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MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS © 2010 Wolf & Company, P.C. FMS/CBA Accounting and Tax Update October 24, 2012.

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Presentation on theme: "MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS © 2010 Wolf & Company, P.C. FMS/CBA Accounting and Tax Update October 24, 2012."— Presentation transcript:

1 MEMBER OF PKF NORTH AMERICA, AN ASSOCIATION OF LEGALLY INDEPENDENT FIRMS © 2010 Wolf & Company, P.C. FMS/CBA Accounting and Tax Update October 24, 2012 Presented by Marty Caine, CPA and Charles J. Frago, CPA Wolf & Company, P.C.

2 About Wolf & Company, P.C. Established in 1911 Offers Assurance, Tax, Business Consulting & Risk Management Services Offices located in: –Boston, MA –Springfield, MA –Albany, NY Over 180 professionals PCAOB Registered & Inspected Member of AICPA Center for Audit Quality Member of PKF North America As a leading regional CPA firm founded in 1911, we provide our clients with specialized industry expertise and outstanding service. 2

3 Our Financial Institution Expertise Provide service to over 200 financial institutions: –Approximately 50 FIs with assets > $1 billion –Approximately 30 publicly traded FIs –Constant regulatory review of our deliverables Over 45 Risk Management professionals –IT Assurance Services Group professionals –Internal Audit Services Group professionals –Regulatory Compliance Services Group professionals –WolfPAC® Solutions Group professionals Provide Risk Management Services in 19 states and 1 U.S. territory 3

4 Our Tax Practice Expertise Wolf’s Tax Practice is comprised of over 30 professionals Wolf’s Tax Group provides customized services including: 4 Preparation of tax returns Estate, gift, and trust tax planning Business entity selection consulting Equity and deferred compensation consulting Planning for tax credits International tax planning & compliance Merger and acquisition consulting Business succession planning Representation before the IRS Determination of tax effects of particular transactions Multi-state tax planning and compliance Wolf’s Tax professionals include individuals with proven expertise in corporate, individual, partnership, non-profit, estate, and trust taxes as well as multi-state income and sales tax matters.

5 Our Presenters Martin M. Caine, CPA Member of the Firm, Wolf & Company 413-726-6852 mcaine@wolfandco.com Charles J. Frago, CPA Principal, Wolf & Company 413-726-6862 cfrago@wolfandco.com 5

6 FASB Update Standards applicable in 2012 ASU 2011-02 Troubled Debt Restructuring ASU 2011-03 Effective Control for Repurchase Agreements ASU 2011-04 Fair Value Measurement and Disclosure ASU 2011-05 Presentation of Comprehensive Income ASU 2011-08 Testing Goodwill for Impairment ASU 2012-02 Testing Indefinite-Lived Intangible Assets for Impairment Issued Standards Applicable In Future Periods Update No. 2011-11 Disclosures About Offsetting Assets and Liabilities Other Projects 6

7 ASU 2011-02 Determination of Whether a Restructuring is a Troubled Debt Restructuring Public companies – first interim or annual period beginning on or after June 15, 2011. Applied retrospectively to beginning of fiscal year of adoption, with measurement occurring in period of adoption. Non-public companies – first annual period ending after December 15, 2012. Early adoption is permitted. Disclosure requirements of ASU 2010-20 for TDR’s –Effective annual periods ending after December 15, 2011 for non-public companies 7

8 ASU 2011-02 TDR (continued) A restructuring of a debt constitutes a troubled debt restructuring “if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider.” 8

9 ASU 2011-02 TDR (continued) TDRs may include: 1.Transfer of assets from the debtor to the lender 2.Granting of an equity interest to the lender by the debtor 3.Modification of debt terms: –Reduction in stated interest rate –Payment deferrals –Extension of maturity date at a less than market rate (for similar risk) –Reduction of the face amount or maturity amount owed –Reduction/write-off of accrued interest 9

10 ASU 2011-02 TDR (continued) In determining if the debtor is experiencing financial difficulties, a creditor must consider the following: The debtor is in payment default on any of its debt. It is probable that the debtor will be in payment default on any of its debt in the foreseeable future without the modification. The debtor has declared or in the process of declaring bankruptcy. There is substantial doubt as to whether the debtor will continue to be a going concern. 10

11 ASU 2011-02 TDR (continued) The creditor forecasts that the debtor’s entity-specific cash flows will be insufficient to service any of its debt in accordance with the contractual terms for the foreseeable future. Without the current modification, the debtor cannot obtain funds from sources other than the existing creditor at an effective interest rate equal to the current market interest rate for similar debt for non- troubled debtors. 11

12 ASU 2011-02 TDR (continued) What constitutes a concession? A concession is deemed to be granted: When, as a result of the restructuring, the creditor does not expect to collect all amounts due, including interest accrued at the original contract rate –If repayment of the loan upon maturity is collateral dependent, the current value of collateral should be assessed in the repayment determination. When additional collateral or guarantees received do not serve as adequate compensation for other terms of the restructuring 12

13 ASU 2011-02 TDR (continued) Other items to consider: Restructuring with a below-market rate may indicate a concession; does the borrower have access to funds at the restructured rate? Restructuring with a temporary or permanent increase in rate does not preclude TDR status, as the higher rate may still be below market for similar risk. 13

14 ASU 2011-02 TDR (concluded) An insignificant delay in payment is not considered a concession. Indicators of an insignificant delay in payment are: The restructured payments subject to delay are insignificant relative to unpaid principal or collateral value and will result in an insignificant shortfall in the contractual amount due. A timing delay is insignificant relative to the following:  The frequency of payments due under the debt  The debt’s original contractual maturity  The debt’s original expected duration The cumulative effect of previous restructurings should also be considered. 14

15 ASU 2011-03 Reconsideration of Effective Control for Repurchase Agreements Effective for first interim or annual periods beginning on or after December 15, 2011. Guidance applied prospectively to transactions or modification of existing transactions occurring after effective date. Early adoption is not permitted. 15

16 ASU 2011-03 Repurchase Agreements (concluded) The amendments in this Update remove from the assessment of effective control: –(1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and –(2) the collateral maintenance implementation guidance related to that criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this update. 16

17 ASU 2011-04, FAIR VALUE MEASUREMENT (TOPIC 820), AMENDMENTS TO ACHIEVE COMMON FAIR VALUE MEASUREMENT AND DISCLOSURE REQUIREMENTS IN U.S. GAAP AND IFRS 17

18 ASU 2011-04 Fair Value Measurement (continued) Effective dates Public entities – Effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. Non-public entities – Annual periods beginning after December 15, 2011. Early application is permitted, but no earlier than interim periods beginning after December 15, 2011. 18

19 ASU 2011-04 Fair Value Measurement (continued) Removes the concept that a fair value measurement of a financial asset or liability needs to take into account the highest and best use of the financial asset or liability. Fair value of an instrument classified in a reporting entity’s shareholders’ equity should be measured from the perspective of market participant that holds the asset. Application of premiums and discounts in a fair value measurement is related to the unit of account. 19

20 ASU 2011-04 Fair Value Measurement (continued) New Disclosure Requirements - Public entity Items for which fair value is only disclosed in the financial statements, but not recorded (FAS 107), disclose the following information: –Level within FV hierarchy –Level 2 and 3, description of valuation techniques and inputs used in FV measurement Level 3 – narrative description of sensitivity to changes in unobservable inputs 20

21 ASU 2011-04 Fair Value Measurement (continued) New Disclosure Requirements – All entities Level 2 and Level 3 recurring and non-recurring –Description of valuation techniques and inputs used –Level 3 – quantitative information about significant unobservable inputs Ex. If using discount rates, prepayment speeds, loss severity rates, disclose the ranges of the inputs that are used (i.e. 6%-10%) 21

22 ASU 2011-05, COMPREHENSIVE INCOME (TOPIC 220), PRESENTATION OF COMPREHENSIVE INCOME 22

23 ASU 2011-05 Presentation of Comprehensive Income Effective Dates Public entity – Fiscal years, and interim periods within those years, beginning after December 15, 2011 Non-public entity – Fiscal years ending after December 15, 2012 Requires retrospective application Early adoption is permitted No transition disclosures required 23

24 ASU 2011-05 Presentation of Comprehensive Income (continued) Currently 3 ^ alternatives to reporting OCI –In statement of changes in stockholders equity –In the income statement –Separate statement Does not change components of OCI Tax effects still required for each item of OCI, but can be provided in notes to FS 2 24

25 ASU 2011-05 Presentation of Comprehensive Income (concluded) Years Ended December 31, 201120102009 Net Income$2,417$3,003$435 Other comprehensive income, net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) on available for sale securities2,018(58)3,791 Less: reclassification adjustment for gains recognized in net income(321)(579)(188) Plus: credit portion of OTTI losses recognized in net income98325151 Plus: noncredit portion of OTTI (losses) gains on available for sale securities(1,142)1,026(440) Net unrealized holding gains on available for sale securities6537143,314 Net unrealized loss on interest-rate swap derivative(220)(85)— Other comprehensive income4336293,314 Comprehensive income$2,850$3,632$3,749 EXAMPLE BANK, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands) 25

26 ASU 2011-08 Testing Goodwill For Impairment Effective for annual and interim goodwill impairment tests for fiscal years beginning after December 15, 2011. Early adoption permitted. First perform a qualitative analysis to determine if it is more likely than not (> 50% chance) that the fair value of a reporting unit is less than its carrying amount. If it is not more likely than not, do not have to perform 2 step test for impairment No requirement to perform qualitative, can go right to 2 step test. 26

27 ASU 2012-02 Testing Indefinite-Lived Intangible Assets for Impairment Effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. Gives entity the option to first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. If determined to be more likely than not, must perform quantitative test. 27

28 ASU 2011-11 Disclosures About Offsetting Assets and Liabilities Effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. Applied retrospectively for all periods presented. 28

29 ASU 2011-11 Disclosures About Offsetting Assets and Liabilities (concluded) 29

30 Questions On Issued Standard Updates? 30

31 Timeout for a brief survey…. 31

32 FASB Update Other Projects Leases Financial Instruments Impairment Liquidity and Interest Rate Risk Disclosures Private Companies 32

33 Leases - Lessee New guidance would require the recording of a right-to- use asset and a liability representing the obligation to make lease payments (leases of 12 months or less excluded). Five Key Areas Definition of a lease Lease term Variable/uncertain cash flows Profit and loss recognition pattern Lessor accounting 33

34 Leases – Lessee (continued) Definition of a lease –Contract in which right to use a specified asset is conveyed for a period of time in exchange for consideration. –Customer must have right to control the asset Ability to direct the use and receive benefit from use throughout the lease term Lease term –Noncancellable period, together with any options to extend or terminate the lease when there is significant economic incentive to exercise or not to exercise an option to terminate. 34

35 Leases – Lessee (continued) Two approaches to accounting for a lease based on whether the lessee acquires or consumes more than an insignificant portion of the underlying asset over the lease term: –Straight Line Approach Recognize liability and asset based on PV of lease payments Subsequently measure liability using effective interest method Measure asset as a balancing figure such that total lease expense is recognized on straight line basis. Recognize lease expense as one amount in IS –Effective Interest/Amortization Approach Recognize liability and asset based on PV of lease payments Subsequently measure liability using effective interest method Amortize asset on systematic basis Recognize interest expense and amortization expense in IS 35

36 Leases – Lessee (continued) How to determine whether the lessee acquires or consumes more than an insignificant portion of the underlying asset over the lease term? –Leases of property – straight line approach unless: Term is for major part of economic life of asset PV of fixed lease payments accounts for substantially all of FV of asset –Assets other than property – effective interest/amortization approach unless: Term is insignificant portion of economic life of asset PV of fixed lease payments is insignificant relative to FV of asset 36

37 Leases – Lessee (concluded) Expected to be re-exposed in first half of 2013. Expected to be final in ?? Effective date of 2016? 2017? Transition guidance requires recording of asset and liability for all operating leases upon adoption based on remaining lease terms. 37

38 Financial Instruments Classification and Measurement Impairment 38

39 Classification and Measurement Three categories for financial assets –Fair Value through Net Income (FV-NI) Held for sale at acquisition or Actively managed and monitored internally on a fair value basis Marketable equity securities must be in this category –Fair Value through Other Comprehensive Income (FV-OCI) Maximize total return by collecting contractual cash flows or selling the asset or Manage the interest rate or liquidity risk by either holding or selling the asset –Amortized Cost Manage instrument through customer financing or lending activities (collect contractual cash flows of instrument) and, Ability to manage credit risk by negotiating any potential adjustment of contractual cash flows with counterparty in event of potential credit loss and, Not held for sale at acquisition Liabilities – generally at amortized cost 39

40 Classification and Measurement (continued) FV measurement of assets based on characteristics of the instrument and entity’s business strategy Characteristic Of Instrument Criterion: Is it a debt instrument held or issued that has all of the following characteristics: 1.It is not a derivative 2.An amount is transferred at inception that will be returned at maturity 3.It cannot be prepaid or settled at loss to investor No – classify/measure at FV-NI (e.g. equity securities) Yes – classify/measure in accordance with business strategy 40

41 Classification and Measurement (continued) Business Strategy Basis Amortized cost (e.g., Loans) –Strategy is to: manage instrument through customer financing or lending activities (collection of cash flows) Manage credit risk by negotiating adjustment of cash flows with counterparty in event of potential credit loss FV changes through OCI (e.g., Debt Securities) –Strategy is to invest cash to: Maximize total return by collecting contractual cash flows or selling asset Manage interest rate or liquidity risk by holding or selling asset 41

42 Classification and Measurement (continued) FV changes through NI –Strategy is to: Hold assets for sale at acquisition Actively manage and monitor fair value basis and do not qualify for FV-OCI Financial liabilities are generally recorded at amortized cost, but FV-NI if either: –Strategy is to subsequently transact at FV –Short sales Currently working on application guidance and disclosure requirements 42

43 Classification and Measurement (continued) Financial Liabilities - if characteristics criteria met, amortized cost except: Held for transfer at acquisition, issuance or inception Liability is short sale Liability is a derivative If so, FV-NI - changes in own debt are classified in OCI and recognized in net income upon settlement 43

44 Classification and Measurement (concluded) Hybrid Instruments - financial assets not eligible for bifurcation FV-NI in their entirety - financial liabilities would be bifurcated using current GAAP Can elect fair value option for entire instrument 44

45 Impairment Measurement Objective: Expected credit losses are defined as the estimate of contractual cash flows not expected to be collected. 45

46 Impairment (concluded) Allowance for loan losses –Due to complexity and lack of understandability, FASB has moved away from joint project with IASB and three-bucket approach –Current Expected Credit Loss Model (“CECLM”) –Still begin with historical charge-offs adjusted for current economic conditions –Allows use of reasonable and supportable forecasts about the future Debt securities –For amortized cost or FV-OCI any expected credit loss recognized as an allowance and not a cost-basis adjustment –Still working on guidance/model for FV-OCI securities 46

47 FASB LIQUIDITY AND INTEREST RATE RISK DISCLOSURES 47

48 Disclosures about Liquidity Risk and Interest Rate Risk Stakeholders wanted more information about credit risk, liquidity risk and interest rate risk. –Credit risk addressed in ASU 2010-20 –This proposal attempts to address liquidity and interest rate risk No effective date proposed Significant impact on FI clients 48

49 Disclosures about Liquidity Risk Available liquid funds, by class of asset, in a tabular format, as well as an entities’ borrowing availability Maturity analysis of financial instruments, by class –Each of next four quarters (non-public can combine into one period) –Year 2 –3-5 years –After 5 years Information related to cost of funding from issuing time deposits and acquiring brokered deposits –Last four quarters, WAY and WAL Supplemental narrative re exposure to liquidity risk 49

50 Disclosures about Interest Rate Risk Required disclosures for financial institutions Interest rate repricing gap analysis (carrying amount and WAY) of financial instruments, by class –Each of next four quarters (non-public can combine into one period) –Year 2 –3-5 years –After 5 years Interest rate sensitivity analysis on after-tax net income for the next 12 month period Supplemental narrative re exposure to interest risk 50

51 Private Company Financial Reporting May 23, 2012, FAF approved creation of Private Company Council (“PCC”) Key responsibilities of PCC –Agenda Setting – work with FASB to determine criteria for whether and when exceptions or modifications to GAAP are needed –Endorsement Process- exceptions or modifications to GAAP will be exposed for public comment if endorsed by simple majority of FASB members. PCC will redeliberate and present for final approval by FASB. 51

52 Questions? 52

53 Tax Agenda Depreciation Expensing/Bonus Update New Repair and Capitalization Rules Health Insurance reporting- Form W-2 Loan Modifications IRS examination issues State Tax Update MA Security Corp Directive CT PIC’s Expiring Tax Rules Potential legislation/ Tax Reform Proposals Q & A 53

54 Depreciation Expensing Section 179: first year expensing of property additions  Through the end of 2011, $500,000 deduction, phase-out when costs exceed $2,000,000  For 2012, $139,000 deduction, phase-out when costs exceed $560,000 –Extends Section 179 treatment for software  For 2013, the deduction is $25,000 and investment ceiling is $200,000  Planning Opportunities 54

55 Bonus Depreciation 100% (and 50%) Bonus Depreciation  Federal only – most states “de-coupled”  100% expired at the end of 2011  50% for qualified assets for 2012 55

56 New Repair and Capitalization Regulations Issued in December, 2011 and effective January 1, 2012 Possible change in tax accounting method Change to Capitalization Standards 56

57 Repair Regulations-timing Issued December 23, 2011 Effective for tax years beginning on or after January 1, 2012 Issued as “temporary” regulations which have the same effect as final regulations May require a change in tax accounting method –This is under further IRS review 57

58 New Capitalization Rules Capitalization Standards: –Betterment –Restoration –New or Different Use Building Property –Capitalization standards applied to major components of the building/system 58

59 New Capitalization Rules Building Systems Components: –HVAC Systems –Plumbing –Electrical –Elevators and Escalators –Fire and Alarm Systems –Others 59

60 New Capitalization Rules Safe harbor for routine maintenance De minimis rule –Must have written accounting policy –Must be expensed in the Applicable Financial Statements –Ceiling limit- cannot exceed greater of (A).1% of gross receipts, or (B) 2% of book depreciation and amortization –This new rule has detractors 60

61 Health Insurance Reporting For 2012 forms W-2 Applies to ALL employers that provide “applicable employer-sponsored coverage”- some exceptions Report in box 12, code DD, aggregate employer cost of employer health insurance Employers who filed less than 250 form W-2’s for 2011 are exempted from providing this information Does not mean it is taxable to employee 61

62 Interesting Tidbit “There’s no business like show business, but there are several businesses like accounting.” ~David Letterman 62

63 Loan Modifications: Reg.§1.1001- 3 Modification: Any alteration, in whole or in part, of a legal right or obligation of the lender, whether the alteration is evidenced by an express agreement, conduct of the parties, or otherwise. Significant Modifications: treated as a sale of the pre- modification loan. The proceeds of the sale are the modified loan. –The “sale” is a taxable event –This regulation applies to any modification of a debt instrument, and both accrual and cash method banks 63

64 Significant Loan Modifications A modification is considered significant only if, based on all facts and circumstances, the legal rights or obligations that are altered and the degree to which they are altered are economically significant. –Changes of annual yield by the > of 25 basis points or 5% –Changes in the timing of payments if they result in a deferral –Changes in the obligor or collateral 64

65 Exceptions to Loan Modification An alteration of a legal right or obligation that occurs by operation of the original terms of the debt instrument is generally not a “modification” –Examples: Floating interest rate changes Election to defer payments for up to five years by a Trust Preferred borrower 65

66 Tax Consequences of “Significant Modification” The bank will recognize a gain/loss on the difference between the “amount realized” and its adjusted income tax basis in the old debt. –Amount realized= issue price; if adequate interest (AFR) should equal stated principal The tax basis in the debt is the principal advanced, plus interest recognized in income and any capitalized costs, less payments and charge-offs 66

67 IRS Examination Issues Bad debt deduction –Deduction is based on facts and circumstances –IRS will review loan files –Deduction for regulatory and financial statement purposes does not guarantee deduction for tax purposes –Charge-off below FMV will likely be challenged Non-accrual Interest –Interest not accrued for book purposes is still considered collectible for tax –Exception – interest on charged-off loans 67

68 Deferred Compensation –Deduction should be payments, not accruals Accrued bonus –“All Events” Test –Is employee required to be employed when bonus payment is made (presuming overlapping of years)? –If not required, if paid with 2 ½ months of year-end, likely deductible when accrued. –If required to be employed when paid—if reallocated and paid to remaining employees, likely deductible; if not, All-Events test is not met, so accrual is not deductible 68 IRS Examination Issues

69 Mandatory Tax Shelter Request –Asks for information related to “listed transactions” –Generally not applicable to community banks –But, need to affirm in writing that the bank has not conducted these activities Review of Senior Management Returns –Will request 1040’s and W-2s –Verify that senior management filed personal returns 69 IRS Examination Issues

70 OREO –Write-downs post foreclosure are deferred for tax –Operating costs on OREO held for sale likely should be capitalized for tax; if on a operating property (income producing- rental), such costs are likely deductible –IRS may challenge using fair value (deducting selling costs etc.) in arriving at FV, versus FMV (willing buyer/seller) –Where do you hold OREO? SMLLC or subsidiary corporation? 70

71 Interesting Tidbit “If you would like to know the value of money, try to borrow some.” ~Benjamin Franklin 71

72 State Tax Update Economic Nexus Definition PL 86-272 may not be applicable State by state –Connecticut –Maine –Massachusetts –New Hampshire –Rhode Island –Vermont –NJ 72

73 State Tax Update Other State Issues – IRC 382/383 disallowance of utilization of NOL/capital losses & Tax credit carry forwards of a loss corporation Does your State follow IRC 382/383? –Connecticut –Maine –Massachusetts –New Hampshire –Rhode Island –Vermont 73

74 State Tax Update Other State Issues Combined Reporting Multi-state Reporting –How to recognize the need and begin tracking Multi-state allocation and apportionment factors –Special rules for Banks (Inclusion of loans as tangible property) –Fixed assets costs or net book value Tax depreciation rules by state (179 & Bonus) Federal to State Income Adjustments Estimated Tax Payments 74

75 MA Security Corp. Directive Original Draft: 9/30/2011 – 2 Issues –Issue 1: Corporation can pledge its investment in subsidiary security corporation under 2 conditions: Stock pledged does not exceed 50% of the value of the subsidiary There are no negative covenants or restrictions that limit permitted assets, liabilities, or activities of the corporation 75

76 MA Security Corp. Directive Original Draft: 9/30/2011 – 2 Issues –Issue 2: Security corporation may acquire appreciated securities from an affiliate and subsequently sell them if: Securities originally acquired through public exchange or secondary market, Acquisition and ownership of securities is for investment purposes, It is consistent with all other requirements for security corporation classification, and It is not part of a plan for disposition of the security to minimize tax on built-in gain (no safe harbor – facts and circumstances) 76

77 MA Security Corp. Directive Revised Draft: 4/6/2012 –Issue 1 – Security Corporation Pledging Corporation’s pledge of shares of stock will not in and of itself preclude security corporation status Restrictive covenants will not preclude security corp. status as long as they limit the activities to permissible security corp. activities However, covenant that pertains to the relationship with shareholder or pledgee is impermissible 3 examples, generally don’t apply –Issue 2 – Transfer and sale of appreciated securities – no change –Issued Final 5/24/2012 as Directive 12-2- no change 77

78 CT PIC’s PIC Disqualification –A PIC will be disqualified if it engages in prohibited activities. –Prohibited activities: The review and processing of loan applications The closing of the initial loan The servicing of loans not held by a PIC Holding a loan solely for the purpose of sale (other than to a related party) –Such PIC may re-qualify as a PIC in a subsequent taxable year if it ceases to engage in prohibited activities. –A PIC must confine its activities to the purchase, receipt, maintenance, management and sale of its intangible investments 78

79 CT PIC’s Adjustments Pursuant to Conn. Gen. Stat. §12-226a –The commissioner will not exercise his discretion to make adjustments to a PIC: on the transfer of a loan (and the resulting future income stream) by a financial service company to a PIC, while the financial service company maintains the burden of the interest expense and other costs associated therewith, or On the transfer of a bad loan by a PIC (and potential loss) back to the financial service company which originated the loan. 79

80 Interesting Tidbit “I’m not the smartest fellow in the world, but I can sure pick smart colleagues. ~Franklin D. Roosevelt 80

81 Expiring Tax Rules Expired After 2011: –Research Credit under Code Sec. 41(h)(1)(B) –15 year write-off for specialized realty assets (qualified leasehold improvements) –Work Opportunity Tax Credit (WOTC) for non-veterans under Code Sec. 51(c)(4) –Enhanced Contribution Deductions Code Sec. 170 –Empowerment Zone Tax Breaks Code Sec. 1391 Expire After 2012: –Work Opportunity Credit for hiring qualified veterans, –The 50% bonus first-year depreciation allowance for qualified property under Code Sec. 168(k)(1) –Temporary payroll tax cut (2% FICA) 81

82 Potential Legislation Continued discussion of bonus depreciation and Section 179 extension Elimination of 2% reduction in employee portion of FICA tax in 2013 Additional Medicare tax on high-income taxpayers –Increase from 1.45% to 2.35% for wages in excess of $250,000 for MFJ returns, and $200,000 for single returns –Effective in 2013 82

83 Potential Legislation Some view corporate tax rates too high among the highest of developed countries –Reduction of rate from 34-35% to 25-28% –How to pay for it? –Be careful what you wish for… 83

84 Potential Legislation Reduction in corporate tax rate –Reduction in deferred tax asset –Example: $10,000,000 in deductible temporary differences, net of state DTA At current federal rate of 34%, DTA = $3,400,000 If rate changes to 28%, DTA = $2,800,000 Effect – tax provision (expense) of $600,000 Reduction in DTA will be offset over time by reduction in current tax Timing of “payback” depends on relationship between DTA and income 84

85 2012 Election: Tax Reform Proposals Obama: –Lower the tax rates for both individuals and corporations with fewer brackets. –Eliminate “inefficient and unfair tax breaks.” –Reduce the deficit by $1.5 trillion over the next 10 years. This principle includes allowing tax cuts to expire for high income individuals (those with over $200,000 of income or $250,000 if married filing jointly). –Increase jobs and economic growth by increasing incentives to “work and invest” in the United States. –Implement the “Buffett rule” to ensure that individuals with over $1 million of income do not have a lower effective rate than those with less income. Obama's FY2013 “Greenbook” has some specifics on his tax proposals. For example, for upper-income taxpayers, he would let the 2001/2003 tax cuts expire and reinstate the estate and gift taxes and exemptions to 2009 levels. He would also cap the tax benefit of itemized deductions and certain exclusions of upper-income individuals at 28%. 85

86 2012 Election: Tax Reform Proposals Romney: –He also calls for repeal of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which would eliminate various taxes, such as the Sec. 1411 3.8% Medicare tax on net investment income. Romney’s corporate tax reforms include: Reduce the corporate rate to 25%. Improve the research tax credit and make it permanent. Move from a worldwide system, which taxes both U.S. individuals and businesses on all their income no matter where it is earned, to a territorial system, which would impose tax only on income earned in the United States. Repeal the corporate AMT 86

87 Martin M. Caine, CPA Member of the Firm, Wolf & Company 413-726-6852 mcaine@wolfandco.com Charles J. Frago, CPA Principal, Wolf & Company 413-726-6862 cfrago@wolfandco.com 87 Questions?

88 Disclaimers LEGAL DISCLOSURES - CIRCULAR 230 DISCLAIMER/DISCLOSURE This communication is not a tax opinion. To the extent that this presentation, includes any tax advice, it is not intended or written to be used by the recipient or any other party for the purpose of avoiding penalties that may be imposed by the Internal Revenue Code or any other tax authority. The State tax advice, if any, contained in this communication is not intended or written to be used, and cannot be used, for the purposes of determining the allowability of any deduction or credit; determining the excludability of any income; or securing any other tax benefit (including not filing a return). This communication may not be used to promote, market or recommend to another party any transaction or matter addressed herein. OTHER DISCLOSURES The views expressed do not necessarily represent those of Wolf and Company, P.C. This material is for informational purposes only and should not be construed as legal, tax, accounting or other professional advice. 88


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