1. American Taxpayer Relief Act of 2012 Patient Protection and Affordable Care Act Practice Update Legislative Outlook

2. Sheryl Eighner Partner PricewaterhouseCoopers, LLP Joseph Wisniewski Partner Deloitte Tax LLP

4. Enacted January 2, 2013 Renews dozens of temporary business tax “extenders”

5. Extended retroactively through 2013 Modifications include  Changes to rules for calculating credit when there is a change of ownership for a portion of the trade or business  Changes to rules for aggregation of research expenses within a controlled group

6. Extended through 2013  Applies to qualified property placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets) Qualified property generally includes  Property with MACRS recovery period of 20 years or less  Certain computer software  Water utility property  Qualified leasehold improvement property Modifications  Decouples bonus depreciation from allocation of contract costs under percentage of completion accounting method rules for assets with depreciable life of seven years or less that are placed in service in 2013  For regulated utilities, clarifies that it is a violation of normalization rules to assume a bonus depreciation benefit for ratemaking purposes when a utility has elected not to take bonus depreciation

7. Election to accelerate some AMT credits in lieu of bonus depreciation extended for property placed in service in 2013 Allows corporations to “monetize” a portion of their AMT credits in lieu of claiming bonus depreciation

8. 15-year straight-line cost recovery retroactively extended for Certain leasehold, restaurant, and retail improvements New restaurant buildings Applies to property placed in service before January 1, 2014

9. Subpart F exception allowing deferral of active financing income of CFCs predominantly engaged in banking, financing, or similar business activity extended retroactively through 2013 Lookthrough treatment under section 954(c)(6) for payments between related CFCs also extended retroactively through 2013.

10. For 2012 and 2013, maximum amount and phase-out threshold for small business expensing increased to levels in effect in 2010 and 2011 For tax years beginning in 2013, limitation is raised to $500,000 (reduced if cost of section 179 property placed in service exceeds $2 million)  Within those thresholds, taxpayer may expense up to $250,000 of the cost of qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property Limitation amounts return to $25,000 and $200,000 after 2013

11. Notable provisions extended through 2013 include  Credit for construction of energy-efficient new homes  Credit for energy-efficiency improvements to existing homes  Credit for manufacture of energy-efficient appliances  Incentives for biodiesel, renewable diesel, alternative fuel, alternative fuel mixtures Production tax credit (section 45)  Extends the credit for wind facilities through 2013  Modifies the rules to allow renewable energy facilities that begin construction before the end of 2013 to claim 10 years of credits  Disallows commonly recycled paper from qualifying

12. New Markets Tax Credit Work Opportunity Tax Credit Special exclusion rules for certain small business stock

13. 2001 and 2003 tax rates for incomes below $400,000 single / $450,000 joint “Permanent AMT” Relief - Individual AMT exemption amounts indexed for inflation PEASE - itemized deduction limitation for incomes above $250,000 single / $300,000 joint Personal Exemption Phaseout for incomes above $250,000 single / $300,000 joint State and Local Sales tax deduction extended Extends permanently the child tax credit Adoption credit, earned income credit enhancements, child and dependent care credit, American tax opportunity credit, deduction for qualified tuition expenses, student loan interest deduction all extended. Other notable items: teacher deduction and IRA gifts to charity extended 12

14.  Permanent extension of select tax provisions  Estate tax with top rate of 40% and $5.12 million exemption indexed for inflation  Portability of unified credit  Extended state death credit/deduction 13

15. Wage income Interest income Dividends Capital gains 2013 top rate39.6% 20.0% Base HI payroll tax (employee share) +1.45% a -- 2013 phase-out of itemized deductions (“Pease”) +1.2% +1.2% b 2013 HI surtax+0.9%+3.8% 2013 combined top rate43.15%44.6%25.0% 14 a Additional 1.45% applies for self-employed. b Assumes taxpayer has ordinary income that exceeds itemized deductions. Note: Rates shown represent the equivalent top marginal tax rate on each additional dollar of income earned in the top income tax bracket.

17. A 2.3% excise tax will be levied on manufacturers, producers, or importers on the sale of most medical devices that are not directly marketed to consumers Primary Guidance issued in under section 9009 of the Patient Protection and Affordable Care Act

18. Common misconceptions of worker classification:  Project workers are not employees  Temporary workers are not employees  Former executives returning as “consultants” are independent contractors

19. “Red flags”:  Former employees  Form 1099 & Form W-2  Form 1099 – Multiple years  Industry focus  Leads  IRS internal database  Contractor originated  State info sharing

20. Medicare Tax: Effective January 1, 2013, the Medicare tax rate will increase from 1.45% to 2.35% on wages paid in excess of $200,000 ($250,000 MFJ) per year:  Applies only to the employee portion; the employer portion will remain at 1.45% for all wages paid in the year  Employers may not withhold the higher rate on amounts of wages that do not exceed $200,000  Form W-2 requirements will not change: any additional Medicare tax will be reflected in box 6  A special line will be added to Form 941 beginning with Q1 2013 to reflect and reconcile the additional 0.9% tax  Primary Guidance issued in under section 9015 of the Patient Protection and Affordable Care Act

21. Single FilerJoint Filer Earnings Additional HI Tax Earnings Additional HI Tax $250,000$450$250,000– $500,000$2,700$500,000$2,250 $1,000,000$7,200$1,000,000$6,750 $5,000,000$43,200$5,000,000$42,750

22. In 2013, certain taxpayers face new Medicare taxes on both earned and unearned income under IRC Section 1411(a)(1): A new 3.8% tax on net investment income — Applicable if adjusted gross income (AGI) exceeds $200,000 (single) or $250,000 (joint). Applies to lesser of investment income or AGI above threshold. Includes interest, dividends, rents, royalties, capital gains, and income from passive activities (partnerships, S corps). Does not apply to distributions from IRAs or qualified plans. Does not apply to active business income distributions. Increase from 1.45% to 2.35% in the employee share of tax on earned income above $200,000 (single) or $250,000 (joint): Employee and employer combined tax rate of 3.8%. Applies also to self-employment income.

23. 22 Additional 2% Social Security tax Loss of Itemized Deductions 4.6% additional income tax 5% additional tax on LTCG and Div. Medicare tax on investment income All with wages More than 200/250K in AGI More than 250/300K in AGI More than 400/450K in AGI

25. More technology – requires more critical thinking, data analytics and consulting skills “Basic” skills – such as tax prep is being outsourced/automated Communication methods and styles Less supervisors/managers – creates challenges for entry level professionals

27. Consensus that rates need to come down, paid with for largely yet-to-be determined base broadening (less deductions) Need for substantial international reforms to promote the competitiveness of U.S.-based companies Carried interest changes are part of reform discussions  If capital gain/ordinary rate differential reduced enough, the benefit of taxing carried interest higher is less enticing to the government  Real estate industry is arguing to carve out of these discussions because change to tax treatment of carried interest would adversely affect investment Passthrough tax regimes may get adjusted Or, reform may be a long way off….

28. 27 * Does not include revenue impact of changing tax treatment for pass-through entities Source: Joint Committee on Taxation “Estimated Revenue Effects of Corporate Tax Reform Revenue Raising Provisions that Repeal or Modify Tax Expenditures,” Ways and Means Committee, October 2011. Largest corporate* tax expenditures JCT Revenue Estimates over 10 yrs. ($ billions) MACRS$506.8 Expensing of R&E expenditures$152.2 Deduction for income attributable to domestic production activities $127.0 Inventory methods and valuation: LIFO & LCM$65.6 Credit for low income housing$33.0 Deferral of gain on like-kind exchanges$16.0 Completed contract rules method$13.9 Energy related expenditures $12.3 $926.8 Total of all business revenue raisers estimated $964.3 Revenue-neutral corporate income tax rate28%

29. Ten largest individual tax expenditures, 2014 2014 Expenditure Value (in $B) Exclusion of employer health contributions$143.0 Exclusion of pension plan contributions and earnings $108.5 Reduced rates of tax on dividends and capital gains $91.3 Mortgage interest deduction$71.7 Earned income tax credit$67.0 Exclusion of Medicare benefits$66.0 Child tax credit$57.9 Deduction for state and local taxes$51.8 Exclusion of capital gains at death$48.4 Deduction for charitable contributions$46.4 Source: “Estimates of Federal Tax Expenditures For Fiscal Years 2012-2017,” Joint Committee on Taxation, JCS-1-13, Feb. 1, 2013.

30.  Conventional wisdom says President must lead  Bipartisan Congressional support  Need for US international business competitiveness  Stable source of revenue to fund government 29

31. President Barack Obama PERAB Report on Tax Reform Options (August 2010) National Commission on Fiscal Responsibility and Reform (December 2010) President’s Council on Jobs and Competiveness (January 2012) Released President’s Framework for Business Tax Reform (February 2012) Released President’s FY 2014 budget (April 2013) Calls for corporate tax reform to fund jobs / infrastructure initiatives (July 2013) House Ways and Means Committee Chairman Dave Camp (R-MI) Held 50+ tax reform hearings (January 2011 – Present) Released international tax reform discussion draft (October 2011) Released financial products tax reform discussion draft (January 2013) Released “small business” tax reform discussion draft (March 2013) Established bipartisan tax reform working groups (April-May 2013) Expected to mark up comprehensive tax reform bill (Fall 2013) Senate Finance Committee Chairman Max Baucus (D-MT) Held 30+ tax reform hearings (March 2011 – Present) Series of bipartisan Member meetings (March – June 2013) Announced “blank slate” approach and requested Senator input (July 2013) “Max and Dave” road show with Chairman Camp to build public support for tax reform Expected to mark up comprehensive tax reform bill (Fall 2013) 30

32.  Reduce corporate rate from 35% to 28%  Fully offset with base-broadening options  Address depreciation schedules  Reduce bias toward debt financing  Establish greater parity between large corporations and large non-corporate businesses  Reduce gap between book income and tax income  Provide 25% rate for certain domestic manufacturing income  Increase research credit and make permanent  Limit deferral of US tax on foreign earnings Minimum tax on foreign earnings Use “transition” tax reform revenue to fund jobs / infrastructure initiatives 31

33. Itemized Deductions by AGI Levels Total Number of Returns, 2010 Share with Itemized Deductions Average Deductions for Itemizers Under $10,000 24,795,6374.1% 15,931 $10,000 to $20,000 24,529,2298.3% 15,184 $20,000 to $30,000 19,135,35714.7% 15,307 $30,000 to $50,000 25,605,31929.4% 15,997 $50,000 to $100,000 30,532,55156.5% 19,540 $100,000 to $200,000 13,997,65184.8% 27,729 $200,000 to $500,000 3,471,72395.6% 49,471 $500,000 to $1,000,000 544,22497.0% 101,502 $1,000,000 and over 280,36098.0% 443,680 Total 142,892,05132.6% 26,084 32 Source: IRS Statistics of Income, August 2012. Obama Administration proposal Cap value of deductions at 28% bracket Estimated by Joint Committee on Taxation to raise $480 billion over ten years

34. Obama Administration proposal  Would establish a new 30% minimum tax on incomes in excess of $2 million, to be phased-in beginning at incomes above $1 million.  $500,000 for married individuals filing a separate return.  Tentative “fair share” tax equals 30% of adjusted gross income less a credit for charitable contributions  AGI thresholds indexed for inflation after 2014  Estimated by the Joint Committee on Taxation to raise $70 billion over ten years, assuming interaction with carried interest proposal 33

35. House Ways and Means Committee  Chairman Dave Camp (R-MI)  Goal to reduce top corporate and individual tax rates to 25%  Base broadening provisions to be determined  International reform discussion draft (October 2011)  Shift from a worldwide system to a territorial-based system Financial products tax reform discussion draft (January 2013) Pass-through tax reform discussion draft (March 2013) Bipartisan tax reform working groups  Plans to mark up comprehensive tax reform bill (Fall 2013)  Senate Finance Committee  Chairman Max Baucus (D-MT)  Bipartisan member discussions  Request for Senators to submit “blank slate” reform proposals  Plans to mark up comprehensive tax reform bill (Fall 2013) 34

36. Source: National Journal’s 2012 Vote Ratings (February 2013)

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