The New England Accounting Advisor
In July 2013 Massachusetts lawmakers voted to switch the rules for sourcing sales of services in its income apportionment formula, moving from a statutory “cost of performance” method to a “market-sourcing” approach. The Massachusetts Department of Revenue (DOR) predicts that the new law will generate up to $37 million annually. In addition to increasing revenue, the new rules are intended – at least in part – to eliminate the many disputes between DOR and taxpayers regarding interpretation of the old cost of performance rules.
On March 31, 2014 New York Gov. Andrew M. Cuomo signed the state’s FY2015 budget – an expansive piece of legislation intended to counteract New York’s reputation as a high-tax state and “create jobs, grow the economy and provide much-needed relief for struggling families.”
Back in 2011, Rhode Island Gov. Lincoln D. Chafee proposed in his FY2012 budget that the state change its business corporation tax statute to a combined method of reporting. At the time, the proposal drew criticism from the Rhode Island Public Expenditure Council (RIPEC), which claimed there wasn’t enough data to evaluate the implementation of combined reporting.
In January 2014, the FASB released Accounting Standard Update 2014-02 Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill (ASU 2014-02). ASU 2014-02 is the first standard issued by the Financial Standards Accounting Board (FASB) upon endorsement of a consensus of the Private Company Council (PCC) that is specifically designed to meet the needs of private companies by providing an alternative within US GAAP.
On January 24, the IRS issued Rev. Proc. 2014-16 clarifying the automatic consent procedures for accounting method changes required or permitted by the temporary and final tangible property regulations issued last September (see our Federal Tax Alert, Updated Tangible Property Rules Expand Safe Harbors, Disposition Rules). Please note that Rev. Proc. 2014-16 modifies Rev. Proc. 2012-19 and rev. Proc. 2011-14.
In an effort to improve financial reporting and reduce the diversity in practice, the Financial Accounting Standards Board (FASB) on April 22, 2013 issued an Accounting Standards Update ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, clarifying when and how public and private companies and not-for-profit organizations should prepare financial statements using this method.
Liquidation enables a business to convert assets to cash (or other assets) to satisfy creditors before permanently suspending operations. The process requires an entity to “measure its assets at the estimated amount of cash or other consideration it expects to collect and its liabilities at the amount otherwise prescribed under U.S. GAAP,” according to FASB. Further, the board says, “an organization in liquidation must prepare its financial statements using a basis of accounting that communicates information to users of those financial statements to enable those users to develop expectations about how much the organization will have available for distribution to investors after disposing of its assets and settling its obligations.”
In the past year, there have been several developments concerning the application of the IRC §199 Domestic Production Activities Deduction ("DPAD"). The DPAD provides eligible taxpayers a deduction of up to 9% of their taxable income from qualifying production activities. Many of these recent developments provide guidance on the types of activities that qualify as "manufacturing or production" for purposes of the DPAD. Taxpayers currently not claiming the DPAD should review their position in light of these rulings.
The DPAD enables domestic manufacturers and producers to deduct for the tax year 9% of the lesser of:
- The taxpayer's qualified production activities income ("QPAI"), or
- The taxpayer's taxable income (modified adjusted gross income, for individual taxpayers), without regard to the DPAD.
The DPAD cannot exceed 50% of the W-2 wages from domestic production activities of the taxpayer. Under (2) above, taxpayers with an overall net loss receive no DPAD benefit.
In January 2014, the FASB released Accounting Standard Update 2014-03 Derivatives and Hedging (Topic 815): Accounting for Certain Receive – Variable, Pay – Fixed Interest Rate Swaps (ASU 2014-03). ASU 2014-03 is the second standard issued by the FASB upon endorsement of a consensus of the Private Company Council that is specifically designed to meet the needs of private companies by providing an alternative within US GAAP.
Companies that are unable to borrow at fixed rates often rely on variable-rate debt combined with an interest rate swap. In effect, they receive variable rates and pay fixed rates. The net effect is similar to borrowing at fixed rates. But the accounting and disclosure requirements are considerably more complex when an interest rate swap is involved.
Current accounting standards require companies to recognize all their derivative instruments (including interest swaps) on their balance sheets as assets or liabilities and to measure them at fair value. The standards allow companies to mitigate the income statement effect of any swings in fair value attributable to interest rate risks by applying an accounting method known as "cash flow hedge" accounting. This technique has the effect of presenting interest expense in the income statement as if the company had a fixed rate debt. But some entities, especially private companies, have expressed concerns about the practical difficulties involved in applying the current standards.
In estate planning, the concept of "portability" of a deceased spouse's unused exclusion (DSUE) amount is relatively new. For decedents dying after December 31, 2010, if a first-to-die spouse has not fully used the estate tax exclusion, the DSUE amount can be transferred to the surviving spouse. This was originally passed as a two-year temporary provision (effective for 2011 and 2012) until it was made permanent in the American Taxpayer Relief Act of 2012.
Portability provides an alternative approach to fulfill a common estate planning goal of a married couple to take full advantage of both spouses' estate tax exclusions. Prior to portability, this was typically accomplished by funding a "bypass trust" (also known as a credit shelter trust) at the death of the first-to-die spouse with the exclusion amount and leaving the balance of the estate to qualify for the unlimited marital deduction. Now that portability is also an option, estate planners should determine which approach is better for a specific situation. Portability may be beneficial for certain estates and not others, but that is beyond the scope of this article.
On July 26, 2013 Massachusetts lawmakers voted to override Gov. Deval Patrick’s veto of a proposed transportation finance bill (H. 3535) – legislation intended to remedy some of the Commonwealth’s most pressing MBTA, road and bridge problems, and limit MBTA fare increases.
Several new taxes were proposed to pay for the transportation improvements, including a controversial portion of the Act that imposed sales tax on computer software and services. While that proposal was repealed by subsequent legislation, approved was a mandate for Massachusetts businesses to move to market-based sourcing.