacies associated with each of these programs (including the installation of the appropriate sys-tems and protocols) before engaging in a contractual agreement. A general explanation of these specific models are as follows:

• Capitation Agreements involve a monthly pre-set dollar amount per member to cover a specific set of services which may include:

preventative and diagnostic treatments, injections and immunizations, outpatient lab work, and health education and counseling. The issue with capitation is that its primary focus is on reducing cost with less emphasis on quality care initiatives.

• Bundled Payment Agreements allow third party payers and healthcare providers to negotiate a set dollar amount for a specific episodic event. The idea is to share risk among all providers tied to a single episodic event. That can be challenging because each provider controls their individual budgets – not withstanding how the dollars will be parceled out to each provider.

• Shared Savings Agreements are usually made up of a group of pro-viders joining together under one umbrella, such as an Accountable Care Organization (ACO) that has contracted with third-party payers to provide care for a patient population in order to meet certain quality and cost metrics for that population over an agreed-upon time period. If the ACO is successful in providing care at a lower cost than what was previously established, both the ACO and the third-party payer would then share in the savings.

• Hybrid Payment Agreements are a combination of more than one payment model. Hybrid payments typically include an FFS component blended with one of the VB payment models discussed above. The purpose is to ease healthcare providers away from a system that pays for volume and towards a system that pays for value.

In conclusion, it is unlikely that we will altogether move away from a FFS payment model in the near future. It is more likely that we will see additional programs around a blended payment model, similar to the hybrid payment agreement as discussed above, that will focus on the need to provide individualized care services, balanced with desired outcomes measured through the use of quality metrics.

Peter is a Director in our New Jersey Practice. He can be reached at 212.375.6670 or at [email protected].

HEALTH CARE


STORMY FORECAST BY JEROME DEVILLERS

The Mazars USA 2017 Water Survey offers information the water industry is looking for: insight into the current state of the industry and how it may change, for better or worse. Jerome Devillers leads the Mazars USA and Mazars Group initiative in the water sector and offers a key perspective on the survey results. W&WD Associate Editor Lauren Baltas spoke with Devillers about his take on the status of the industry.

Lauren Baltas: What most concerns you about the survey results?Jerome Devillers: The most concerning item in the survey results is prob-ably the responses to our inquiries on anticipated water supply challenges. Fifty-four percent of respondents do not expect any issue in the next 20 years, and 21% don’t expect any issue ever. Long-term planning is critical on the topic of water sustainability, and the absence of recognition that challenging times are ahead will slow down the actions required to address conservation, diversification of water supply sources, development of tech-nology to increase water-system efficiency and smart investments.

Baltas: What important takeaways would you stress about U.S. water infrastructure based on the survey results?Devillers: The key takeaway remains the overall picture around distribution infrastructure and the need for colossal investments. The responses to our inquiries on useful life of mains—60% of respondents estimate useful life to be less than 20 years—are concerning and brings into question whether the bill is too expensive and if there will ever be a significant catch-up.The second major takeaway is the adoption of new technologies, specifi-cally in the areas of energy efficiency, smart metering and data analytics. These highlight important trends in the industry that see innovation motivat-ed by operating cost reduction and improved information with an ultimate objective of knowing in real time quantity, quality and flow.

Finally, this year’s [report] highlights the complex planning needed to continue providing customers with an affordable, sufficient and safe utility. Cybersecurity is identified by more than half of survey participants as a major risk. Important changes to consumption, access to supply, infra-

structure upgrades, and mitigating risks like cybersecurity will all come at a higher cost.

Baltas: How does the changing status of water infrastructure affect water utilities, specifically?Devillers: The first is that water utilities, by and large, recoup their operat-ing costs through tariffs. The second factor relates to capital expenditures, which usually generate returns for water utilities through these same tariffs.Two of the major impacts of aging infrastructure from an operation’s perspective are: one, above average or sub-standard non-revenue water; and two, an increasing number of main breaks. Sub-standard non-revenue water (water treated and pushed through distribution systems but lost along the way) increases the average cost of drinking water consumed. Main breaks create a lot of costs from the perspective of repairs, but also other services disruptions (transportation, gas, electric utilities, police, etc.).

As a result, water utilities should benefit (if the regulation functions efficient-ly) from investing in infrastructure upgrades, rather than fixing more breaks and accepting higher water losses every year. Ratepayers might perceive capital expenditures as more expensive and push back because of the re-sulting increase in service fees. They will, however, benefit from investment in their water infrastructure in terms of service quality and economies in the mid/long term.

Baltas: Despite the negative data, what positive improvement have you seen?Devillers: We have seen some movement in the last five to 10 years, and there are a lot of industry groups, private sector utilities, public utilities, federal agencies, investors and other stakeholders that are working hard, bringing a lot of enthusiasm and energy, and are heading in the right direc-tion to make things better every day.

Jerome is a Partner in our New York Practice. He can be reached at 212.375.6866 or at [email protected].


6 COSTLY ACCOUNTING MISTAKES NYC CRE PROS MAKEBy Bisnow, sponsored by Mazars

REAL ESTATE


The implementation of tax reform is on the horizon, and economists say it will be favorable for commercial real estate companies. The pre-diction has left many feeling uncharacteristically cheery about tax season. But New York City’s tax codes are notoriously complex, and not knowing the rules, or consulting a tax professional who does, can have dire consequences.

Avoiding these six common tax mistakes can help NYC owners and developers plan ahead and prevent overpayment or painful audits.

1. Classify Correctly

Accounting is nuanced, and it is easy to make mistakes. One such error results from not knowing what constitutes a capital expenditure versus repair and maintenance activity. This can cause CRE pros to significantly overestimate or underestimate their tax liability.

According to Mazars partner Ron Lagnado, significant renovations, remodels or knockdowns can trigger the New York State Department of Taxation and Finance to conduct an assessment of the property’s bookkeeping, as these improve-ments are frequently recorded incorrectly.

Although categorizing capital expenditures is complex, they must become part of the property, add value to it and represent a permanent installation.

2. The Harsh Reality Of Real Property Trans-fer Tax

New York State imposes a real property transfer tax on transactions over $500 and when the controlling interest of a corporation, partnership or trust that owns or manages real estate assets is sold.

“Neglecting to consider real property transfer tax to the extent applicable when contemplating an asset sale can have consequences,” Mazars partner Kyle Wissel said. “In New York City, that tax can be about 3%, so it’s a meaningful amount.”

3. Condo Cash ConundrumA potential supply glut of luxury high-rises is not the only danger NYC condo developers have to contend with. Even after successfully selling their units, unforeseen taxes may threaten their bottom lines.

“When a developer sells condos, they need to make sure that there is a carve-out for taxes in the underlying mortgage documents,” Mazars partner Donald Bender said. “If not, typically all the proceeds from the sale of condo units go to pay down mortgage debt, and the developer has no money left to pay taxes on the sale of the condo units.”

4. Closing Cost Considerations

Closing costs are expenses above the purchase price agreed to in the contract, and may be paid by the seller or buyer of the asset.

“Periodically, our clients fail to properly estimate the amount of the closing costs or closing adjust-ments,” Mazars partner Ed Ichart said.

Buyers and sellers may be surprised to discover funds will be held in escrow for future payments of real estate taxes, title insurance, loan origina-tion fees or appraisal fees.

“They don’t realize all of the costs that are required upon the purchase of a property and the related debt incurred,” Ichart said.

5. Watch Your Language

Commercial property buyers must proceed with caution with documents that can affect Purchase Price Allocation. PPA is the process of assigning fair market value to all assets after an acquisition, including their identifiable value, value of intangi-bles and goodwill.

“When purchasing real estate assets, one must draft sale documents and any accompanying schedules in such a way to provide flexibility in determining allocations of purchase costs,”

Mazars Director Joe Strickland said. “Significant tax benefits can result by not locking yourself into a predetermination of purchase cost allocations that may benefit the seller, but may severely limit your tax-saving opportunities available through a cost segregation study.”

6. Ensure Contracts Are As Structurally Sound As Buildings

The NYC CRE market is one of the most highly regulated and taxed, which elevates the impor-tance of a comprehensive tax strategy.

“A common mistake developers make when purchasing a property is poor tax structuring,” Mazars partner John Ohannessian said.

According to Ohannessian, the standard life cycle of real estate includes the acquisition, the operat-ing period and property disposition. Developers must consider the tax implications of each stage in the cycle at a deal’s inception.

To view all Mazars sponsored pieces for Bisnow, visit https://www.bisnow.com/blogs/mazars

Donald is a Partner in our Long Island Practice. He can be reached at 516.620.8420 or at [email protected].

Edward is a Partner in our Londg Island Practice. He can be reached at 516.620.8441 or at [email protected].

Ron is a Partner in our New York Practice. He can be reached at 212.375.6551 or at [email protected].

Joe is a Director in our New York Practice. He can be reached at 212 375 6763 or at [email protected].

John is a Partner in our New York Practice. He can be reached at 212.375.6722 or at [email protected].


Industries are Moving Past the Millennials and Preparing to Recruit Generation Z

When it comes to generational gaps, many human resource departments are like cashiers at a busy deli: “Next!” Many have dealt with the baby boomers, a generation that loved change, and then in the

1980s decided they were done changing. The boomers were followed by generation X, also known as the “latchkey” generation because their boomer parents often weren’t home when gen X kids

returned from school. Gen X became well known for their independence and resourcefulness, being self-managing and seeking a work-life balance.

The most recent generation, the millennials, began to join the workforce around the year 2000 and through the recession. Millennials are a group that has strong communal ties and their ideologies of teamwork turned the corporate world on its head. Open cubes and campuses were introduced and companies had to adapt to this new way of life.

The shift continues, as the first wave of millenni-als are nearing 40, with many of them partners

and c-suite executives. Now is the time to begin preparing for the next generation of young adults who will be entering the workforce: generation Z.

Generation Z is expected to be more inclined to forgo traditional higher education. This isn’t to suggest that Gen Z will not be educated, but they are expected to opt for a more independent alternative to finishing their degrees (e.g., online) or work-study options where they can be certified in a specific expertise while working. For many of

us this may be seen as an advantage, as Gen Z may be more inclined to enter a skilled workforce and learn the ins and outs of operations as they also are completing business, science and art degrees. In many ways, this could be the gener-ation that bridges the gap between the working class and upper management.

However, there is one problem for those looking to recruit talent: Generation Z is expected to be the most entrepreneurial generation yet. Pro-

By Kellie Murphy and Ben Hutterer

MANUFACTURING & DISTRIBUTION


”Gen Z is shaping up to be a crop of fresh, independent, entrepreneurial-spirited high school students."

jections from a recent study by Millennial Branding and Interships.com states that some 72 percent of high school students want to start their own business someday, with 61 percent of them expecting to start that business right out of college.

Gen Z is shaping up to be a crop of fresh, independent, entrepreneurial-spirited high school students. They appear to be willing to enter the workforce early while simultaneously earning degrees through either traditional or alternative methods, and they don’t care to work for anybody but themselves. So how, as an industry, might we put ourselves in an advantageous position to recruit the best of Generation Z?

1) Identify as “cool.” What was cool for millennials is not necessarily cool for gen Z. Millennials mostly came into the workforce around the time of the great recession and generally believed that cool companies were focused on stability and teamwork. They cared about their employ-ees, and developed programs that created synergies among people. Gen Z is a group of individuals who identify themselves as entrepreneurs and want to make a difference. When appealing to gen Z, think about how your company would be a dream job, not just a stable job. Think about how your company can appeal to the individualist who wants to build something on their own and communicate that message.

2) Technology alone won’t impress. Many companies pride themselves on their interconnectivity. We brag to clients and customers about our cutting-edge portals and our awesome file-sharing capabilities. We gleam with pride about our latest video conferencing capabilities or the instant messaging system we use to communicate. They aren’t special. Gen Z will expect this and will roll their eyes if this is the pitch they receive during their interview process. This is a generation that grew up with

Wi-Fi and on Facebook, Facetime, Twitter and Instagram, so our tech game probably won’t impress them much.

3) Appeal to their entrepreneurial spirit. With so many members of this generation wanting to be entrepreneurs – approximately three out of every four – businesses will need to figure out how to tap into that desire. This might be as simple as developing “thought groups” where they can use their creativity in a positive way. It also might be of value to push down certain responsibilities that will allow them to work independently and take ownership. Things like this will encourage creativity and recognition and create a sense of ownership and pride.

4) Be a thought leader/influencer. Ensure that your message is being broadcast to the right audience. Let that audience know what your company is trying to do, and how they are differentiating themselves. Communi-cate your ethical and social goals, and the difference that you are making, and make sure that you are utilizing the proper vehicles to have that messaged delivered.

As we all prepare to welcome the next group of young professionals entering the workforce, it is important for all of us to be thinking of how we are going to recruit the best and brightest. To do this, it is important that we start acknowledging the differences between the millennials and gen Z, and it is important that we start implementing a plan to do so now. With only four years to go, now is the time.

Kellie is a Senior Manager in our New Jersey Practice. She can be reached at 732.475.2131 or at [email protected].

Ben s a Manager in our New Jersey Practice. He can be reached at 732.475.2185 or at [email protected].


HOW TO ANSWER A U.S. CUSTOMS AND BORDER PROTECTION SURVEY TO HELP MINIMIZE THE CHANCE OF AN AUDITBY RALPH LOGGIA

TRANSPORTATION & LOGISTICS

US Customs and Border Protection (CBP) have, with more frequency, been sending surveys to Customhouse Brokers that contains approximately 75 questions to answer in lieu of conducting full scale audits. While completing the CBP survey can take a few hours, improper completion is likely to lead to a full audit, which can drag on for weeks. Standard language for the survey may begin with the following:


U.S. Customs and Border Protection, Office of Regulatory Audit, is con-ducting a survey of your brokerage. As part of this process, we are sending you the attached questionnaire related to your brokerage activities. The questionnaire is designed to give the Office of Regulatory Audit a general understanding of the brokerage’s policies and procedures as it relates to conducting Customs transactions and identify any significant issues. The review of the questionnaire responses may then be followed up by a broker interview, a walkthrough of selected transactions, and a review of select powers of attorney.

The purpose of this questionnaire is to obtain information about the brokerage’s organizational structure and procedures related to U.S CBP transactions. The questionnaire is designed to give the CBP team a gener-al understanding of the broker’s operations.

The CBP uses the surveys as a way to determine who is picked for an audit. An audit is time consuming, expensive and examines all aspects of a broker’s business.

The questionnaire tends to focus on the broker’s controls and procedures and the process that is in place. The CBP is also looking to verify how the broker exercises responsible supervision, the execution of POAs, relation-ships with freight forwarders, and recordkeeping.

Employees should be educated in this area, including having access to the Harmonized Tariff Schedule of the US (HTSUS) and CBP regulations. Have a process and procedures in place to train new employees and document employee background checks. It is also recommended to have an employee manual covering these matters.

Due to the many pitfalls involved, the CBP also scrutinizes Powers of Attorney (POA). The CBP is looking to see if the POAs are executed properly and signed by a person who has the authority to do so, if they are validated, if they are dated prior to the broker conducting business on an importer’s behalf, if they are expired, if they have the authority to conduct specific activities, if they are strictly followed, and if the POAs are direct from the importer or from a freight forwarder. The CBP looks to see if the broker makes a contemporaneous record of the steps taken to verify the importer’s identity. This implies that the CBP wants the broker to demon-strate how the POA is valid and document the procedures taken in order to accomplish this.

A ruling was issued that a freight forwarder acting under an importer’s POA may sign for the importer another POA which appoints a licensed custom-house broker as the importer’s agent.

The CBP also examines the relationship with unlicensed persons such as freight forwarders. Are the broker’s dealings with freight forwarders consistent with CBP regulations and does the broker transmit a copy of

his invoice and a copy of the entry directly to the importer? If not, is there a waiver in place? The CBP will look to see if the freight forwarder has marked up the duty, since this is an inappropriate transaction.

Section 111.36 of the Code of Federal Regulations addresses relations with unlicensed persons. It states that a broker may compensate a freight for-warder for referring brokerage business, subject to the following conditions:

1. The importer is notified in advance by the forwarder or broker of the name of the broker selected by the forwarder for the handling of his customs transactions;

2. The broker transmits directly to the importer a true copy of his brokerage charges if the fees and chargers are to be collected by or through the forwarder, or a statement of his brokerage charges and an itemized list of any charges to be collected for the account of the freight forwarder, if the fees and charges are to be collected by or through the broker;

3. No part of the agreement of compensation between the broker and the forwarder prevents direct communication between the importer and the broker.

Welke Customs Brokers USA Inc. (Welke) is an example of a request for a ruling involving fees for a broker with an unlicensed person. This is a violation that could lead to penalties and other sanctions. The agreement was based on commissions which are not permitted under the regulations. If the agreement was based on a flat amount that was not tied to any particular transaction, a violation of the regulations would not have taken place, since compensating a licensed customs broker to solicit business is not a violation. The Entry Process and Duty Refunds Branch ruled that unlicensed independent agents may not accept commissions from Welke for promoting its brokerage services.

Regarding record retention, a broker needs to maintain its customs records for five years from the date of entry.

So if you should receive a questionnaire, do not take it lightly. Don’t make up procedures, the CBP finds that this is worse than not having a formal process in place. Demonstrate corrective actions on an ongoing forward basis. And feel free to reach out to Mazars USA - we can assist with the process of designing and properly documenting key internal controls, get-ting prepared for a visit by the CBP, offer advice and issue an audit report to substantiate the operating effectiveness of internal controls that are in place. This will help to minimize the chance of a full-blown CBP audit.

Ralph is a Senior Manager in our New Jersey Practice. He can be reached at 732.205.2025 or at [email protected].


FEE DISCLOSURES AND FIDUCIARY RESPONSIBILITIES UNDER ERISABY SARAH KALISH

EMPLOYEE BENEFITS


The Employee Retirement Income Security Act (ERISA) Section 401(a)(1) requires fiduciaries of retirement plans to make decisions that are in the best interests of the participants of the plan. To assist fiduciaries in selecting and monitoring service providers, the

Department of Labor passed regulations under ERISA Section 408(b)(2) that have been effective since July 1, 2012. Under these regulations, prior to entering into a contract with a covered plan, covered service providers must make certain disclosures in writing to the plan’s fiduciaries regarding the service provider’s compensation and potential conflicts of interest. These disclosures enable fiduciaries to understand the services to be provided, evaluate the reasonableness of the compensation paid and determine whether the service providers have any conflicts of interest.

An entity that provides services to a plan is considered a party in interest to the plan, and any compensation received would be considered a prohibited transaction under ERISA Section 406(a)(1)(C). In order to not be a prohibited transaction, three requirements must be met:

• The contract must be reasonable.• The services must be necessary for the operation of the plan.• The compensation paid must be reasonable.

In order for a contract to be reasonable, the service provider must disclose certain information to the plan fiduciaries. By following the regulations in Section 408(b)(2), the transaction will not be a prohibited transaction and the plan fiduciaries will be able to make informed decisions regarding the selec-tion of service providers.

Under Section 408(b)(2) a “covered service provider” is any service provider that expects to receive direct or indirect compensation of $1,000 or more for services provided to the plan. A covered service provider must disclose:

• The nature of the services to be provided. • Whether the service provider will perform services as an ERISA fiduci-

ary, a registered investment adviser or both.• Direct and indirect compensation expected to be received. • The services that will be provided in exchange for the indirect com-

pensation and the payer of such compensation. The arrangement between the payer and the covered service provider must also be disclosed. These disclosures are intended to assist the plan fiduciaries in determining whether any conflicts of interest exist from the indirect compensation.

• The compensation to be paid between related parties of the service provider that is transaction based, such as commissions, and any compensation that is charged directly to the investments in the plan. The services related to such compensation must be described along with the payer and recipient of this compensation.

• The compensation expected to be received upon termination of the contract and how any prepayments will be calculated and refunded.

• The cost of recordkeeping services to be provided to the plan. Even when there is no explicit compensation for those services, an estimate of costs to the plan must be disclosed. Detailed explanations of the recordkeeping services to be provided must also be disclosed.

• How compensation for services will be received. For example, whether the plan will be billed or whether the fees will be deducted from the plan’s investments.

• Any other information requested in writing to enable the plan fiduciaries or plan administrator to comply with reporting and disclosure require-ments of ERISA.

Additionally, a service provider that is “a fiduciary to an investment contract, product or entity that holds plan assets and in which the covered plan has a direct equity investment” must disclose the following for each investment offered by the plan:

• Compensation that is expected to be charged directly against invest-ments.

• Annual operating expenses if the return on the investment is not fixed, and any additional continuing expenses.

• For designated investment alternatives, the total annual operating expenses and any information that is required for the plan administrator to comply with its disclosure obligations.

Compliance with Section 408(b)(2) is crucial since non-compliance will most likely cause the contract to be considered unreasonable and the transaction to be a prohibited transaction. Plan fiduciaries will have violated ERISA and the service provider will be considered a “disqualified person” and will be obligated to pay excise taxes ranging from 15 percent to 100 percent of the amount of the prohibited transaction.

Compensation arrangements with service providers can be complex. The disclosures required under Section 408(b)(2) help plan fiduciaries com-pare service providers, evaluate the reasonableness of compensation and determine whether conflicts of interest exist. This will enable plan fiduciaries to make decisions that are in the best interests of the plan participants and beneficiaries.

Sarah is a Manager in our New Jersey Practice. She can be reached at 732.475.2138 or at [email protected].


EVERYTHING YOU NEED TO KNOW ABOUT GDPR!

ARE YOU READY FOR THE GDPR? IT IS LITERALLY JUST AROUND THE CORNER

AND WILL IMPACT MANY U.S. BUSINESSES EVEN IF THEY DO NOT HAVE AN OFFICE IN THE EU.QUALITY IN MANAGED CARE

By Louis Osmont

INTERNATIONAL


What is the GDPR?

The European Union’s General Data Protection Regulation (GDPR) address-es the protection of individuals with regard to the collecting and processing of personal data. This new regime becomes enforceable on May 25, 2018. The GDPR’s aims are twofold: First, the EU wants to give control over personal data back to citizens and residents. Second, the EU wants to simplify the regulatory environment for all businesses by creating uniformity in personal data protection within the 28 countries comprising the EU.

Who is affected by the GDPR?

The regulation applies to all organizations which collect or process personal data of residents of the EU. Moreover, it applies to any organization regard-less of where they operate in the EU or not. In effect this regulation will affect any company that uses personal data of persons residing in the EU in order to provide services, sell goods or monitor their behavior, even if these com-panies do not have an EU presence. It is important to note that the GDPR is intended to protect any individual who is legally considered a resident of the EU even if that person is not a citizen of the EU.

What is considered “personal data” under the GDPR?

Personal data is defined as any information relating to an individual, whether it deals with his or her private, professional or public life. It is very broad and covers such data as name, home address, picture, IP or email address, and any bank information, digital media post or medical records.

What are the key elements of the GDPR?

Privacy by design: The concept of privacy by design is a requirement under the GDPR, whereby organizations subject to this regulation are expected to embed privacy protection mechanisms into processes and operations, rather than add them as an afterthought.

Appointment of a data protection officer (DPO): Organizations which regularly process data on a large scale are required to appoint a Data Protection Officer. The DPO must report directly to top management and is responsible for advising key decision-makers about compliance with GDPR.

Obtaining consent: The GDPR requires that consent to collect and use per-sonal data be obtained “by a statement or by clear affirmative action” before such data may be lawfully processed. Additional protection is provided to children under the age of 16. Organizations which control personal data must be able to prove consent was received and must also provide for the consent to be withdrawn.

72-hour rule: Data controllers must notify the Supervising Authority within 72 hours of having become aware of a data breach. Furthermore, individuals must be notified “without undue delay” when adverse impact is likely. There exists some exception to the 72-hour rule whenever the data was rendered unintelligible using such techniques as encryption.

Right to erasure: Individuals covered by the scope of the GDPR have the right to request that their data be permanently erased from an organiza-tion’s database whenever it is determined that the legitimate interests of the controller is overridden by the interests or fundamental rights and freedoms of the individual.

Minimization, purpose limitation, and storage limitation: The collection and storage of personal data must not only be clearly communicated and consented to, it must include the minimum amount of information necessary, and must be stored for the minimum amount of time required.

Penalties for non-compliance: Financial penalties are mandated under the GDPR for the mishandling of personal data. Fines of up to 20 million Euros or 4% of annual worldwide turnover (whichever is greater) can be assessed should non-compliance be determined. Fines for noncompliance with data breach reporting obligations are limited to the lower of 10 million Euros or 2% of global annual turnover.

The EU General Data Protection Regulation is far reaching and will impact all companies that use or store personal data of individuals within the EU, whether or not those companies have actual operations in the EU. Many international organizations will begin to require that their service providers be GDPR compliant and will refuse to work with companies which are not. It is also likely that as consumers continue to become ever more savvy and cautious about their personal data, companies who are GDPR compliant will enjoy a competitive advantage. There is no question that the challenges of implementing GDPR are many. However, based on a recent survey of tech executives and their legal counsels, GDPR is expected to become the gold standard of personal data management and will create opportunities for higher quality data as well as more efficient data management.

Louis is a Partner in our New York Practice. He can be reached at 212.375.6944 or at [email protected].


FOOD & BEVERAGE

It can be difficult for restaurants to comply with the ongoing changes in state and federal employee pay regulations.

The most common issues are around excessive side work, unpaid overtime, unpaid wages, missed meals, missed breaks, and nonpayment for mandatory job-related training, which is required under the Fair Labor Standards Act (“FLSA”).

Tipping has been customary in America’s restaurants for years. Servers were able to increase their income, customers used it to reward good service, and restaurant management was able to keep down labor costs. However, many restaurants had difficulty achieving compliance with tipping laws because of their complexity, state-to-state variation, and inconsistency of enforcement.

As class-action wage and hour suits have become more profitable and less labor intensive than discrimination lawsuits, large restaurant chains are facing litigation brought by employees who allege that they are underpaid per federal regulations. The suits involve thousands of workers at restaurants nationwide who receive a tip credit wage while performing side work such as washing dishes, cleaning and setting tables, making coffee, and sweeping floors. The FLSA makes it illegal for employers to pay servers and bartenders below minimum wage on the basis that they are tipped employees, while also having them perform excessive side work that does not produce tips. Federal regulations provide that servers and bartenders may spend up to

20%of their time doing non-tipped side work, but must be paid at the federal minimum wage rate after that. If the work takes longer, it is supposed to be treated as a separate job at full minimum wage, to prevent abuse (i.e. hiring employees for less than minimum wage, even though they are performing minimum wage work). If an employee is primarily a server and is needed to provide non-server duties, they should clock out and back in as a non-server for those tasks.

And the law is not the same in every state. Many states have tipped minimum wages that exceed the federal tipped minimum wage and differing non-tipped side work rules.

Minimum wage overtime lawsuits are also a risk for restaurant operators if regulations are not followed. The FLSA requires employers to pay for all hours worked as well as for overtime hours. Failure to do so is a violation of the minimum wage and overtime provisions of the FLSA.

Most restaurant operators don’t purposefully violate tipping rules. As mentioned above, the rules are complex. Compliance can be difficult. Continuously reviewing tipping practices, regulations, job responsibilities and payment practices will greatly assist restaurant operators to reduce risk.

David is a Partner in our Pennsylvania Practice. He can be reached at 267.532.4324 or at [email protected].

BY DAVID PIERCE

THE IMPORTANCE OF COMPLYING WITH MINIMUM WAGE, OVERTIME AND TIPPING REGULATIONS


The US watch market registered a decline in imports back in 2016 (-11.8%), reflecting the challenging situation experienced by this market in terms of sales. This downturn is mainly attributed to the soft local demand, the increase in sales at bargain prices from outside authorized distribution channels (e-commerce sites), the strong US dollar and the political tensions which negatively impacted the flow of tourists, who are key consumers of watches in the US. This trend continued as of June 30, 2017 with a decline in the sales of watches of 6% in both volume and current value, although the last few months have shown the first signs of stabilization. However, the US remains one of the biggest markets worldwide for personal luxury goods and high-end watches. It is the second-largest buyer of watches (by value) with 10.2% of the market after Hong Kong (20.4%). The fourth-largest global watch manufacturer is an American brand, Fossil, with 5.2% market share. Indeed, the US still represents the third most prominent market after China and the rest of Asia for watch brands, mainly due to its potential in the smartwatch market.

TRENDS AMONG BRANDSThe US watch market is mainly driven by American purchasing power, with young consumers willing to invest in traditional watches as soon as they in-crease their disposable income. In contrast, the decrease of foreign tourists contributes to the underperformance of overall watch sales.

Despite the growth in smartwatches (+10% in 2017), high-end watches remain very popular in the US, representing 77% of total watch sales. Rolex, Cartier, Omega, Breitling, Patek Philippe and TAG Heuer are the most pop-ular luxury watch brands in the United States. Such watch models include popular classics like the Rolex Submariner, Rolex Daytona, Patek Philippe Calatrava, Omega Speedmaster, Breitling Navitimer and TAG Heuer Carre-ra. Apple Watch (Watch Series 3), Fitbit (Fitbit Blaze) and Samsung (Gear S3) are the most popular smartwatch makers.

The US market offers a wide range of watches in all price segments, from high-end Swiss luxury brands costing hundreds of thousands of US

dollars to cheaper watches from Hong Kong priced at $4. The best-seller smartwatch hovers around $300. 2017 purchase statistics show that US consumers still favor classic watches. Despite the decrease in volume of overall watch sales, unit prices of luxury brands held up well.

The US is the second biggest destination country for Swiss watch exports after Hong Kong; however, the value of this trade continues to decrease. Total value fell by 9% in 2016 compared to 2015 and by approximately 5% for the ten month period ending October 31, 2017, as compared to the same period in 2016. Weaker demand for watches in the US is one of the main reasons for the decrease in Swiss watch exports.

IMPACT OF THE SMARTWATCHThe appeal of connected watches is big in the US, where nearly 9% of US consumers over 18 years of age own a smartwatch. Apple Watch accounts for 55% of smartwatch global market share, with 11.6 million sales in 2016, priced between $300 and $1,400. Apple discontinued the Gold model Apple Watch priced at $10,000. In September 2017, Apple claimed they had become the largest watch brand in the world, ahead of Rolex, although their official sales figures were not released.

However, smartwatches are not seen as a threat by luxury brand watchmak-ers (77% of total sales are mechanical watches) but more as an opportu-nity to develop high-end smartwatches. Indeed, TAG Heuer successfully launched its connected smartwatch, which starts at $1,500 more than other similarly priced smartwatches. Hermès and Apple are continuing their part-nership announced back in 2015 to create Hermès straps for Apple Watches and retail them in Hermès boutiques, priced at around $2,000.

Julieis a Partner in our New York Practice. She can be reached at 646.315.6109 or at [email protected].

Marielle is a Senior in our New York Practice. She can be reached at 212.375.6897 or at [email protected].

It is probably the avant-garde of world markets in terms of smartwatch sales: American buyers are looking both for connection and for vintage prestige. Is the watch market moving towards greater fragmentation?

BY JULIE PETIT AND MARIELLE FONTBONNEWORN IN THE USA – AN ANALYSIS

CONSUMER PRODUCTS


FINANCIAL SERVICES

OVERVIEW OF THE US STRESS TEST SCENARIOS VS. THE EUROPEAN SCENARIOS

On February 1, 2018, just one day after the European Banking Authority (EBA) officially kicked off its EU-wide stress test exer-cise, the Federal Reserve Board (FRB) released the applicable scenarios for its own US stress test.

2018 US Stress Test Scenarios OverviewThe annual stress test exercise is required by a provision of the Compre-hensive Capital Analysis and Review rules (CCAR) and the Dodd-Frank Act Stress Testing rules (DFAST). For 2018, 38 large firms will be subject to this quantitative assessment, with results on capital planning and stress testing to be submitted before April 5, 2018. The results are expected to be released by the FRB by the end of June 2018. The scope includes six European bank subsidiaries which will also be part of the EU stress test at the parent company level.

The FRB has defined three scenarios to be used for the exercise, including a severely adverse scenario representing a significant downturn in the global economy.

The main characteristics of those scenarios are presented in the table below.

US vs. EU Stress Tests 48 large European banks will have to run the 2018 EU-wide stress test, the results of which will be published by November 2, 2018. While the EBA and the European Systemic Risk Board (ESRB) have included deviations to the baseline scenario to define adverse scenario assumptions, the FRB specifically defined a severely adverse scenario and requires projecting macro-economic assumptions on a quarterly basis.

Whereas 11 macro-economic indicators are projected in Europe for each country and/or area, the set of 28 assumptions released by FRB integrates 18 indicators covering the US and three indicators for each the four jurisdic-tions, or country blocks, listed in its scenario (change in real gross domestic product (GDP), change in the consumer price index (CPI) and the US dollar exchange rate).

As the scenarios are not exactly based on the same set of assumptions, a straightforward line by line comparison between the US and EU scenarios is not practicable. Nevertheless, there are some common assumptions that we can compare below to analyze the trends and differences between the adverse (US and EU) and severely adverse (US) scenarios.

BY LAURENCE KARAGULIAN


GDP Growth in US, Euro Area and Japan

Unemployment Rate in USWhile the US unemployment rate follows a similar trend for 2018 under all scenarios, and for the first half of 2019 in the adverse scenarios for the US and EU, the FRB’s severely adverse scenario peaks at 10% in 2019 before declining while the ESRB scenario steadily increases.

US Real Estate Price Evolution

The EU assumptions for US real estate (both commercial and residential) are positioned between the adverse and severely adverse US assumption up to mid-2019, but consider a greater recovery after the second half of 2019.

Comparing data is not always easy, but it provides a broad picture of the capacity of larger financial institutions to absorb shocks and show resiliency. With some of the EU banks being challenged on both sides of the Atlantic, even if balance sheet and capital requirements as well as accounting principles are different, it will be interesting to look at the results and see how these scenarios will impact their solvency!

Laurence is a Senior Manager in our New York Practice. He can be reached at 646.315.6186 or at L [email protected].


Published on February 1, 2018

TAX L E R TT

By Richard Bloom and David Kohn Trustees and executors have the ability to make certain elections on or before March 6, 2018 that could affect 2017 tax returns both for the trusts and estates for which they are fiduciaries as well as the beneficiaries of those trusts and estates.

Election to Treat Distributions as Made in the Prior Tax YearA fiduciary of a trust or estate can elect to treat all or any part of a distribution made within the first 65 days of a new tax year as having been made in that previous tax year. The 65-day deadline applicable to the 2017 tax year is Tuesday, March 6, 2018. For example, if a distribution is made on or before March 6, 2018, the fiduciary can elect to treat any or all of the distribution as made in the 2017 tax year.

In order to determine whether or not to make this election, the fiduciary should compute the trust’s 2017 fiduciary accounting income, distributable net income and taxable income and then determine the impact of additional distributions on these three amounts and how the additional distribution would impact the tax situation of the beneficiary. In addition, the fiduciary should factor in the new 2018 tax rates and brackets for both fiduciaries and individuals when determining whether to make the election as the change in rates may impact the final decision.

For Example:The fiduciary determines that the trust has taxable income subject to the 39.6% tax bracket after computing the trust’s distributable net income and fiduciary accounting income. The fiduciary also knows that the beneficiary of the trust is currently subject to the 15% tax bracket. Consequently, the fiduciary determines that it would be beneficial to distribute additional funds from the trust to the beneficiary prior to March 6, 2018 and elect to treat these distributions as having been made in 2017 in

order to shift income taxed in the 39.6% tax bracket to income taxed in the 15% tax bracket.

As part of this analysis, the fiduciary must also consider the 3.8% Additional Medicare Tax as well as non–tax factors such as the financial acumen of the beneficiary and the grantor’s desire to distribute additional funds to the beneficiary.

The election is made by checking the box next to Question 6 on page 2 of Form 1041 (U.S. Income Tax Return for Estates and Trusts). If no return is required to be filed for the taxable year of the trust for which the election is made, the election is made by filing a statement with the Internal Revenue Service. The election is binding on that one tax year only; a fiduciary is free to make or not make the election in subsequent years.

Fiduciaries must make note of any amounts elected under this rule for the 2017 tax year and not treat them as current year (2018) distributions. Likewise, amounts elected this year cannot be treated as distributions on next year’s tax returns.

Election to Treat Certain Payments of Estimated Tax as Paid by the BeneficiaryA trustee may elect to treat any portion of a payment of estimated tax made by a trust as a payment made by a beneficiary of the trust. This election may also be made by the executor of an estate in a tax year that is reasonably expected to be the last tax year of the estate. This election must be made on or before the 65th day after the close of the taxable year of the trust, which is Tuesday, March 6, 2018 for 2017 estimated tax payments.

The election is made by filing Form 1041-T (Allocation of Estimated Tax Payments to Beneficiaries). The election must be made, and the Form 1041-T filed, by March 6, 2018. The Form 1041-T may be filed with the related fiduciary income tax return (Form 1041) if they are both filed

TWO TIMELY ELECTIONS TRUSTEES AND EXECUTORS SHOULD CONSIDER NOW

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on or before March 6, 2018. Otherwise, the Form 1041-T is filed separately with the Internal Revenue Service Center where the Form 1041 will be filed.

The amount elected is treated as distributed to the beneficiary on the last day of the prior taxable year (i.e., December 31, 2017 for amounts elected by March 6, 2018) and paid by the beneficiary as an estimated payment on January 15 of the following year (i.e., January 16, 2018 since January 15, 2018 was a holiday for amounts elected by March 6, 2018). Amounts treated as distributions should be considered by fiduciaries when considering the distributions election discussed above.

For Example:

A trust made estimated tax payments during the first three quarters of a tax year. The trust’s fiduciary then realizes that a beneficiary attained a certain age which triggered a mandatory distribution. This mandatory distribution caused the trust’s taxable income to be distributed to the beneficiary. Consequently, the trust is expected to owe little or no tax, but the beneficiary would owe additional tax as a result of the distribution.

By making the election described above, the trust’s estimated tax payments could be treated as made by the beneficiary.

Please contact your Mazars USA tax professional for more information.

Published on February 16, 2018

ENERGY EFFICIENT COMMERCIAL BUILDINGS TAX DEDUCTION IRC SECTION 179D

By Lisa Minniti-Soska

In the early morning hours of February 9, 2018, Congress passed the Bipartisan Budget Act of 2018 which included an extension of the Internal Revenue Code Section 179D Energy Efficient Commercial Buildings Deduction, commonly referred as the Commercial Buildings Deduction or the 179D deduction, to include projects completed in 2017.

How Does 179D Work?Section 179D provides for an immediate deduction which is claimed in the year in which eligible energy-efficient property and building systems are placed in service and can vary based on both the size of the building and the level of efficiency of the systems installed. The more energy-efficient the building is, the bigger the deduction.

In order to achieve the maximum benefit, the building must achieve a 50% savings in energy and power costs set by the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2001 (if placed in service prior to January 1, 2016) or Standard 90.1-2007 (for buildings placed in service on or after January 1, 2016). For purposes of the deduction, energy savings is measured in the following three categories:

§ Interior lighting systems § Heating, cooling, ventilation and hot water systems § Building envelopes (e.g., insulation, roofing, and windows)

Once it has been determined that a 50% savings in energy and power cost has been achieved, a tax deduction of up $1.80 per square foot can be applied. Additionally, partial deductions are available of up to $.60 per square foot per system for buildings where the overall building does not meet the 50% energy savings threshold, but individual building systems do meet

certain requirements for energy savings. Even being able to claim a partial deduction can give the taxpayer substantial tax savings.

Below is an example of how the deduction works:

Assume a company builds a new 100,000 square foot warehouse that costs a total of $2,000,000. The new building includes property that has been certified to reduce the energy usage by over 50% when compared to similar buildings. Under current depreciation rules, the building would be depreciated over 39 years, resulting in an annual deduction of $51,282.

However, under Section 179D, the taxpayer would be allowed to immediately expense $1.80 per square foot, or $1.80 X 100,000 = $180,000. The deduction would reduce the basis of the building, allowing a depreciation deduction in the current year of $46,667 (($2,000,000 – $180,000)/39 years). The maximum deduction for the building in the current year increases to the sum of $180,000 and $46,667, or $226,667.

How to Qualify?The deduction is available to building owners and lessees who make eligible improvements to a commercial building. These buildings can include warehouses, office buildings, retail buildings, industrial buildings and even apartment buildings, provided they are at least four stories or more. This means that most types of buildings located in the United States should potentially qualify for the deduction, if the upgrades or installation of new building systems meet the energy efficiency requirements.

In addition, eligible designers and builders (such as architects, engineers, contractors, environmental consultants and energy service providers) can also qualify for the 179D deduction under a special rule for public


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Published on March 14, 2018

By Ralph Loggia Bipartisan Budget Act of 2018 Extends Expired Tax ProvisionsThe recently signed Bipartisan Budget Act of 2018 (the “BBA”) retroactively extends 33 provisions that had expired at the end of 2016. The effective date of the provisions extended in the BBA is January 1, 2017. Most of the provisions were extended for only one year. Some of the more popular provisions include the exclusion for discharge of indebtedness

on a principal residence, the treatment of mortgage insurance premiums as deductible qualified residence interest, the deduction for qualified tuition and related expenses, and the alternative fuel excise tax credit.

Below is a list of the extended provisions along with their retroactive extended period.

Tax Provisions Extended by the Bipartisan Budget Act of 2018

BIPARTISAN BUDGET ACT OF 2018 EXTENDS EXPIRED TAX PROVISIONS

property. In this case, designers and builders that have enhanced the energy efficiency of a new government-owned building or made energy-saving renovations and renovations to existing government-owned buildings are able to claim the deduction. As government entities do not traditionally pay tax, the owners of these buildings can allocate the deductions to the designer or builder responsible for the energy-saving enhancements. This is an attractive benefit to the building designer or builder since they receive a tax benefit without incurring any building construction costs.

The energy savings must be certified by a qualified, independent, unrelated third-party, who is properly

licensed as a professional engineer or contractor in the jurisdiction in which the building is located. The certification is done using software which is included on the Department of Energy’s published list of qualified software.

Additionally, for businesses that are seeking a Section 179D deduction based on work performed on government-owned buildings, these companies are required to secure an allocation letter that allows the government entity to transfer the benefit to the taxpayer.

Please contact Mazars USA LLP professional for additional information.


Published on March 15, 2018IRS CEASES OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP)

By Richard Tannenbaum

The Internal Revenue Service has announced that it plans to end the Offshore Voluntary Disclosure Program (“OVDP”) which has been in existence in various versions since 2009. The closure would occur on September 28, 2018. Approximately 56,000 taxpayers have used the program since 2009, with $11.1 billion paid in back taxes, interest and penalties.

The program provides for taxpayers who have not disclosed foreign assets and income to come into compliance by voluntarily filing eight years of income tax returns and foreign bank account reports in exchange for less severe penalties while avoiding the risk of criminal prosecution. Taxpayers who believe they may have unreported foreign accounts are urged to take advantage of the OVDP before it ends. The time to act is now - submissions must be made by September 28, 2018.

Due to FATCA and required bank reporting information, there has been a decline in the number of participants in the OVDP from a high of

approximately 18,000 in 2011 to only 600 in 2017. The IRS will continue to monitor offshore activity and has stated that there may be a substitute program. However, if the IRS follows the pattern seen in previous versions of the program, any future substitute program may contain higher penalties than the one expiring September 28, 2018.

Separate programs like the Streamlined Offshore Filing Procedures, the Delinquent Filing Procedures and the IRS Criminal Investigation Voluntary Disclosure Program will remain in effect. However, the IRS has stated that it may also end the Streamlined Offshore Filing Procedures program at some point. The standard voluntary disclosure program as set forth in the Internal Revenue Manual remains in effect.

The IRS has posted detailed frequently asked questions about the closing of the OVDP on its website, and has indicated that additional information on the Voluntary Disclosure Process after September 28, 2018 is forthcoming.

Please consult your Mazars USA LLP professional for additional information.

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