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Accounting & Tax Update FEI NE Wisconsin Chapter November 16, 2009. Agenda. SFAS No. 141R - Business Combinations New and Proposed Tax Changes FIN 48 – Accounting for Uncertainty in Income Taxes Roth Conversions Alternative Minimum Tax Planning

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Accounting & Tax Update FEI NE Wisconsin Chapter November 16, 2009


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    1. Accounting & Tax UpdateFEI NE Wisconsin ChapterNovember 16, 2009

    2. Agenda • SFAS No. 141R - Business Combinations • New and Proposed Tax Changes • FIN 48 – Accounting for Uncertainty in Income Taxes • Roth Conversions • Alternative Minimum Tax Planning • SFAS No. 157 - Fair Value Measurements & Disclosures • Gifting Opportunities • IRS & Wisconsin Audit Update • Other Accounting Updates • Other Tax Updates

    3. Presenters • Christopher J. Handrick, CPA Audit Shareholder, Schenck SC • 920-455-4203 • chris.handrick@schencksc.com • James A. Olson, CPATax Shareholder, Schenck SC • 920-455-4160 • jim.olson@schencksc.com

    4. Presenters • Christopher J. Handrick, CPA Audit Shareholder, Schenck SC • 920-455-4203 • chris.handrick@schencksc.com • James A. Olson, CPATax Shareholder, Schenck SC • 920-455-4160 • jim.olson@schencksc.com

    5. SFAS No. 141R -Business Combinations

    6. Effective Date • Fiscal years beginning after December 15, 2008 (i.e. 1/1/09 for calendar-year companies) • Acquisition date on or after • Early adoption prohibited

    7. Overview • SFAS 141R requires measuring and recognizing the business acquired at full acquisition date fair value • Highlights of changes from previous guidance follows.

    8. Direct External Acquisition Costs • Old: Added to purchase price • New: Expensed as incurred • Exception: Cost associated with issuing debt or securities are still accounted for in accordance with applicable GAAP rules

    9. Recording of an Acquisition • Old: Cost accumulation approach • Cost is allocated to acquired assets and assumed liabilities at estimated fair values with numerous exceptions, excess is goodwill. • New: Total value of the acquiree is the acquisition date fair value of (generally): • Consideration transferred • Any entity interest held in the acquiree by the acquirer immediately before the acquisition date (step acquisition) • Non-controlling interest in the acquiree recognized at fair value

    10. Contingent Consideration • Old: Not recorded until earned and recognized as additional purchase price. • New: Recorded at its fair value at acquisition date • Subsequent adjustments of contingent consideration classified as a liability recognized through earnings

    11. Bargain Purchases • Old: Negative goodwill allocated as prorata reduction to other fair value adjustments (i.e. intangibles or fixed assets), any excess to income statements as extraordinary item. • New: Recognized by acquirer as a gain (not extraordinary) on income statement at date of acquisition.

    12. Restructuring Activities • Old: Restructuring plans of acquirer related to “target,” generally incorporated into purchase accounting. • New: Acquirer’s restructuring plan accounted for separate from business combination accounting.

    13. Purchase Price Allocation Uncertainties • Old: Generally one-year period from acquisition date to make adjustments. • New: Provisional accounting created at acquisition date and disclosed. • Revisions of initial estimates require retrospective application.

    14. Income Tax Accounting Changes • Old: Decreases in acquirer’s valuation allowance part of purchase accounting • New: Changes in valuation allowance generally reflected in the income statement.

    15. Income Tax Accounting Changes • Old: Subsequent changes to valuation allowance related to target recorded at acquisition would first reduce goodwill to zero, then other intangibles, finally income tax expense. • New: For changes not considered measurement period adjustments, change would generally be reflected in income statement.

    16. Tax ChangesNew & Proposed

    17. The Worker, Homeownership, and Business Assistance Act of 2009 • Signed into law on November 6, 2009 • Expanded ability to carry back NOL’s • Expanded credits for purchase of new homes

    18. NOL Carrybacks • For “eligible small businesses” (under $15 million gross receipts), the ability to carry back losses 3, 4 or 5 years is extended to 2009 tax years also • For larger companies, the longer carry back periods are available for 2008 OR 2009, but not both

    19. NOL Carrybacks • For large and small companies, carry backs to the 5th prior year are limited to 50% of the income in the carry back year, the balance rolling to the 4th prior in full, and so on.  However, this limitation does not apply to 2008 NOL’s for eligible small businesses • The 90% income limitation on the use of NOL’s for AMT purposes is suspended for an extended carry back year

    20. First Time Homebuyer Credit • The November 30, 2009 expiration is extended to April 30, 2010 • If a binding contract to close is done by April 30, closing can take place up to June 30, 2010 and still be eligible for the credit • For purchases in 2010, an election can be made to claim the credit on the 2009 return (similar to the current rule) • AGI phase out raised to $125K single and $225K joint

    21. First Time Homebuyer Credit • Effective November 6, 2009 purchase price of residence cannot exceed $800,000 • Effective November 6, 2009 the credit is expanded to “long time residents of the same principal residence” • Owned or used the same principal residence for any 5 consecutive years of the past 8 • Maximum credit is $6,500, vs. the $8,000 for first time buyers

    22. Proposed Tax Increases • Automatic Restoration of 2001 tax rates in 2011 Present Rates2011 Rates 10% - 15% 15% 25% 28% 28% 31% 33% 36% 35% 39.6%

    23. Proposed Tax Increases • Capital Gain and Qualified Dividend rates automatically restored to 2001 Present Rates2011 Rates Cap Gains 0% 10% 15% 20% Qualified Dividends 0% ordinary 15% income rates

    24. Proposed Tax Increases • The Obama Administration has proposed extending the 0% and 15% rates for dividends and capital gains for taxpayers with income up to $250K joint or $200K single. • For taxpayers above these limits, the capital gain rate would go back to 20%, and dividends would be taxed at the same rate, under the proposal. • STAY TUNED!!!

    25. Proposed Tax Increases • Strategies in anticipation of higher rates • Defer capital losses • Extract excess liquidity via dividends or partial redemptions of stock • Accelerate installment sale gains • elect out of installment reporting in ‘09 and ‘10 • “dispose” of pre-’09 installment contracts • create new installment sales and lock in the current low interest rates

    26. FIN 48Accounting for Uncertainty in Income Taxes

    27. Overview • Effective for private companies & NFPs fiscal years beginning after 12/15/08 (originally 12/15/06 but the FASB delayed implementation for private companies via FASB Staff Position No. FIN 48-3) • Applies to all entities that prepare GAAP financials (i.e., C-corps, pass-through entities, NFPs, etc.) including all subsidiaries in consolidation. OCBOA f/s are not GAAP (i.e., cash basis, income tax basis, modified cash, etc.). • Further interpretation of SFAS No. 109 (effective since 1992)

    28. Overview • Most tax positions are not “controversial”…but tax law is subject to varied interpretation and whether that tax position will be sustained can be uncertain • FAS 109 didn’t contain guidance on how to address “uncertainty” in income taxes • FIN 48 requires a detailed review, documentation and recording of any potential income tax exposures from tax positions related to all open tax years • Private companies generally will have fewer number of uncertain tax positions than public companies due to size and volume of transactions.

    29. Overview • Income tax only…taxes such as payroll, sales, use & property are not covered • Materiality is used…which is a matter of professional judgment • 1st year will be toughest/most time consuming…update thereafter • Primarily a documentation “exercise” • Topic 740 income taxes in ASC

    30. Potential exposure under FIN 48: • State nexus positions • Transfer pricing (international operations). Little or no support • Travel and entertainment • Inventory • BIG (Built-In Gains) Tax – transaction recognized that will trigger tax

    31. FIN 48 Possible Applications to Flow-Thru’s and Nonprofits Partnerships/LLC’s Entity level state income taxes (generally Texas and Michigan) Nonprofits  Exempt application validation Any violations of exempt status? Any unrelated business taxable income? If have UBTI, are expense allocations correct? S Corporations • S Corp election validation • Any violation of S Corp status • Ineligible shareholder • Second class of stock • Passive income test • Built-in-gains taxes • Entity level state income taxes (generally Texas and Michigan) • Likely individual

    32. Mechanics of FIN 48 • Step 1: Establish Materiality Level • Step 2: Identify any Tax Positions • Step 3: Determine Optimal/Appropriate Unit of Account for each Tax Position • Step 4: Apply the “More–Likely–Than–Not” Test to each Tax Position • Step 5: Measure the Recognized Tax Benefit for each Uncertain Tax Position • Step 6: Calculate the FIN 48 Liability • Step 7: Record and Disclose the FIN 48 Liabilities

    33. Step 1: Establish Materiality Level • Specific to each company • Consult with auditors’ materiality thresholds

    34. Step 2 : Identify any Tax Positions • A tax position refers to a position in a tax return or future return if affecting realizability of current or deferred tax asset liability. •  A tax position includes a permanent or deferred reduction in income taxes. • A tax position includes a change in the realizability of a deferred tax asset. • Also includes: • Decision not to file an income tax return • Allocation or shift of income between jurisdictions (i.e. states, countries) • Characterization of income (i.e. ordinary income to capital gain) • Entity status

    35. Step 3: Determine Optimal/Appropriate Unit of Account for each Tax Position • Matter of judgment based on the individual facts and circumstances of that position • Examples • R&D credits • Project by project basis, versus functional expenditures (wages, department, materials, etc.) • T&E expenses • Group into officer and non-officer groups, or all T&E as one group • Transfer pricing • By transaction, product line, country, etc. • Must consider how company prepares and supports its income tax return, and manner in which tax authorities would examine the issue. • Should be consistently applied, but can change if supportable.

    36. Step 4: Apply the “More–Likely–Than–Not” Test to each Tax Position • The tax benefits of a tax position may be recognized only if it is “more–likely–than–not” that the tax position would be sustained upon examination. • It is presumed that the tax return will be examined, and the tax authority has full knowledge of all the relevant information. • Prior tax audits of the company should be considered • No offset of tax position’s against each other •  If a tax position does not meet the “more–likely–than–not” threshold, then zero recognition of the tax position in the financial statements.

    37. Step 4: Apply the “More–Likely–Than–Not” Test to each Tax Position cont. • If the tax position meets the “more–likely–than–not” threshold, then the recognized tax benefit must be measured. • If do not meet the “more–likely–than–not” threshold for the period the tax position is taken, a company shall recognize the benefit in the first period that meets any one of the following 3 conditions: • The “more–likely–than–not” threshold is met by the reporting date, • The tax matter is settled, or • The statute of limitations has expired • Subsequent changes of judgment resulting from new information may lead to changes in recognition.

    38. Step 5: Measure the Recognized Tax Benefit for each Uncertain Tax Position • Only need to measure if the tax position meets the “more–likely–than–not” threshold, and only if less than 100% certain of tax position (an “uncertain tax position”, or “UTP”) • Probable outcomes measurement • Purpose is to estimate the largest amount of benefit that is greater than 50% likely of being realized upon settlement. • This measured amount of tax benefit is recognized in the financial statements

    39. Step 5: Measure the Recognized Tax Benefit for each Uncertain Tax Position cont. • Example Because $60 is the largest amount of benefit that is greater than 50% likely of being realized upon settlement, the company would recognize a tax benefit of $60 in the financial statement. •   May consider recent tax audit results.

    40. Step 6: Calculate the FIN 48 Liability •  Liability includes tax, interest and penalties • Applied to unrecognized portion of UTP • Record as a current or noncurrent liability (based on management’s assessment) • Reduce the deferred tax asset or increase deferred tax liability if applicable

    41. Step 7: Record and Disclose the FIN 48 Liabilities • Footnote in Financial Statement • Disclose FIN 48 tax interest and penalties recognized in financial statements • Disclose any significant changes to unrecognized tax benefits expected within 12 months

    42. Getting Started • Begin now! • Examples: • Entity status • State Nexus • Transfer pricing • Meet with auditors to identify potential tax issues • First year requires a review of all open tax years

    43. Roth Conversions

    44. Roth IRA Conversion • General Rules • Convert all or part of traditional IRA to Roth IRA • Pay the tax on the amount converted, typically from funds outside the IRA • Thereafter, obtain benefits of Roth IRA: • No RMD’s at age 70 ½ • Non-taxable withdrawals

    45. Roth IRA Conversion • 2010 Opportunity • The $100,000 AGI limit is repealed, now anyone can convert to a Roth • The tax due on the conversion can be deferred to 2011 and 2012

    46. Roth IRA Conversion • What should I do?? • Current v. Future tax brackets? • When will I need the money? • How much will I need in retirement? • Do I have outside funds to pay the tax? • What are my estate planning objectives? • What is Wisconsin going to do? • Run the numbers!!!

    47. Alternative Minimum Tax Planning

    48. Alternative Minimum Tax Similar to a flat tax, with only a few deductions allowed • Many normal write-offs not allowed – • Personal exemptions • Standard deduction • State and local taxes • Unreimbursed business expenses • 2 Rates apply - • 26% on the first $175K of AMT income • 28% thereafter • Pay the greater of the 2 taxes calculated

    49. Alternative Minimum Tax • Individuals (and Businesses) – depending on your AMT exposure • Payment of state income taxes & local property taxes • Spread out capital gains or move capital gains to a potentially non-AMT tax year • Sell capital loss assets to offset capital gains causing AMT • Exercise of Incentive Stock Options • Postpone charitable contributions • Use any AMT credits, if applicable