Following are a few important issues our accounting professionals wanted to briefly share with you. As always, should you desire more in-depth information please feel free to contact us.
COMPREHENSIVE TAX REFORM LESS LIKELY
Just as momentum for a comprehensive tax overhaul this year was building, Senate Finance Committee Chairman Max Baucus was confirmed as U.S. Ambassador to China and left the Senate. In February, House Ways and Means Committee Chair Dave Camp took up the cause, releasing a draft version of his tax reform proposals, but hope for tax reform again was quashed when Camp announced he will not seek re-election after his term ends this year.
With the likelihood of a comprehensive tax reform package now waning, Congress will turn its attention to “tax extenders” according to Jeffrey B. Engler, Weinberg’s Director of Tax.
This year’s tax extenders-so named because Congress routinely extends them for only a year or two at a time-include more than fifty tax incentives that expired at the end of 2013. Given the current political environment, a deal on the extenders is generally regarded as the best chance to enact major tax legislation this year.
In April both the Senate Tax, and House Ways and Means Committees, voted on tax extenders legislation. On May 9, the House of Representatives approved making six tax incentives permanent, including: the research & development credit; enhanced expensing under Section 179; look-though treatment for controlled foreign corporations; basis reduction rule for S corporations making charitable contributions of property; a five-year recognition period for built-in gains of S corporations; and the active financing exemption for lenders under Subpart F.
Meanwhile, the Senate is moving to extend nearly all temporary tax breaks through 2015, putting off the debate over which ones to make permanent. The Senate could vote on its package shortly, setting up a showdown with the House that might not get settled until after congressional elections in November.
While President Barack Obama supports making the research and development tax credit permanent, he threatened to veto the House bill because it isn’t offset by other tax increases. The President noted that if all the 50-plus temporary tax breaks were made permanent, it would “add $500 billion or more” to the deficit.
“It makes tax planning difficult,” according to Engler, “as we go through the year uncertain of which expired tax provisions will be revived and which will be retroactive to January 1. It is also certain to have an effect on corporate purchases for R&D and equipment, for businesses that depend on the tax incentives in determining the affordability of the purchases.”
IRS GRANTS FATCA RELIEF
In a stroke of lenience for foreign financial institutions (FFIs), the IRS has announced that it will treat calendar years 2014 and 2015 as a “transition period” for certain requirements of the Foreign Account Tax Compliance Act (FATCA). The IRS decision, announced May 2nd, will help facilitate an orderly transition for compliance with the law’s due diligence, reporting, and withholding provisions.The U.S. imposes a “worldwide” tax on its citizens: broadly speaking, any income earned by a U.S. citizen, anywhere, is subject to U.S. taxation. The offshore enforcement floodgates opened with a high-profile IRS win in 2009, in which UBS was compelled to pay $780MM and release the names of over 4,000 American account-holders.Since then, the U.S. has turned up the pressure on citizens with offshore holdings, requiring annual disclosure of foreign-held assets, and stiff penalties for tax evaders, ranging from fines and penalties to prison sentences.
Enacted in 2010, FATCA goes into effect on July 1 of this year. In addition to individual filing requirements, the law requires foreign banks to report information about their U.S. citizens’ accounts. Faced with the choice of turning over account information or losing access to U.S. markets, foreign banks have been scrambling to comply with the new regulation.
To help ensure a smooth transition, the IRS announced a general relaxation of some of the FATCA deadlines. The relief is welcomed by FFIs who are struggling to comply with the paperwork of tracking and reporting their holdings of U.S. citizen accounts (including TIN numbers, addresses, and account balances).
Compliance with the FATCA provisions has been further hampered by the lack of published instructions for complex new forms, such as Form W-8BEN-E: which U.S. withholding agents and FFIs will use to document the status of payees and account holders, and ultimately determine if they must report and/or withhold income from U.S. citizens.
“During the transition period, the IRS will take into account the extent to which an FFI or withholding agent makes ‘good faith efforts’ to comply with the requirements of the FATCA regulations,” warns Weinberg’s Director of Tax, Jeffrey B. Engler. “An entity that has not made good faith efforts to comply with the new requirements will not be given any relief from IRS enforcement during the transition period.”
Though FATCA compliance still needs to be pursued, reducing the pressure on FFIs and withholding agents will help ensure a smoother transition: trying to achieve perfect compliance with the new rules may cause withholding agents or FFIs to over-withhold to ensure they have no liability for FATCA withholding taxes. The IRS itself acknowledges its own need to publish instructions for FATCA-related forms, and this notice gives it some breathing room as well.
Rather than assume the burdens of FATCA compliance, some banks have chosen to drop their American clients. This month, Deutsche Bank AG asked its U.S. clients in Belgium to close their accounts and HSBC Holdings PLC and UniCredit SPA’s German operations have decided to close certain services for U.S. residents outside of America
FASB REVISES REPORTING STANDARDS FOR DISCONTINUED OPERATIONS
In a move designed to improve the transparency and decision-usefulness of financial statements, the Financial Accounting Standards Board (FASB) has updated standards related to the reporting of discontinued operations.
Released on April 10, 2014, Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) significantly raises the threshold for when a company may classify and report a component as a “discontinued operation” on its financial statements.
Under the new standards, only those discontinued operations that represent a “strategic shift” in the company’s business activities (or that would have a “major effect” on an organization’s operations and financial results) would be considered discontinued in the company’s financial statements.
The new standards also come with an increased management responsibility to disclose additional information about the discontinued operation, including any pre-tax income attributable to it.
This represents a departure from the current standards, which allow any disposed-of component to be classified as discontinued, provided the operations and cash-flows of the component cease and the organization does not have any significant continuing involvement.
The FASB’s revision process began in 2007 in response to criticism that too many disposals of small groups of assets qualified for discontinued operations-leading to less decision-useful financial statements. Other stakeholders noted that some of the guidance on reporting discontinued operations resulted in higher costs for preparers because of the difficulty and complexity of the rules.
The new standards will apply for annual periods beginning December 15, 2014. While the shift is intended to improve transparency, “there is likely to still be some give-and-take over how companies evaluate whether a discontinued component has a ‘significant’ effect on company operations,” noted Weinberg Managing Partner Corey Fischer.
NEW REVENUE RECOGNITION STANDARDS TO BE UNVEILED
In yet another move to align GAAP with international accounting standards, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are set to release revised revenue recognition standards this month.
The anticipated release brings to a close over a decade of internal debate over the proper characterization and recognition of revenue. Russell Golden, chairman of the FASB, calls this a “grand achievement,” getting all 23 board members of the FASB and the IASB to agree on standards.
Current GAAP allows different industries to abide by their own revenue recognition standards. The new proposal requires all companies across all industries to use the same revenue recognition methodology.
Under the new standards, companies must recognize revenue upon the completion of specific “performance obligations,” during the term of the contract. Performance obligations are best understood as transfers of funds, goods, or services during the contract period.
Companies will be required to look for performance obligations within their contracts with customers and clients, and estimate a transaction price for each. As performance obligations occur (and goods or services are transferred), the company will recognize revenue based on the transaction price.
The new standards are expected to fundamentally alter the way certain industries account for revenue: most notably those industries that rely upon revenue from royalties, licenses, or other use of intellectual property.
To illustrate: under current standards, a company awaiting royalty income may wait until uncertain amounts are known before booking the revenue. To comply with the new standards, however, the same company may be required to estimate the total revenue expected from completion of a contract and allocate some of it as specific performance obligations in the contract are satisfied.
Also affected will be decisions related to the structuring of employee compensation plans, particularly those that award bonuses based on achievement of revenue targets.
“The single revenue recognition standard will help investors better compare companies side-by-side, regardless of industry-related accounting quirks,” said Weinberg Managing Partner Corey Fischer. “However, the new standards may call for a heavy dose of estimation-a potentially dicey proposition considering how much (from executive compensation, to debt service terms, to financial statement presentation) will rely upon those estimates.”
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Weinberg & Company is a leading, international, full service, multi-office CPA firm serving clients throughout the United States and the Pacific Rim. Founded over two decades ago, the practice groups include: Assurance and Audit, Tax and Accounting, and Advisory Services. Weinberg has a depth of knowledge and experience to meet the needs of both public and privately held companies, high net worth individuals, entrepreneurs, family offices, and can provide customized business management services. www.weinbergla.com
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