AUDIT TAX SYSTEMS RISK New Developments in Taxation for Financial Institutions: What s coming down the pipe? October 14, 2015 Presented by: Patrick Tuley, CPA: Tax Partner
Topics of Interest Affordable Care Act Reporting Effective Tax Rate Planning Stock Options / Warrants BASEL III Implementation / Observations Section 382 Limitations Other Sundry Tax Tidbits
Affordable Care Act Reporting Applies to Applicable Large Employers (ALE) for 2015 reporting Form 1095-C requires the ALE to report Employee s name, SSN and address Employer contact (name and phone #) and FEIN Description of the offer of coverage and months of coverage Each FT employee s share of the cost for coverage Applicable Safe Harbor Form must be submitted to: employees by 1/31/2016 IRS by 2/29/2016 (paper filers) IRS by 3/31/2016 (e-filings)
Affordable Care Act Reporting 30 day extension available for filing of forms Electronic filing waiver available Penalties for late filing $250 per return Maximum penalty of $3 million Good faith relief available, but not if returns are late What to do now Contact your insurance broker if you have not started this process Will need information from your payroll provider, insurance company and HR Need to have this in process to avoid late filings in early 2016
Polling Question #1 Were you aware of the full extent of the new changes to the Affordable Care Act Reporting Requirements? Yes No I am now
Effective Tax Rate Common means to reduce ETR Municipal securities Corporate owned life insurance
Effective Tax Rate Common means to reduce ETR Tax Credits Federal State specific Examples - Low income housing; rehabilitation activities; Qualifying Zone Academy Bonds (QZAB); jobs credits, energy credits, film credits Use of partnerships to facilitate the transfer of credits Outright purchase / transfer of credits Conservation credits Easements versus direct donation
Stock Incentive Compensation Incentive Stock Options (ISO s) Non-qualified stock options (NQ Options) Phantom Stock Plans Restricted Stock Awards (RSA) Compensatory options require a P&L expense based upon the value of the option / award ISO s don t necessarily generate a tax deduction, so any book expense is added back as a permanent difference NQ options create a temporary difference Generally can deduct for tax when the option is exercised RSA create a temporary difference Generally can deduct when the stock award vests
Stock Incentive Compensation Potential issue if previously awarded NQ Option expires unexercised Cumulative temporary difference (DTA) will need to be written off
Limitation on Deferred Tax Assets GAAP Treatment Net DTA and DTL; record valuation allowance if necessary Valuation allowance determination requires evaluation of the gross DTA related to deductible temporary differences Consider different taxable income sources *Carryback history; DTLs; Tax planning strategies; projections Evaluate positive and negative evidence Old Rules For Regulatory Capital Purposes - Reduce net DTA to the extent that net deductible temporary differences cannot be recovered through hypothetical carrybacks projection of taxes payable for the next twelve months
Limitation on Deferred Tax Assets New Rules BASEL III Determine GAAP DTA as before Segregate DTAs and DTLs into categories DTA / DTL related to AFS securities DTA / DTL related to MSRs, goodwill Gross DTA related to NOL, capital loss and credit carryovers Don t forget AMT credits! Other DTA related to deductible temporary differences Other DTLs Attach DTA / DTL to relevant component (AFS securities, goodwill, MSR, etc.)
Polling Question 2 Have you elected to exclude FAS115 OCI from regulatory capital? Yes No Unsure
Limitation on Deferred Tax Assets New Rules BASEL III Apply DTL against DTA as appropriate DTA arising from NOL and credit carryforwards are subtracted from CET1 DTA (deductible temporary differences) that can be realized through carryback are calculated. These are allowed in calculating CET1 DTA (deductible temporary differences) that rely on future taxable income are calculated limited to 10% and 15% of CET1 parameter carry a 250% risk weighting Transition rules (that aren t)
Limitation on Deferred Tax Assets Segregate components Apply DTL Decision points Yes No Yes No Legend AFS available for sale CF carryforward DTD deductible temporary difference TTD taxable temporary difference MSR mortgage servicing right
Section 382 Triggered upon a change in control 50% change in ownership Testing period is a rolling three year lookback Applies to NOL carryforwards, credit carryforwards and to recognized built-in losses Measured based upon greater than five percent shareholders
Polling Question 3 Have you undergone a change in control in the last 5 years either through recapitalization or merger? Yes, merger Yes, recapitalization No Unsure
Trust Preferred Repurchases Remember that TrPS are debt for tax purposes Taxable gain on debt forgiveness Recapitalization concurrent with TrPS repurchase Ability to utilize Net Operating Losses against debt forgiveness income may be limited under IRC Section 382 Timing is critical
Other Sundry Tax Tidbits Other Sundry Tax Tidbits IRS Form 1098 changes New Tax Deadlines Conformity for estimated selling costs on ORE
Form 1098 Mortgage Interest Reporting Lenders that receive $600 or more in interest are required to file a separate information return for each qualified mortgage. The new act requires that the following additional information be included on this return: The amount of outstanding mortgage principal as of the beginning of the calendar year. The mortgage origination date. The address of the property which secures the mortgage. These additional reporting requirements are also included under Code Sec. 6050H(d)(2) relating to the information provided to the payor of mortgage interest. Effective for returns filed after December 31, 2016. Penalties for incorrect information generally are $30 / $250,000 (30 days); $60 / $500,000 (before 8/1) or $100 / $1,500,000 after 8/1
Polling Question 4 Have you had penalties assessed by the IRS relating to information reporting deficiencies in the last 12 months? Yes No Unsure
Revised due dates for returns Effective for tax years beginning after December 31, 2015
Due dates for returns
Other Real Estate Writedowns Estimated selling costs used in determining net realizable value IRS has historically challenged any writedown in value related to selling costs Issue exists for IRS for those taxpayers with conformity elections for bad debts IRS has indicated that it will no longer challenge these adjustments for taxpayers that have made a conformity election What about banks that have not made the conformity election?
Questions?? Pat Tuley, CPA Tax Partner ptuley@pkm.com 404-420-5670
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