Transcript Document

FMS/CBA
Accounting and Tax Update
October 24, 2012
Presented by Marty Caine, CPA and
Charles J. Frago, CPA
Wolf & Company, P.C.
MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS
© 2010 Wolf & Company, P.C.
About Wolf & Company, P.C.
• Established in 1911
• Offers Assurance, Tax, Business Consulting & Risk
Management Services
• Offices located in:
– Boston, MA
– Springfield, MA
– Albany, NY
• Over 180 professionals
• PCAOB Registered & Inspected
• Member of AICPA Center for Audit Quality
Member of PKF North America
As a leading regional CPA firm founded in 1911, we provide our
clients with specialized industry expertise and outstanding service.
2
Our Financial Institution Expertise
• Provide service to over 200 financial institutions:
– Approximately 50 FIs with assets > $1 billion
– Approximately 30 publicly traded FIs
– Constant regulatory review of our deliverables
• Over 45 Risk Management professionals
–
–
–
–
IT Assurance Services Group professionals
Internal Audit Services Group professionals
Regulatory Compliance Services Group professionals
WolfPAC® Solutions Group professionals
• Provide Risk Management Services in 19 states and 1
U.S. territory
3
Our Tax Practice Expertise
• Wolf’s Tax Practice is comprised of over 30 professionals
• Wolf’s Tax Group provides customized services including:
•
•
•
•
Preparation of tax returns
Estate, gift, and trust tax planning
Business entity selection consulting
Equity and deferred compensation
consulting
• Planning for tax credits
• International tax planning &
compliance
•
•
•
•
Merger and acquisition consulting
Business succession planning
Representation before the IRS
Determination of tax effects of
particular transactions
• Multi-state tax planning and
compliance
Wolf’s Tax professionals include individuals with proven expertise in
corporate, individual, partnership, non-profit, estate, and trust taxes
as well as multi-state income and sales tax matters.
4
Our Presenters
Martin M. Caine, CPA
Member of the Firm, Wolf & Company
413-726-6852
[email protected]
Charles J. Frago, CPA
Principal, Wolf & Company
413-726-6862
[email protected]
5
FASB Update
Standards applicable in 2012
• ASU 2011-02 Troubled Debt Restructuring
• ASU 2011-03 Effective Control for Repurchase Agreements
• ASU 2011-04 Fair Value Measurement and Disclosure
• ASU 2011-05 Presentation of Comprehensive Income
• ASU 2011-08 Testing Goodwill for Impairment
• ASU 2012-02 Testing Indefinite-Lived Intangible Assets for Impairment
Issued Standards Applicable In Future Periods
• Update No. 2011-11 Disclosures About Offsetting Assets and Liabilities
Other Projects
6
ASU 2011-02 Determination of Whether a
Restructuring is a Troubled Debt Restructuring
• Public companies – first interim or annual period beginning
on or after June 15, 2011. Applied retrospectively to
beginning of fiscal year of adoption, with measurement
occurring in period of adoption.
• Non-public companies – first annual period ending after
December 15, 2012.
• Early adoption is permitted.
• Disclosure requirements of ASU 2010-20 for TDR’s
– Effective annual periods ending after December 15, 2011 for
non-public companies
7
ASU 2011-02 TDR (continued)
A restructuring of a debt constitutes a troubled debt
restructuring “if the creditor for economic or legal
reasons related to the debtor’s financial difficulties
grants a concession to the debtor that it would not
otherwise consider.”
8
ASU 2011-02 TDR (continued)
TDRs may include:
1. Transfer of assets from the debtor to the lender
2. Granting of an equity interest to the lender by the debtor
3. Modification of debt terms:
– Reduction in stated interest rate
– Payment deferrals
– Extension of maturity date at a less than market rate (for
similar risk)
– Reduction of the face amount or maturity amount owed
– Reduction/write-off of accrued interest
9
ASU 2011-02 TDR (continued)
In determining if the debtor is experiencing financial
difficulties, a creditor must consider the following:
• The debtor is in payment default on any of its debt.
• It is probable that the debtor will be in payment default on
any of its debt in the foreseeable future without the
modification.
• The debtor has declared or in the process of declaring
bankruptcy.
• There is substantial doubt as to whether the debtor will
continue to be a going concern.
10
ASU 2011-02 TDR (continued)
• The creditor forecasts that the debtor’s entity-specific
cash flows will be insufficient to service any of its debt
in accordance with the contractual terms for the
foreseeable future.
• Without the current modification, the debtor cannot
obtain funds from sources other than the existing
creditor at an effective interest rate equal to the current
market interest rate for similar debt for non- troubled
debtors.
11
ASU 2011-02 TDR (continued)
What constitutes a concession? A concession is
deemed to be granted:
• When, as a result of the restructuring, the creditor does
not expect to collect all amounts due, including interest
accrued at the original contract rate
– If repayment of the loan upon maturity is collateral
dependent, the current value of collateral should be assessed
in the repayment determination.
• When additional collateral or guarantees received do not
serve as adequate compensation for other terms of the
restructuring
12
ASU 2011-02 TDR (continued)
Other items to consider:
• Restructuring with a below-market rate may indicate
a concession; does the borrower have access to
funds at the restructured rate?
• Restructuring with a temporary or permanent
increase in rate does not preclude TDR status, as the
higher rate may still be below market for similar risk.
13
ASU 2011-02 TDR (concluded)
An insignificant delay in payment is not considered a
concession. Indicators of an insignificant delay in
payment are:
• The restructured payments subject to delay are insignificant
relative to unpaid principal or collateral value and will result
in an insignificant shortfall in the contractual amount due.
• A timing delay is insignificant relative to the following:
 The frequency of payments due under the debt
 The debt’s original contractual maturity
 The debt’s original expected duration
The cumulative effect of previous restructurings should also be
considered.
14
ASU 2011-03 Reconsideration of Effective
Control for Repurchase Agreements
• Effective for first interim or annual periods beginning
on or after December 15, 2011.
• Guidance applied prospectively to transactions or
modification of existing transactions occurring after
effective date.
• Early adoption is not permitted.
15
ASU 2011-03 Repurchase Agreements
(concluded)
The amendments in this Update remove from the
assessment of effective control:
– (1) the criterion requiring the transferor to have the ability to
repurchase or redeem the financial assets on substantially the
agreed terms, even in the event of default by the transferee,
and
– (2) the collateral maintenance implementation guidance
related to that criterion.
• Other criteria applicable to the assessment of effective
control are not changed by the amendments in this
update.
16
ASU 2011-04, FAIR VALUE
MEASUREMENT (TOPIC 820),
AMENDMENTS TO ACHIEVE COMMON
FAIR VALUE MEASUREMENT AND
DISCLOSURE REQUIREMENTS IN U.S.
GAAP AND IFRS
17
ASU 2011-04 Fair Value Measurement
(continued)
Effective dates
• Public entities – Effective during interim and annual
periods beginning after December 15, 2011. Early
application is not permitted.
• Non-public entities – Annual periods beginning after
December 15, 2011. Early application is permitted,
but no earlier than interim periods beginning after
December 15, 2011.
18
ASU 2011-04 Fair Value Measurement
(continued)
• Removes the concept that a fair value measurement
of a financial asset or liability needs to take into
account the highest and best use of the financial
asset or liability.
• Fair value of an instrument classified in a reporting
entity’s shareholders’ equity should be measured
from the perspective of market participant that holds
the asset.
• Application of premiums and discounts in a fair value
measurement is related to the unit of account.
19
ASU 2011-04 Fair Value Measurement
(continued)
New Disclosure Requirements - Public entity
• Items for which fair value is only disclosed in the
financial statements, but not recorded (FAS 107),
disclose the following information:
– Level within FV hierarchy
– Level 2 and 3, description of valuation techniques and inputs
used in FV measurement
• Level 3 – narrative description of sensitivity to
changes in unobservable inputs
20
ASU 2011-04 Fair Value Measurement
(continued)
New Disclosure Requirements – All entities
• Level 2 and Level 3 recurring and non-recurring
– Description of valuation techniques and inputs used
– Level 3 – quantitative information about significant
unobservable inputs
• Ex. If using discount rates, prepayment speeds, loss severity rates,
disclose the ranges of the inputs that are used (i.e. 6%-10%)
21
ASU 2011-05, COMPREHENSIVE
INCOME (TOPIC 220),
PRESENTATION OF
COMPREHENSIVE INCOME
22
ASU 2011-05 Presentation of
Comprehensive Income
Effective Dates
• Public entity – Fiscal years, and interim periods within
those years, beginning after December 15, 2011
• Non-public entity – Fiscal years ending after
December 15, 2012
• Requires retrospective application
• Early adoption is permitted
• No transition disclosures required
23
ASU 2011-05 Presentation of
Comprehensive Income (continued)
2
• Currently 3 ^ alternatives to reporting OCI
– In statement of changes in stockholders equity
– In the income statement
– Separate statement
• Does not change components of OCI
• Tax effects still required for each item of OCI, but can
be provided in notes to FS
24
ASU 2011-05 Presentation of
Comprehensive Income (concluded)
EXAMPLE BANK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
2011
Net Income
$
Years Ended December 31,
2010
2009
2,417
$
3,003
$
435
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) on available for sale securities
Less: reclassification adjustment for gains recognized in net income
2,018
(321)
Plus: credit portion of OTTI losses recognized in net income
98
Plus: noncredit portion of OTTI (losses) gains on available for sale securities
(1,142)
Net unrealized holding gains on available for sale securities
Net unrealized loss on interest-rate swap derivative
Other comprehensive income
Comprehensive income
$
(58)
(579)
3,791
(188)
325
151
1,026
653
714
(220)
(85)
433
629
2,850
$
3,632
(440)
3,314
—
3,314
$
3,749
25
ASU 2011-08 Testing Goodwill For
Impairment
• Effective for annual and interim goodwill impairment
tests for fiscal years beginning after December 15,
2011. Early adoption permitted.
• First perform a qualitative analysis to determine if it is
more likely than not (> 50% chance) that the fair
value of a reporting unit is less than its carrying
amount.
• If it is not more likely than not, do not have to perform
2 step test for impairment
• No requirement to perform qualitative, can go right to
2 step test.
26
ASU 2012-02 Testing Indefinite-Lived Intangible
Assets for Impairment
• Effective for annual and interim impairment tests
performed for fiscal years beginning after September
15, 2012. Early adoption is permitted.
• Gives entity the option to first assess qualitative
factors to determine whether it is more likely than not
that the asset is impaired.
• If determined to be more likely than not, must perform
quantitative test.
27
ASU 2011-11 Disclosures About Offsetting
Assets and Liabilities
• Effective for annual reporting periods beginning on or
after January 1, 2013 and interim periods within
those annual periods. Applied retrospectively for all
periods presented.
28
ASU 2011-11 Disclosures About Offsetting
Assets and Liabilities (concluded)
29
Questions On Issued Standard Updates?
30
Timeout for a brief survey….
31
FASB Update
Other Projects
•
•
•
•
•
Leases
Financial Instruments
Impairment
Liquidity and Interest Rate Risk Disclosures
Private Companies
32
Leases - Lessee
New guidance would require the recording of a right-touse asset and a liability representing the obligation to
make lease payments (leases of 12 months or less
excluded).
Five Key Areas
• Definition of a lease
• Lease term
• Variable/uncertain cash flows
• Profit and loss recognition pattern
• Lessor accounting
33
Leases – Lessee (continued)
• Definition of a lease
– Contract in which right to use a specified asset is conveyed
for a period of time in exchange for consideration.
– Customer must have right to control the asset
• Ability to direct the use and receive benefit from use throughout the
lease term
• Lease term
– Noncancellable period, together with any options to extend
or terminate the lease when there is significant economic
incentive to exercise or not to exercise an option to
terminate.
34
Leases – Lessee (continued)
Two approaches to accounting for a lease based on
whether the lessee acquires or consumes more than an
insignificant portion of the underlying asset over the
lease term:
– Straight Line Approach
• Recognize liability and asset based on PV of lease payments
• Subsequently measure liability using effective interest method
• Measure asset as a balancing figure such that total lease expense is
recognized on straight line basis.
• Recognize lease expense as one amount in IS
– Effective Interest/Amortization Approach
•
•
•
•
Recognize liability and asset based on PV of lease payments
Subsequently measure liability using effective interest method
Amortize asset on systematic basis
Recognize interest expense and amortization expense in IS
35
Leases – Lessee (continued)
How to determine whether the lessee acquires or
consumes more than an insignificant portion of the
underlying asset over the lease term?
–
Leases of property – straight line approach unless:
• Term is for major part of economic life of asset
• PV of fixed lease payments accounts for substantially all of FV of asset
– Assets other than property – effective interest/amortization
approach unless:
• Term is insignificant portion of economic life of asset
• PV of fixed lease payments is insignificant relative to FV of asset
36
Leases – Lessee (concluded)
• Expected to be re-exposed in first half of 2013.
Expected to be final in ?? Effective date of 2016?
2017?
• Transition guidance requires recording of asset and
liability for all operating leases upon adoption based
on remaining lease terms.
37
Financial Instruments
• Classification and Measurement
• Impairment
38
Classification and Measurement
• Three categories for financial assets
– Fair Value through Net Income (FV-NI)
• Held for sale at acquisition or
• Actively managed and monitored internally on a fair value basis
• Marketable equity securities must be in this category
– Fair Value through Other Comprehensive Income (FV-OCI)
• Maximize total return by collecting contractual cash flows or selling the asset or
• Manage the interest rate or liquidity risk by either holding or selling the asset
– Amortized Cost
• Manage instrument through customer financing or lending activities (collect
contractual cash flows of instrument) and,
• Ability to manage credit risk by negotiating any potential adjustment of contractual
cash flows with counterparty in event of potential credit loss and,
• Not held for sale at acquisition
• Liabilities – generally at amortized cost
39
Classification and Measurement
(continued)
FV measurement of assets based on characteristics of the
instrument and entity’s business strategy
Characteristic Of Instrument Criterion: Is it a debt
instrument held or issued that has all of the following
characteristics:
1. It is not a derivative
2. An amount is transferred at inception that will be returned at
maturity
3. It cannot be prepaid or settled at loss to investor
No – classify/measure at FV-NI (e.g. equity securities)
Yes – classify/measure in accordance with business strategy
40
Impairment
Measurement Objective:
Expected credit losses are defined as the estimate of
contractual cash flows not expected to be collected.
45
Impairment (concluded)
Allowance for loan losses
– Due to complexity and lack of understandability, FASB has
moved away from joint project with IASB and three-bucket
approach
– Current Expected Credit Loss Model (“CECLM”)
– Still begin with historical charge-offs adjusted for current
economic conditions
– Allows use of reasonable and supportable forecasts about
the future
Debt securities
– For amortized cost or FV-OCI any expected credit loss
recognized as an allowance and not a cost-basis adjustment
– Still working on guidance/model for FV-OCI securities
46
FASB LIQUIDITY AND INTEREST
RATE RISK DISCLOSURES
47
Disclosures about Liquidity Risk and Interest
Rate Risk
Stakeholders wanted more information about credit risk,
liquidity risk and interest rate risk.
– Credit risk addressed in ASU 2010-20
– This proposal attempts to address liquidity and interest rate
risk
No effective date proposed
Significant impact on FI clients
48
Disclosures about Liquidity Risk
• Available liquid funds, by class of asset, in a tabular
format, as well as an entities’ borrowing availability
• Maturity analysis of financial instruments, by class
– Each of next four quarters (non-public can combine into one
period)
– Year 2
– 3-5 years
– After 5 years
• Information related to cost of funding from issuing
time deposits and acquiring brokered deposits
– Last four quarters, WAY and WAL
• Supplemental narrative re exposure to liquidity risk
49
Disclosures about Interest Rate Risk
Required disclosures for financial institutions
• Interest rate repricing gap analysis (carrying amount
and WAY) of financial instruments, by class
– Each of next four quarters (non-public can combine into one
period)
– Year 2
– 3-5 years
– After 5 years
• Interest rate sensitivity analysis on after-tax net
income for the next 12 month period
• Supplemental narrative re exposure to interest risk
50
Private Company Financial Reporting
• May 23, 2012, FAF approved creation of Private
Company Council (“PCC”)
• Key responsibilities of PCC
– Agenda Setting – work with FASB to determine criteria for
whether and when exceptions or modifications to GAAP are
needed
– Endorsement Process- exceptions or modifications to GAAP
will be exposed for public comment if endorsed by simple
majority of FASB members. PCC will redeliberate and
present for final approval by FASB.
51
Questions?
52
Tax Agenda
•
•
•
•
•
•
•
•
•
•
•
Depreciation Expensing/Bonus Update
New Repair and Capitalization Rules
Health Insurance reporting- Form W-2
Loan Modifications
IRS examination issues
State Tax Update
MA Security Corp Directive
CT PIC’s
Expiring Tax Rules
Potential legislation/ Tax Reform Proposals
Q&A
53
Depreciation Expensing
• Section 179: first year expensing of property
additions
 Through the end of 2011, $500,000 deduction,
phase-out when costs exceed $2,000,000
 For 2012, $139,000 deduction, phase-out when
costs exceed $560,000
– Extends Section 179 treatment for software
 For 2013, the deduction is $25,000 and
investment ceiling is $200,000
 Planning Opportunities
54
Bonus Depreciation
• 100% (and 50%) Bonus Depreciation
 Federal only – most states “de-coupled”
 100% expired at the end of 2011
 50% for qualified assets for 2012
55
New Repair and Capitalization
Regulations
• Issued in December, 2011 and effective January 1, 2012
• Possible change in tax accounting method
• Change to Capitalization Standards
56
Repair Regulations-timing
• Issued December 23, 2011
• Effective for tax years beginning on or after January 1,
2012
• Issued as “temporary” regulations which have the
same effect as final regulations
• May require a change in tax accounting method
– This is under further IRS review
57
New Capitalization Rules
• Capitalization Standards:
– Betterment
– Restoration
– New or Different Use
• Building Property
– Capitalization standards applied to major components
of the building/system
58
New Capitalization Rules
• Building Systems Components:
–
–
–
–
–
–
HVAC Systems
Plumbing
Electrical
Elevators and Escalators
Fire and Alarm Systems
Others
59
New Capitalization Rules
• Safe harbor for routine maintenance
• De minimis rule
– Must have written accounting policy
– Must be expensed in the Applicable Financial
Statements
– Ceiling limit- cannot exceed greater of (A) .1% of gross
receipts, or (B) 2% of book depreciation and
amortization
– This new rule has detractors
60
Health Insurance Reporting
• For 2012 forms W-2
• Applies to ALL employers that provide “applicable
employer-sponsored coverage”- some exceptions
• Report in box 12, code DD, aggregate employer cost of
employer health insurance
• Employers who filed less than 250 form W-2’s for 2011
are exempted from providing this information
• Does not mean it is taxable to employee
61
Interesting Tidbit
“There’s no business like show business, but
there are several businesses like
accounting.” ~David Letterman
62
Loan Modifications:
Reg.§1.1001-3
• Modification: Any alteration, in whole or in part, of a
legal right or obligation of the lender, whether the
alteration is evidenced by an express agreement,
conduct of the parties, or otherwise.
• Significant Modifications: treated as a sale of the premodification loan. The proceeds of the sale are the
modified loan.
– The “sale” is a taxable event
– This regulation applies to any modification of a debt
instrument, and both accrual and cash method banks
63
Significant Loan Modifications
• A modification is considered significant only if, based
on all facts and circumstances, the legal rights or
obligations that are altered and the degree to which
they are altered are economically significant.
– Changes of annual yield by the > of 25 basis points or 5%
– Changes in the timing of payments if they result in a deferral
– Changes in the obligor or collateral
64
Exceptions to Loan Modification
• An alteration of a legal right or obligation that
occurs by operation of the original terms of
the debt instrument is generally not a
“modification”
– Examples:
• Floating interest rate changes
• Election to defer payments for up to five years by a Trust
Preferred borrower
65
Tax Consequences of
“Significant Modification”
• The bank will recognize a gain/loss on the difference
between the “amount realized” and its adjusted
income tax basis in the old debt.
– Amount realized= issue price; if adequate interest (AFR)
should equal stated principal
• The tax basis in the debt is the principal advanced,
plus interest recognized in income and any
capitalized costs, less payments and charge-offs
66
IRS Examination Issues
• Bad debt deduction
– Deduction is based on facts and circumstances
– IRS will review loan files
– Deduction for regulatory and financial statement
purposes does not guarantee deduction for tax purposes
– Charge-off below FMV will likely be challenged
• Non-accrual Interest
– Interest not accrued for book purposes is still considered
collectible for tax
– Exception – interest on charged-off loans
67
IRS Examination Issues
• Deferred Compensation
– Deduction should be payments, not accruals
• Accrued bonus
– “All Events” Test
– Is employee required to be employed when bonus
payment is made (presuming overlapping of years)?
– If not required, if paid with 2 ½ months of year-end, likely
deductible when accrued.
– If required to be employed when paid—if reallocated and
paid to remaining employees, likely deductible; if not,
All-Events test is not met, so accrual is not deductible
68
IRS Examination Issues
• Mandatory Tax Shelter Request
– Asks for information related to “listed transactions”
– Generally not applicable to community banks
– But, need to affirm in writing that the bank has not
conducted these activities
• Review of Senior Management Returns
– Will request 1040’s and W-2s
– Verify that senior management filed personal returns
69
IRS Examination Issues
• OREO
– Write-downs post foreclosure are deferred for tax
– Operating costs on OREO held for sale likely should be
capitalized for tax; if on a operating property (income
producing- rental), such costs are likely deductible
– IRS may challenge using fair value (deducting selling costs
etc.) in arriving at FV, versus FMV (willing buyer/seller)
– Where do you hold OREO? SMLLC or subsidiary
corporation?
70
Interesting Tidbit
“If you would like to know the value of
money, try to borrow some.”
~Benjamin Franklin
71
State Tax Update
Economic Nexus
• Definition
• PL 86-272 may not be applicable
• State by state
–
–
–
–
–
–
–
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
NJ
72
State Tax Update
Other State Issues – IRC 382/383 disallowance of
utilization of NOL/capital losses & Tax credit carry
forwards of a loss corporation
• Does your State follow IRC 382/383?
–
–
–
–
–
–
Connecticut
Maine
Massachusetts
New Hampshire
Rhode Island
Vermont
73
State Tax Update
Other State Issues
• Combined Reporting
• Multi-state Reporting
– How to recognize the need and begin tracking
• Multi-state allocation and apportionment factors
– Special rules for Banks (Inclusion of loans as tangible
property)
– Fixed assets costs or net book value
• Tax depreciation rules by state (179 & Bonus)
• Federal to State Income Adjustments
• Estimated Tax Payments
74
MA Security Corp. Directive
• Original Draft: 9/30/2011 – 2 Issues
– Issue 1: Corporation can pledge its investment in
subsidiary security corporation under 2 conditions:
• Stock pledged does not exceed 50% of the value of the
subsidiary
• There are no negative covenants or restrictions that limit
permitted assets, liabilities, or activities of the corporation
75
MA Security Corp. Directive
• Original Draft: 9/30/2011 – 2 Issues
– Issue 2: Security corporation may acquire appreciated
securities from an affiliate and subsequently sell them if:
• Securities originally acquired through public exchange or
secondary market,
• Acquisition and ownership of securities is for investment
purposes,
• It is consistent with all other requirements for security
corporation classification, and
• It is not part of a plan for disposition of the security to
minimize tax on built-in gain (no safe harbor – facts and
circumstances)
76
MA Security Corp. Directive
• Revised Draft: 4/6/2012
– Issue 1 – Security Corporation Pledging
• Corporation’s pledge of shares of stock will not in and of
itself preclude security corporation status
• Restrictive covenants will not preclude security corp. status
as long as they limit the activities to permissible security
corp. activities
• However, covenant that pertains to the relationship with
shareholder or pledgee is impermissible
• 3 examples, generally don’t apply
– Issue 2 – Transfer and sale of appreciated securities – no
change
– Issued Final 5/24/2012 as Directive 12-2- no change
77
CT PIC’s
• PIC Disqualification
– A PIC will be disqualified if it engages in prohibited activities.
– Prohibited activities:
•
•
•
•
The review and processing of loan applications
The closing of the initial loan
The servicing of loans not held by a PIC
Holding a loan solely for the purpose of sale (other than to a related
party)
– Such PIC may re-qualify as a PIC in a subsequent taxable
year if it ceases to engage in prohibited activities.
– A PIC must confine its activities to the purchase, receipt,
maintenance, management and sale of its intangible
investments
78
CT PIC’s
• Adjustments Pursuant to Conn. Gen. Stat. §12-226a
– The commissioner will not exercise his discretion to make
adjustments to a PIC:
• on the transfer of a loan (and the resulting future income stream) by a
financial service company to a PIC, while the financial service company
maintains the burden of the interest expense and other costs
associated therewith, or
• On the transfer of a bad loan by a PIC (and potential loss) back to the
financial service company which originated the loan.
79
Interesting Tidbit
“I’m not the smartest fellow in the world, but I
can sure pick smart colleagues.
~Franklin D. Roosevelt
80
Expiring Tax Rules
• Expired After 2011:
– Research Credit under Code Sec. 41(h)(1)(B)
– 15 year write-off for specialized realty assets (qualified
leasehold improvements)
– Work Opportunity Tax Credit (WOTC) for non-veterans
under Code Sec. 51(c)(4)
– Enhanced Contribution Deductions Code Sec. 170
– Empowerment Zone Tax Breaks Code Sec. 1391
• Expire After 2012:
– Work Opportunity Credit for hiring qualified veterans,
– The 50% bonus first-year depreciation allowance for
qualified property under Code Sec. 168(k)(1)
– Temporary payroll tax cut (2% FICA)
81
Potential Legislation
• Continued discussion of bonus depreciation and
Section 179 extension
• Elimination of 2% reduction in employee portion of
FICA tax in 2013
• Additional Medicare tax on high-income taxpayers
– Increase from 1.45% to 2.35% for wages in excess of
$250,000 for MFJ returns, and $200,000 for single
returns
– Effective in 2013
82
Potential Legislation
• Some view corporate tax rates too high among the
highest of developed countries
– Reduction of rate from 34-35% to 25-28%
– How to pay for it?
– Be careful what you wish for…
83
Potential Legislation
• Reduction in corporate tax rate
– Reduction in deferred tax asset
– Example: $10,000,000 in deductible temporary
differences, net of state DTA
• At current federal rate of 34%, DTA = $3,400,000
• If rate changes to 28%, DTA = $2,800,000
• Effect – tax provision (expense) of $600,000
• Reduction in DTA will be offset over time by reduction in
current tax
• Timing of “payback” depends on relationship between
DTA and income
84
2012 Election: Tax Reform Proposals
• Obama:
– Lower the tax rates for both individuals and corporations with fewer
brackets.
– Eliminate “inefficient and unfair tax breaks.”
– Reduce the deficit by $1.5 trillion over the next 10 years. This principle
includes allowing tax cuts to expire for high income individuals (those with
over $200,000 of income or $250,000 if married filing jointly).
– Increase jobs and economic growth by increasing incentives to “work and
invest” in the United States.
– Implement the “Buffett rule” to ensure that individuals with over $1 million of
income do not have a lower effective rate than those with less income.
• Obama's FY2013 “Greenbook” has some specifics on his tax
proposals. For example, for upper-income taxpayers, he would
let the 2001/2003 tax cuts expire and reinstate the estate and
gift taxes and exemptions to 2009 levels. He would also cap the
tax benefit of itemized deductions and certain exclusions of
upper-income individuals at 28%.
85
2012 Election: Tax Reform Proposals
• Romney:
– He also calls for repeal of the Patient Protection and
Affordable Care Act and the Health Care and Education
Reconciliation Act of 2010, which would eliminate various
taxes, such as the Sec. 1411 3.8% Medicare tax on net
investment income. Romney’s corporate tax reforms include:
• Reduce the corporate rate to 25%.
• Improve the research tax credit and make it permanent.
• Move from a worldwide system, which taxes both U.S.
individuals and businesses on all their income no matter
where it is earned, to a territorial system, which would
impose tax only on income earned in the United States.
• Repeal the corporate AMT
86
Questions?
Martin M. Caine, CPA
Member of the Firm, Wolf & Company
413-726-6852
[email protected]
Charles J. Frago, CPA
Principal, Wolf & Company
413-726-6862
[email protected]
87
Disclaimers
LEGAL DISCLOSURES - CIRCULAR 230 DISCLAIMER/DISCLOSURE
This communication is not a tax opinion. To the extent that this presentation,
includes any tax advice, it is not intended or written to be used by the recipient or
any other party for the purpose of avoiding penalties that may be imposed by the
Internal Revenue Code or any other tax authority.
The State tax advice, if any, contained in this communication is not intended or
written to be used, and cannot be used, for the purposes of determining the
allowability of any deduction or credit; determining the excludability of any income; or
securing any other tax benefit (including not filing a return).
This communication may not be used to promote, market or recommend to another
party any transaction or matter addressed herein.
OTHER DISCLOSURES
The views expressed do not necessarily represent those of Wolf and Company, P.C.
This material is for informational purposes only and should not be construed as
legal, tax, accounting or other professional advice.
88