Quantitative Services (QS)Lunch & LearnJuly 27, 2016

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Agenda

► Introduction & Background on QS – Myunghee Geerts, Manager► Uniform Capitalization (UNICAP) - Daniel Chang, Staff► Research Credit - Christine Lafferty, Staff► Accounting Method Changes - Dan Stillman, Staff► Section 199 Deduction - Leah Rand, Staff► Transaction Costs – Leah Rand, Staff► Tangible Property Regulations (TPR) - Ariana Clarke, Senior ► Next steps: Let us know! – Myunghee Geerts, Manager

Background on Quantitative ServicesMyunghee Geerts

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What is Quantitative Services (QS)?

► The QS practice is focused on assisting clients with application of federal tax regulations and laws to their specific facts and businesses in the following technical areas:

► Tangible Property Regulations► Research Credit services► Accounting Methods ► Inventory► Section 199 Domestic Manufacturing Deduction► Transaction Costs► Meals & Entertainment► Capitalization and Depreciation

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What makes a good QS target?

► Any company is a good target!► Taxpayers► Companies coming out of an NOL position► Companies that need to clean up exposures and risks► Companies that want to decrease ETR

Uniform Capitalization (UNICAP)

Daniel Chang

Page 8 12 July 2016

► Compliance► Verify compliance with capitalization rules/regulations.► IRS can challenge the company’s position:

► IRS Audit► Company Exposure

► Efficiency► Improve financial reporting capabilities through greater predictability and

timeliness.► Substantial time savings in calculation preparation and record-keeping

processes.

Why is this important?

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Potential Opportunities

► Taxpayers that capitalize accounts that are excludible for tax purposes.► Ex. Warranty, Freight out,

R&D costs, etc.

Negative 263A Costs

Research & Development CreditChristine Lafferty

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Purpose of the Credit

► Established to encourage U.S. businesses to increase investments in developing new and improved technologies, products, and processes.

► Goal was to make U.S. companies more competitive through creation of technologically improved products and processes and to encourage businesses to increase their R&D spending.

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Summary of Research Credit Rules

► Qualifying research expenses► Wages ► Supplies► Contract research expenses

► Four-Part Test► Technical Uncertainty► Process of Experimentation► Technological in Nature► Functional Development

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Opportunities Related to R&D

1Requirements NON-Software Software

Innovative test Significant economic risk

test Not commercially

available test

Non internal-use software

Dual function softwareR&D Credit

Opportunities (IRC §41)

3

3

Technological in nature Process of

experimentation New or improved

functions

Technical uncertainty

R&D CreditOpportunities

(IRC §41)

Internal-use softwareR&D Credit

Opportunities (IRC §41)

Proposed Regulations

Deductible software development costs

Rev. Proc. 2000-50

Deductible Expense(IRC §174)

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Existing Clients: R&D Conversation Starters

► Has significant R&D-related expenditures ► Has large amount of software as a new asset appearing on tax

return► Has annual revenues $1 billion ► Within computer services industry or producer of product held for

sale► Pays or expects to pay regular tax ► Focused on reducing federal/state ETR► Already utilizing EY for Section 199 services

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Existing Clients: R&D Risks

► Prohibitive controlled/aggregated group arrangement and/or research credit computation

► Has “funded” research► Has research conducted outside the U.S.

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Existing Clients: Increased R&D Service Offering Opportunities

► Claiming research credit but no contemporaneous documentation► Claiming federal but not state research credit ► Claiming research credit only based on those conducting R&D; not

on those supporting or supervising

Accounting Method Changes

Dan Stillman

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Purpose

► Tax treatment is established in either first or second year, and filing method change is required in order to move forward with new method

► Incorrect method► Two years of filing, incorrect method is the established method

► Correct method► One year of filing, correct method is the established method► May be an advantageous or preferred method

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► Software development costs► Immediate expense, 36-month, or 60-month deferral► Companies undertaking enterprise resource planning► Companies with large software expenditure amortization

► Prepaid expense acceleration► Expense amounts paid to create any right or benefit for the

taxpayer that does not extend beyond:► 12 months after the date of realizing the right or benefit► End of tax year in which payment is made

► Insurance, warranty & service contracts, license, software maintenance, taxes (business/ real estate/ personal property)

Common Types Filed

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► Revenue deferral► Recognize income from an advance payment in the tax year of

receipt to the extent the payment is recognized in applicable financial statements

► Remaining amount recognized in the next succeeding tax year► Services, sale of goods, use of intellectual property, sale/ lease/

license of computer software, sale of gift cards

► Accounts receivable► Identify receivables that can be deferred or excluded from income

recognition and/or accelerate deductions related to receivables

Common Types Filed

Section 199 Deduction

Leah Rand

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Qualified Activities

► Domestic Production Gross Receipts (DPGR): ► Manufacture tangible personal property► Produce qualified film► Produce electricity, natural gas, or water► Construction of real property► Service of architecture/engineering► Software Development

1 January 2014

Page 24 Presentation title

Software Development

► §1.199-3► DPGR include gross receipts from computer software

services if: ► 1) Taxpayer also derives gross receipts from lease, rental, or other

disposition of computer software► 2) Another person derives gross receipts from lease, rental, or

other disposition of substantially identical software

1 January 2014

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Value for the Client

► Reduce Taxable Income► Permanent tax savings

► Reduce Effective Tax Rate► Increase Earnings & Profit► Increase Cash Flow

12 July 2016

Transactions Cost

Page 27 Presentation title

Transaction Cost Analysis

► Fees for professional services in connection with transactions

► Transactions: ► Third- Party domestic Acquisition► Internal restructuring► Initial public offerings ► Bankruptcies

1 January 2014

Tangible Property Regulations (TPR)Ariana Clarke

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Tangible Property Regulations

► Change in accounting method for the treatment of tangible property.

► Effective for tax years beginning on or after January 1, 2014.

► Breakdown of the TPR► Materials & Supplies► Acquisitions► Improvements► General Asset Accounts (GAA) and Dispositions

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Moving Forward with TPR

► Maintaining the method► Ensure clients have not “blown” their methods

► Filing annual elections► De minimis safe harbor election► Election to capitalize otherwise deductible repairs

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Retail-Restaurant IIR

► Rev. Proc. 2015-56

► Remodel-Refresh Safe Harbor

► Deduct 75% and capitalize 25% of qualifying remodel costs

► Simplified formula► Conclusions under the

TPR► Impact of IRC Section

263A► Dispositions

► Form 3115 and 481(a) adjustment

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Remodel-Refresh Safe Harbor Calculation

total fixed asset additions (per AFS)

(subtract listed exclusions)

= qualifying remodel-refresh costs

75% deducted 25% capitalized

25% Improvement Asset► Recovered over 15 or 39 years► Section 263A does not apply► Included in a group GAA

► Depreciate out unless entire store location is disposed of

General Operation of the Safe Harbor

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EY Depreciation System (EYDS)

► Technology-based service to assist clients in: ► Compliance with tax depreciation/amortization guidance ► Tax planning opportunities

► EYDS can result in significant tax benefits including: ► Reduces federal and state effective tax rates. ► Streamlines tax compliance in the deprecation/amortization space.► Streamlines reviews and audits.► Supports a wide range of federal and state depreciation methods

and reporting.

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Target Market/Profile

► Companies in all industries and all sectors► Significant investments in capital assets or intangible assets

► Companies willing to amend tax returns or interested in tax benefits on current year returns.

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Next Steps: Let us know!

► Does your client have any high accrual balances?

► Does your client employ engineers, scientists, software developers?

► Does your company manufacture goods?

Q&A

1 January 2014Presentation title