Recent Articles

President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief

Tax provisions and other analysis of The New Health Care Legislation signed by President Obama

Business Incentives in the 2010 HIRE Act

SEC Release No. 33-9109: Clear Sign for Continued Support of Single Set of Global Accounting Standards – IFRS Cited as Best Framework
by Bill Godshall and Sean Lager

Revenue Recognition Update - A Recap of What Happened in 2009
by Michael Warren

President Signs Foreign Tax Reforms Into Law; Helps Fund Education/Medicaid Relief

for a PDF of this article click here.

On August 10, 2010 the House approved a critical education and Medicaid Funding bill. President Obama signed the bill into law the same day. Highlights of the bill include:

Elimination of foreign tax credit splitting
Reduction of foreign tax credits on stepped-up assets
Restricts treaty use to resource U.S. income
Limits Use of Sec. 956 on deemed dividends
Repeals 80/20 rules; reinstates withholding
Ends advance earned income credit

For full details of the bill, please view the CCH briefing by clicking here.

Tax provisions and other analysis of The New Health Care Legislation signed by President Obama

for a PDF of this article click here.

Debate Moves to Senate Where GOP Promises Parliamentary Fight on “Reconciliation” Bill. The debates over a massive rewrite of the nation's health care system has moved to the Senate and although Democrats say the pieces are in place to complete the “reconciliation” package and send it to President Obama, Republicans warned they will use parliamentary tactics to slow down the process.

Senate action follows a long weekend in the House, where March 21 that chamber voted 219-212 to clear the $871 billion Patient Protection and Affordable Care Act (H.R. 3590) originally passed by the Senate in December (246 DTR GG-2, 12/29/09).  The president signed the bill into law March 23, 2010.

The House also voted 220-211 to pass a new reconciliation bill (H.R. 4872) that finished its share of the work to enact a broad overhaul of the nation's health care system, paid for with $438 billion in new taxes and fees on insurers, businesses, and families.

“History has been made today. We promised health reform and we have delivered it,” said Rep. George Miller(D-Calif.), chairman of the House Education and Labor Committee. “This bill will create millions of jobs, reduce the federal budget deficit, and finally hold accountable the insurance companies that have caused so much panic and pain in the lives of hard-working Americans.”

New Taxes on High-Income Households
While lower-income households will gain access to tax credits, those changes will be financed largely in the first 10 years of the bill with new taxes on high-income households.

Beginning in 2013, individuals earning more than $200,000 per year ($250,000 for joint filers) will be subject to a new 3.8 percent tax on all unearned income, including capital gains, dividends, and rental income. When combined with the 0.9 percent surtax that would also be imposed on high-income taxpayers' share of their Hospital Insurance (HI) payroll taxes, the new Medicare taxes would raise $210.2 billion over the 2010-2019 period, according to the Joint Committee on Taxation.

The new Medicare taxes largely replace revenues that would be lost by delaying the start date of the Senate-originated bill's excise tax on high-cost insurance plans by five years until 2018. The changes also raise the threshold levels for which insurance policies would be affected by the tax from $23,000 for family plans to $27,500. Individual plans that cost more than $10,200 would be subject to excise tax, up from $8,500 in the Senate-passed version of the bill.

The House's reconciliation bill also includes a less generous inflation index that could accelerate the number of high-cost health insurance plans that will be affected by the tax over time.

In the Senate-originated version of the health care bill, the excise tax on “Cadillac” insurance plans would be indexed to the rate of the consumer price index for all urban consumers (CPI-U) plus 1 percentage point. The House's reconciliation bill modifies that Senate language to index the excise tax thresholds to CPI-U after 2019, making it more likely that health insurance plans would be affected by the tax if health costs rise faster than overall inflation.

However, the House bill still includes many provisions that were sought by labor unions, including adjustments to the thresholds for plans that are priced higher because of the age and gender of employees. The bill also excludes the value of dental and vision benefits from the thresholds, providing even more room to keep most health plans from being affected by the tax when it goes into effect.

Lower- and middle-income households could also be affected by some tax increases under the legislation, including a new $2,500 limit on tax-free contributions to health care flexible spending accounts. Consumers will lose the ability to use their FSA funds to purchase nonprescription medications under the bill.

Tax Credits for Coverage
On net, the total changes to the Senate bill because of the reconciliation bill would produce legislation that costs $940 billion and reduces federal deficits in the 2010-2019 period by $143 billion, while expanding health insurance coverage to 32 million additional people. Without the reconciliation bill, the Senate bill would cost$950 billion and cut the federal deficit by $118 billion, according to the Congressional Budget Office.

CBO said the bill will expand the share of insured non-elderly, legal individuals in America to 94 percent from 83 percent under existing law. To achieve those levels of coverage, the bill also provides for tax credits for individuals and small businesses.

Small businesses with up to 25 employees and average annual wages of less than $50,000 would be eligible for a sliding scale tax credit of up to 50 percent if they purchase insurance for their workers. For employers with fewer than 10 employees and average wages of less than $20,000, a 100 percent credit would be available.

Specifically, a sliding scale credit of up to 35 percent of the cost of providing health care is available through 2013; the credit is expanded in 2014 to cover up to 50 percent of a small business's costs for the first two years that a business purchases health insurance through the new exchanges created in the bill.

The bill also would create a tax credit of 50 percent for investments made after Dec. 31, 2008, and before Jan. 1, 2011, for new therapies to prevent, diagnose, and treat acute and chronic diseases.

Individuals earning less than 400 percent of the federal poverty level, currently about $22,000 for a family of four, would be eligible to receive refundable tax credits to be used to help cover the cost of health insurance premiums. The credits would be on a sliding scale, starting at 2 percent of income for those at 100 percent of poverty levels and phasing out at 9.8 percent of income for those at 300-400 percent of poverty.

An unrelated tax credit for adoptions would be increased from $10,000 to $13,170 as part of the bill. The adoption tax credit would be adjusted to inflation, made refundable, and extended through 2011.

Penalties for No Coverage
Under the Senate bill, employers with more than 50 employees who do not offer coverage would be charged $750 per full-time worker if at least one of their employees qualifies for a premium subsidy in the exchange.

The reconciliation bill would increase that assessment to $2,000 per employee but also would subtract the first 30 employees from the penalty calculation to make sure the requirement does not create a disincentive for hiring.

The underlying Senate bill also would raise$4.5 billion by eliminating the tax deduction for employers that receive a government subsidy for providing retiree prescription drug coverage under Medicare Part D and prohibit health insurance companies from deducting any executive pay in excess of $500,000 if at least 25 percent of its gross premium income is derived from health insurance plans that meet the minimum requirements under the bill.

The reconciliation bill also would modify the penalties for individuals who fail to obtain insurance coverage. The reconciliation bill would exempt from the requirement individuals with incomes below the filing threshold and lower the flat penalty payment from $495 to $325 in 2015 and from $750 to $695 in 2016.

Individuals would pay the greater of the flat tax or a percent of income, and those percentages also would increase under the reconciliation bill. The percentages would increase from 0.5 percent to 1 percent in 2014, 1 percent to 2 percent in 2015, and 2 percent to 2.5 percent in 2016 and subsequent years.

The changes would mean the penalties for low-and middle-income individuals would decrease, compared with the Senate bill, while penalties for higher-income people would increase, according to House Democrats.  

GOP Challenges Focus on ‘Cadillac Tax.'
Through the Health Care and Education Reconciliation Act of 2010, several key provisions of the underlying health care bill were modified, including changes that would raise additional revenues from high-income households and reduce the impact the new 40 percent excise tax on high-cost health insurance policies will have on middle-class households.

“The reconciliation bill was used to buy votes in the House, but that does not mean that the Senate should go along with this misguided exercise,” Senate Budget Committee ranking member Judd Gregg (R-N.H.) said in a statement. “Instead, the Senate should take steps to protect future generations from the effects of the reconciliation bill by rejecting it.”

Democratic and Republican staff members from the Senate Budget, Finance, and Health, Education, Labor and Pensions committees met for about an hour with Senate Parliamentarian Alan Frumin, but afterward aides said no decisions had been rendered on possible procedural challenges to the reconciliation bill. The meeting was on the possible challenge to the bill on the grounds it would violate prohibitions in the Congressional Budget Act and the Senate's procedural “Byrd rule” regarding Social Security.

The Social Security issue came into play when House Democrats put into the reconciliation bill language delaying the start of the tax on high-cost insurance plans until 2018, a change that affects payroll taxes that finance the Social Security Trust fund.

“Both sides presented their arguments to the parliamentarian in the meeting and he didn't provide an answer,”said a Senate GOP aide.

While Frumin gave no decisions, one GOP aide said there could be other issues to be discussed with him. “There's probably going to be a little more discussion [of the Social Security issue]. But there's a lot of other Byrd things we have to go through.”

Sen. Kent Conrad (D-N.D.) told reporters that he did not know when deliberations would be wrapped up, but didn't “see anything as of this moment ... being dropped” due to the Byrd rule.

The parliamentarian has not handed down a final decision on the so-called Cadillac tax on high-cost health insurance plans, Conrad said, adding that “we feel confident” it would be left in the bill.

Aside from outright defeat of the reconciliation bill—which is not likely because final passage requires only 51 votes and the Democratic Caucus has 59 members—Republicans can offer unlimited amendments. Adoption of even one amendment would require the measure to return to the House before it could go to Obama for his signature.

“Democrats were hoping that they could silence the voices of the American people last night. But, starting today, those voices are going to be heard,“ Senate Minority Leader Mitch McConnell (R-Ky.) said March 22 on the Senate floor. “Senate Republicans are going to make sure those voices are heard.”

Treasury, CMS Information-Sharing Program
In addition to those changes, the bill also raises the threshold for claiming deductions for medical expenses to 10 percent of a taxpayer's adjusted gross income for those under 65, up from 7.5 percent, and creates a new 10 percent excise tax on indoor tanning services.

The bill also creates a new excise tax on medical devices sales equal to 2.3 percent of the price of the device. According to JCT, the tax, which is set to begin in 2013, would raise $20 billion through 2019.

A separate annual fee on health insurance providers beginning in 2014 would raise $60 billion over 10 years, and an annual fee on manufacturers and importers of branded drugs would raise $27 billion. The branded drug fee would begin in 2011.

The reconciliation bill also includes a joint program between the Department of Treasury and the Centers for Medicare &  Medicaid Services (CMS)that would authorize data sharing of tax return information for Medicare providers and suppliers.

Under this program, CMS would use tax return information, specifically any information on delinquent taxes, to determine whether to enroll or re-enroll providers and suppliers in Medicare.

Shared taxpayer information would be restricted to an individual taxpayer identification number, the amount of seriously delinquent tax debt owed by the taxpayer, and the tax year relevant to the debt.

For purposes of the program, seriously delinquent tax debt would refer to a situation where a lien has been filed against an individual. A debt that was being paid off, or a situation where a taxpayer was entered into a collection due process hearing, would not qualify as a seriously delinquent tax debt.

Economic Substance, ‘Black Liquor' Provisions
Two other revenue-raisers include the language to codify the economic substance doctrine. The bill clarifies that those transactions will be treated as having economic substance only if they change the taxpayer's economic position in a meaningful way. The taxpayer must have a substantial purpose for the transaction, other than changing federal income tax liability, according to a summary of the bill. JCT said that provision would raise $4.5 billion through 2019.

Another provision would raise $23.6 billion for the bill by disallowing the use of the cellulosic biofuel producer credit for paper manufacturers that use a fuel known as “black liquor” to power their plants. Lawmakers said paper manufacturers would be exploiting a loophole to claim credit for their use of black liquor, a byproduct of paper pulp that been in use as a fuel since the 1930s.

While Democrats celebrated their victory in the House, Republicans said it was a sad day for individual choice and warned that the bill will hurt, not help, the nation's fiscal outlook.

“Federal bureaucrats will be making your health care choices for you and the [Internal Revenue Service] will be enforcing them,” said Rep. Dave Camp (R-Mich.), ranking member of the Ways and Means Committee. “The American people know you can't reduce health care costs by spending $1 trillion or raising taxes by more than one-half trillion dollars ... Simply put, the Democrats' bill will not only ruin our health care system, but the tax increases will ruin our economy and kill jobs

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Business Incentives in the 2010 HIRE Act

for a PDF of this article click here.

Recently, Congress passed and the President signed the Hiring Incentives to Restore Employment Act of 2010 (2010 HIRE Act). The 2010 HIRE Act has several business-friendly tax provisions that may benefit you.

Incentives for Hiring and Retaining Unemployed Workers
To encourage employers to hire new employees in 2010, the Act combines Social Security tax forgiveness for newly added employees and a tax credit for retaining those employees for at least 52 consecutive weeks.

Payroll Tax Forgiveness
The 2010 Hire Act effectively exempts a qualified employer from paying the 6.2% OASDI Social Security tax for wages paid for any 2010 period beginning after March 18, 2010 (the date of enactment) through December 31, 2010, for new employees if certain conditions are met. To qualify for the exemption, each employee must be a “qualified individual.”A qualified individual is an employee: (1) who begins work for a qualified employer after February 3, 2010, and before January 1, 2011; (2) who has not been employed for more than 40 hours during the 60-day period ending on the date employment begins; (3) is not employed to replace another employee of the employer unless the other employee separated from employment voluntarily or for cause; and (4) cannot be related to the employer or own more than 50% of the business. Generally, a “qualified employer” is any business, other than a governmental entity.

A qualified employer may elect not to apply the payroll tax forgiveness. Note that a qualified employer may not claim the work opportunity tax credit on any wages paid to a qualified individual during the 1-year period beginning on the hiring date of the employee if those wages qualify the employer for payroll tax forgiveness, unless the employer opts out of  payroll tax forgiveness as to that employee.

The reduction in taxes due for wages paid in the first calendar quarter of 2010 is treated as a payment against the second 2010 calendar quarter taxes otherwise due.

Business Credit Increase for Retention of Newly Hired Individuals in 2010
The 2010 HIRE Act allows taxpayers to increase their business credit by the lesser of$1,000 or 6.2% of wages for a 52-week period for each retained worker that satisfies a minimum employment period. A retained worker is defined the same as a “qualified individual” for purposes of the payroll tax forgiveness provision, which is discussed above. In addition, the worker must be employed by the employer for at least 52 consecutive weeks, and receive wages for the last 26 weeks of the 52-week period that are at least 80% of the wages paid during the first 26 weeks.

This increase to the business credit is effective for new hires beginning on March 18, 2010, and cannot be carried back to a taxable year that began prior to this effective date. Note that employers can claim both the work opportunity tax credit and the retention credit on the same qualified employee.

Election to Expense Depreciable Business Assets
The Act extends the higher $250,000 limit for small business expensing for another year. The $250,000 amount applies to the cost of depreciable tangible personal property purchased for use in the active conduct of a trade or business (including off-the-shelf computer software placed in service before 2011) for taxable years beginning in 2010. The maximum amount that the taxpayer may deduct is increased from$125,000 to $250,000. This $250,000 amount is reduced, however, by the amount by which the cost of the qualifying property placed in service during 2010 exceeds $800,000. Note that the deduction amount continues to be limited to the taxpayer's taxable income derived from the active conduct of the trade or business. Any amount that exceeds the taxable income limitation may be carried forward to succeeding taxable years.

Corporate Estimated Taxes
To help pay for the legislation, the Act increases the required corporate estimated tax payment for large corporations (those with assets exceeding$1 billion) due in July, August or September 2014 to 157.75% of the estimated tax payment otherwise due. Payments due in July, August or September 2015 must be 121.5% of the payment otherwise required. Payments due in July, August or September 2019 must be 106.5% of the payment otherwise required. For the 2015 and 2019 payments, a corporation's next required installment is correspondingly decreased.

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SEC Release No. 33-9109: Clear Sign for Continued Support of Single Set of Global Accounting Standards – IFRS Cited as Best Framework
By Bill Godshall and Sean Lager

On Wednesday, February 24, the Securities and Exchange Commission (SEC) held an open meeting to continue discussions about the role of International Financial Reporting Standards (IFRS) in our domestic financial reporting system. The SEC also unanimously agreed to publish a statement of continued support for a single set of high-quality global accounting standards. In addition, the SEC confirmed its view that IFRS is best suited to be that global standard.

The statement of support describes the issues that need to be further analyzed and lays out the events that must occur between now and 2011, when the SEC expects to make a determination on whether or not to further incorporate IFRS into the U.S. public markets. The SEC reaffirmed its commitment to addressing the feedback from over 200 comment letters received on the proposed roadmap, and also to basing any move to IFRS on the best interests of US investors and markets.

Chairman Shapiro noted that ongoing convergence projects must be successfully completed before conversion to IFRS takes place. The SEC staff has developed a work plan to assist the commission in its analysis of the impact that IFRS might have on the US securities market. As noted in the release, “t he work plan sets forth specific areas and factors for the staff to consider before potentially transitioning our current financial reporting system for U.S. issuers to a system incorporating IFRS. Specifically, the work Plan addresses areas of concern that highlighted by commenters, including:

The SEC staff expects to provide public progress reports on the work plan beginning in October 2010. Also, the Commission stated that any transition to IFRS reporting would begin no earlier than 2015.

Bill Godshall, Frazier & Deeter, LLC Audit Partner-in-Charge, stated, "This is the clearest sign yet under Chairman Shapiro's leadership that the SEC is still committed to a single set of quality global financial reporting standards and that IRFS is best positioned at this time to be the framework.” To contact Bill click here.

Sean Lager, Frazier & Deeter's leading expert in IFRS and nationally recognized for his involvement with IFRS noted, “Frazier & Deeter has been actively involved with IFRS for several years and continues to support the goal of a single framework of high-quality global accounting and financial reporting standards. We are really glad to see the SEC continue to support the movement towards this single set of global accounting and financial reporting standards." To contact Sean click here.

SEC Release No. 33-9109, page 14

For complete draft of SEC Release No. 33-9109 click here.

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Revenue Recognition Update - A Recap of What Happened in 2009
By Michael Warren, Partner at Frazier & Deeter, LLC

During 2009, there were some significant developments regarding revenue recognition accounting standards. Those most relevant to high tech companies include:

• EITF 08-011, Revenue Arrangements with Multiple Deliverables (supersedes EITF 00-21)
• EITF 09-032, Certain Revenue Arrangements that Contain Software Elements

The above standards were both ratified in September 2009 and will have a substantial impact on revenue recognition upon adoption.

CLICK HERE TO VIEW A PDF OF THIS ENTIRE WHITE PAPER.

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