CBIZ MHM Executive Education Series Fourth Quarter Accounting

CBIZ & MHM Executive Education Series™ Fourth Quarter Accounting and Financial Reporting Issues Update Mike Loritz, Mark Winiarski, Steve Henley January 10, 2019 Questions? Email cbizmhmwebinars@cbiz. com 1

About Us • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2, 900 professionals nationwide A member of Kreston International A global network of independent accounting firms MHM (Mayer Hoffman Mc. Cann P. C. ) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms. Questions? Email cbizmhmwebinars@cbiz. com 2

Before We Get Started… • Use the control panel on the right side of your screen to: • Change your audio mode • Submit questions • Download handouts • If you need technical assistance: • Call support at 877 -582 -7011 • Email us at cbizmhmwebinars@cbiz. com Questions? Email cbizmhmwebinars@cbiz. com 3

CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer polling questions throughout the webinar. External participants will receive their CPE certificates via email within 15 business days of the webinar. Questions? Email cbizmhmwebinars@cbiz. com 4

Disclaimer The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business. Questions? Email cbizmhmwebinars@cbiz. com 5

Presenters Mike has 21 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair MIKE LORITZ, CPA MHM Shareholder value, revenue recognition and others. Mike also serves as a technical resource for application of audit methodologies for both private and public entities. 816. 945. 5611 • mloritz@cbiz. com Questions? Email cbizmhmwebinars@cbiz. com 6

Presenters Located in our Kansas City office, Mark is a member of our Professional Standards Group (PSG). Mark's role includes instructing in our national training program, presenting as a subject matter expert at webinars and conferences, and preparing MHM publications on accounting and auditing issues. As a PSG member, Mark consults with clients and engagement teams across the country in many areas of accounting and auditing. Mark has served clients as an auditor, consultant and advisor in numerous MARK WINIARSKI, CPA MHM Shareholder industries including manufacturing, distribution, mining, retail sales, services and software. 816. 945. 5614 • mwiniarski@cbiz. com • @KCWini Questions? Email cbizmhmwebinars@cbiz. com 7

Presenters Steve has 30 years experience in serving the tax needs of clients in a variety of industries including retail, distribution and manufacturing, services, technology and communications. In serving as lead tax engagement executive, Steve’s focus is identifying and executing value creating strategies to meet the needs of his clients in a variety of technical areas, such as revenue recognition, acceleration of deductions, research and experimentation credits, state and local tax minimization, M&A tax structures, international tax planning and tax implications of compensation programs. Stephen C. Henley, CPA National Tax Practice Leader Questions? Email cbizmhmwebinars@cbiz. com 770. 858. 4443 • shenley@cbiz. com 8

Agenda 01 Current Events 02 Reminders 03 Federal Tax Update 04 Questions? Email cbizmhmwebinars@cbiz. com 9

CURRENT EVENTS Questions? Email cbizmhmwebinars@cbiz. com 10

ASU 2018 -17 Variable Interest Entity Consolidations • Part One: • Expansion of the private company accounting alternative • Part Two: • Narrowing the scope of indirect interest in service contracts Questions? Email cbizmhmwebinars@cbiz. com 11

Consolidations: Order of Operations Variable Interest Entity (VIE) Guidance • • Voting Interest Entity (VOE) Guidance Other GAAP Step 1: Scoping Step 2: Identify variable interests Step 3: Determine if the legal entity is a VIE Step 4: Determine the primary beneficiary Other GAAP could include another consolidation method, equity method of accounting, leasing guidance, financial instruments, etc. Questions? Email cbizmhmwebinars@cbiz. com 12

Part One: Existing Private Company Accounting Alternative Susan Owner Susan holds 100% of equity voting rights Reporting Entity Susan holds 100% of equity voting rights Lease Leasing Entity Mortgage loan Loan guarantee Questions? Email cbizmhmwebinars@cbiz. com Bank 13

Part One: Existing Private Company Accounting Alternative § Don’t apply the VIE guidance if: Susan Owner Susan holds 100% of equity voting rights Reporting Entity Susan holds 100% of equity voting rights Lease Leasing Entity Mortgage loan Loan guarantee Bank Questions? Email cbizmhmwebinars@cbiz. com § The lessor entity and the private company are under common control § The private company has a lease arrangement with the lessor entity § Substantially all the activity between the two entities is related to the leasing activities, and § The value of the asset leased by the private company is greater than any obligations, secured by the asset, that are guaranteed or collateralized by the private company 14

Part One: Revise and Replace PCC Accounting Alternative • A private company can elect to scope out commonly controlled entities from the VIE guidance if: • The reporting entity and the legal entity are under common control, • The reporting entity and the legal entity are not under common control of a public business entity, • The legal entity under common control is not a public business entity, and • The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the General Subsections of this Topic. The Variable Interest Entities Subsections shall not be applied when making this determination. Questions? Email cbizmhmwebinars@cbiz. com 15

What is Common Control? The SEC staff concluded common control exists when: • An individual or enterprise holds more than 50 percent of the voting ownership of each entity • A group of shareholders holds more than 50 percent of the voting ownership of each entity and have contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists • Immediate family members (i. e. married couples and their children, but not their grandchildren) hold more than 50 percent of the voting ownership interest of each entity…and there is no evidence those family members will not vote their shares in concert. The FASB and PCC have said that the definition of common control is broader then the SEC interpretation. Questions? Email cbizmhmwebinars@cbiz. com 16

However…. Solely for purposes of the accounting alternative common control is assessed only under the general subsection of the consolidation guidance… Voting Model The party with more than 50% voting interest is presumed to consolidate an entity In a limited partnership voting interests are evaluated as the substantive kickout rights held by limited partners Questions? Email cbizmhmwebinars@cbiz. com Noncontrolling rights can overcome the presumption when they can prevent the taking of actions in the ordinary course of business 17

Definition of a Public Business Entity • All other entities that meet any one of these five criteria are public business entities • Those required by the SEC to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC • This includes entities whose financial statements or financial information are required to be included in a filing. • Those required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency, other than the SEC • Those required to file or furnish financial statements with a regulatory agency (foreign or domestic) in preparation for the sale of securities or for purposes of issuing securities • Those that have (or is a conduit bond obligor for) securities that are traded, quoted, or listed on an exchange or an over-the-counter market • Those with securities not subject to contractual restrictions on transfer, and it is required to prepare U. S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods) pursuant to a legal, contractual, or regulatory requirement Questions? Email cbizmhmwebinars@cbiz. com 18

Examples Susan Owner Susan holds 100% of equity voting rights Auto manufacturer Susan holds 100% of equity voting rights Supply Questions? Email cbizmhmwebinars@cbiz. com Engine manufacturer 19

Examples Bob Owner Jamie Owner Bob holds 100% of equity voting rights Auto manufacturer, Inc Jamie holds 51% of equity voting rights Supply Questions? Email cbizmhmwebinars@cbiz. com Engine manufacturer, Inc 20

Examples Jamie Owner Bob holds 100% of equity voting rights Reporting Entity Jamie owns a 20% beneficial interest and is general partner Lease agreement Questions? Email cbizmhmwebinars@cbiz. com John Owner John owns a 80% beneficial interest and is limited partner Leasing Entity, LP 21

Examples Susan Owner Susan holds 100% of equity voting rights Reporting Entity Reporting entity holds 100% of equity voting rights Entity A Questions? Email cbizmhmwebinars@cbiz. com Reporting entity holds 100% of. Common equity voting rights control Entity B 22

Disclosures • The nature and risks associated with a reporting entity’s involvement with the legal entity under common control. • How a reporting entity’s involvement with the legal entity under common control affects the reporting entity’s financial position, financial performance, and cash flows. • The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position resulting from its involvement with the legal entity under common control. • The reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control. If the reporting entity’s maximum exposure to loss resulting from its involvement with the legal entity under common control cannot be quantified, that fact shall be disclosed. • If the reporting entity’s maximum exposure to loss (including implicit arrangements) exceeds the carrying amount of the assets and liabilities, qualitative and quantitative information to allow users of financial statements to understand the excess exposure Questions? Email cbizmhmwebinars@cbiz. com 23

Return of Combined Financial Statements • Combined financial statements may be appropriate when: • Entities are under common control or common management • Combined financial statements are more meaningful • Eliminations work the same except: • Equity of all entities is presented • Income statement combines all entities Questions? Email cbizmhmwebinars@cbiz. com 24

Balance Sheet and Income Statement Differences Consolidated Questions? Email cbizmhmwebinars@cbiz. com Combined 25

Part One: Adoption of Private Company Accounting Alternative • Effective for fiscal years beginning after Dec. 15, 2020 • Early adoption is permitted • Retrospectively applied • Will eliminate PCC Accounting Alternative for leasing entity • Cumulative effect adjustment in the earliest period presented An auditor may include an emphasis of matter paragraph in their opinion and include language to address prior GAAP departures that are retrospectively corrected Questions? Email cbizmhmwebinars@cbiz. com 26

Consolidations: Order of Operations Variable Interest Entity (VIE) Guidance • • Voting Interest Entity (VOE) Guidance Other GAAP Step 1: Scoping Step 2: Identify variable interests Step 3: Determine if the legal entity is a VIE Step 4: Determine the primary beneficiary Other GAAP could include another consolidation method, equity method of accounting, leasing guidance, financial instruments, etc. Questions? Email cbizmhmwebinars@cbiz. com 27

Part Two: Service and Decision Maker Arrangements Susan Owner Susan holds 51% of equity voting rights Susan holds 100% of equity voting rights Auto Manufacturer, Inc Auto Manufacturing, Inc. provides decision making services for a fee Bicycle Manufacturer, Inc. Does Auto Manufacturer, Inc. have a variable interest in Bicycle Manufacturer, Inc. ? Questions? Email cbizmhmwebinars@cbiz. com 28

Part Two: Service and Decision Maker • The RE’s arrangement to provide decision maker or other services to a legal entity is not a variable interest if: • Fee is commensurate • The RE does not hold other significant interests in the legal entity* • Terms, conditions and amounts are customary (arms length) Questions? Email cbizmhmwebinars@cbiz. com 29

Current Guidance *A proportionate share of indirect interests held by related parties, other than employees and employee benefit plans. Indirect interests held through related parties that are under common control with the decision maker should be considered the equivalent of direct interests in their entirety. Equity Reporting Method Entity 25% Investment 40% Legal Entity Being Evaluated In both cases, the reporting entity has a 10% (indirect) interest in the legal entity. Questions? Email cbizmhmwebinars@cbiz. com Parent Entity Reporting Entity Sister Entity 10% Legal Entity Being Evaluated 30

Revised Guidance *A proportionate share of indirect interests held by related parties, other than employees and employee benefit plans. Indirect interests held through related parties that are under common control with the decision maker should be considered the equivalent of direct interests in their entirety. Equity Reporting Method Entity 25% Investment 40% Legal Entity Being Evaluated This reporting entity has a 10% (indirect) interest in the legal entity. Questions? Email cbizmhmwebinars@cbiz. com Parent Entity Reporting Entity Sister Entity 10% Legal Entity Being Evaluated 31

Part Two: Service and Decision Maker Arrangements Susan Owner Susan holds 51% of equity voting rights Susan holds 100% of equity voting rights Auto Manufacturer, Inc Auto Manufacturing, Inc. provides decision making services for a fee Bicycle Manufacturer, Inc. Does Auto Manufacturer, Inc. have a variable interest in Bicycle Manufacturer, Inc. ? No, as long as the fee is commensurate with the services provided and the terms and conditions are customary Questions? Email cbizmhmwebinars@cbiz. com 32

Structured Investment Vehicles Sponsor controls management company Investment Management Company Sponsor owns 10% of equity Investment Funding, & Defeasance Management Services Diversified owners Own 90% of equity Structured Investment Vehicle Equity has no voting rights. Investment Manger may not have consolidation or disclosure obligations under the VIE guidance Questions? Email cbizmhmwebinars@cbiz. com 33

Timing and Adoption • Effective date for public companies for is annual periods, including interim within, beginning after Dec. 15, 2019 • Private companies one year later • Early adoption permitted • Retrospectively applied Questions? Email cbizmhmwebinars@cbiz. com 34

ASU 2018 -18 Collaborative Arrangements • Align the assessment of whether a revenue transaction exists under Topic 808 with Topic 606 by evaluating whether a distinct good or service is promised • Clarifies that Topic 606 applies if the partner is a customer • Precludes revenue presentation unless the partner is a customer • Effective public business entities fiscal year, including interim therein, after Dec. 15, 2019 • All others annual period one year later • Early application is permitted if Topic 606 is adopted • Applied retrospectively Questions? Email cbizmhmwebinars@cbiz. com 35

ASU 2018 -20 Leasing Update – Lessor Practical Expedient • Sales Tax • Elect to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price • Excludes taxes on gross receipts of lessor and property taxes • Absent the election a lessor evaluates whether they are the primary obligor of the taxes to decide if the tax amounts are presented gross in the revenues Questions? Email cbizmhmwebinars@cbiz. com 36

ASU 2018 -20 Leasing Update – Lessor Changes • Lessor Costs • Lessee payment of costs directly to a third party on behalf of the lessor are excluded from variable payments • Lessee reimbursement of costs to the lessor are included in variable payments • Variable Payments • Variable payments allocated to a nonlease component should be recognized according to the accounting requirements applicable to the nonlease component Questions? Email cbizmhmwebinars@cbiz. com 37

Further Lessor Improvements Coming Soon… • Exception for determining the fair value of the underlying asset if the lessor is not a manufacturer or dealer • Fair value can be cost • Requested by financial institutions and captive finance companies • Depository institutions may present sales-type and direct financing leases as investment activity in the statement of cash flows Questions? Email cbizmhmwebinars@cbiz. com 38

ASU 2018 -16 Hedge Accounting SOFR • New permissible benchmark interest rate for hedge accounting: • The overnight index swap (OIS) rate based on the secured overnight financing rate (SOFR) was added as • Effective public business entities fiscal year, including interim therein, after Dec. 15, 2018 • All others annual period one year later • Early application is permitted if improvements to hedging (ASU 2017 -12) are already adopted Board is discussing transition issues Questions? Email cbizmhmwebinars@cbiz. com 39

ASU 2018 -19 Current Expected Credit Loss (CECL) Model • Improvements • Deferred transition date for private companies • Exclude operating lease receivables • Proposed improvements • • • Accrued interest Recoveries Extensions and inputs impact on contractual term Vintage disclosures Transfers from: • Loans held-for-sale to held-for-investment • Debt securities available-for-sale to held-to-maturity Questions? Email cbizmhmwebinars@cbiz. com 40

PCAOB Standards – Auditing Estimates • Intended to address differences in existing three standards and the continued occurrence of audit deficiencies • Improvements • Devote greater attention to potential bias • Align auditing requirements for all estimates, including fair value • Integrate risk assessment standards • Improve clarity and specificity Questions? Email cbizmhmwebinars@cbiz. com 41

PCAOB Standards – Specialists • Intended to address diversity in practice and audit deficiencies • Improvements • Enhance requirements for use of a company’s specialist • Risk-based approach for supervising auditors specialists Both standards are effective for audits for fiscal years ending on or after Dec. 15, 2020 Questions? Email cbizmhmwebinars@cbiz. com 42

REMINDERS Questions? Email cbizmhmwebinars@cbiz. com 43

Financial Instruments: Recognition & Measurement • Equity investments measured at fair value with changes in fair value recognized in net income • Practicability Exception: elect to record equity investments without readily determinable fair values at cost • Cost is adjustment for subsequent adjustments for observable price changes for an identical or similar investment of the same issuer and impairment Eliminates the available-for-sale and cost method classifications for equity investments, but does not impact debt securities or securities measured under the fair value option. Questions? Email cbizmhmwebinars@cbiz. com 44

Financial Instruments: Recognition & Measurement • Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes • Clarifies assessments of income tax valuation allowances for available-for-sale securities • Effectively eliminates the ability to consider ability and intent to hold the debt securities to maturity as a tax planning strategy • Updates disclosure requirements • Effective for private companies in calendar year 2019 Questions? Email cbizmhmwebinars@cbiz. com 45

Definition of a Business • Previously… • Often “assumed” an acquisition was of a business • Three significant revisions reduce the likelihood of a an acquisition or sale being of a business: • Application of a “screen” • Definition of an output • Existence of inputs and processes • Effective for private companies in calendar year 2019 • Early adoption permitted Questions? Email cbizmhmwebinars@cbiz. com 46

Presentation of Restricted Cash • Requires that restricted cash be included in beginning and ending cash on the cash flow statement • Cash, cash equivalents, restricted cash and restricted cash equivalents • Disclosure requirements • Nature of the restriction • Amount, by line items on the balance sheet, of restricted cash and restricted cash equivalents • Effective for private companies in calendar year 2019 • Early adoption permitted • Applied retrospectively Questions? Email cbizmhmwebinars@cbiz. com 47

Accounting for Income Taxes Optional measurement period for the tax cuts and jobs act has come to an end • Topic 606 conformity rules have been clarified by the IRS through examples in the blue book • Variable consideration may not be subject to the “earlier of” rule • Refundable AMT credits are not subject to sequestration • Partnership audit rules go into effect Questions? Email cbizmhmwebinars@cbiz. com 48

Accumulate Other Comprehensive Income Reclassification • Elections to reclassify “stranded” tax effects in AOCI to retained earnings: • Direct effect of the change in corporate income taxes • i. e. Remeasurement from 35% to 21% • Other effects of the tax cuts and jobs act • Repatriation tax • State tax effect, etc. • Disclosure of whether the election was made or not, and the other effects that were elected to be reclassified (if any) • Effective for fiscal years beginning after December 15, 2018, early adoption permitted • Apply on a modified retrospective or retrospective method Questions? Email cbizmhmwebinars@cbiz. com 49

Other Standards Coming Up • 2019 Public Business Entities • Improvements to Accounting for Hedging Activities • Accounting for Certain Financial Instruments with Down Round Features • Non-employee Share-Based Accounting • Premium Amortization on Purchased Callable Debt Securities • Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes • Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost • Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Questions? Email cbizmhmwebinars@cbiz. com 50

Other Standards Coming Up • 2019 Private Companies • Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments • Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory • Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost • Service Concession Arrangements (Topic 853) Determining the Customer of the Operation Services • Liabilities—Extinguishments of Liabilities (Subtopic 405 -20): Recognition of Breakage for Certain Prepaid Stored-Value Products • Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Questions? Email cbizmhmwebinars@cbiz. com 51

ADMINISTRATIVE Questions? Email cbizmhmwebinars@cbiz. com 52

Meals and Entertainment Guidance • Expenditures for both meals and entertainment were 50 • • percent deductible prior to the TCJA, with certain limitations The distinction of meals from entertainment expenses was not critical prior to the TJCA because either way, the expense was 50 percent deductible and the deduction requirements for entertainment expenses normally were met for meals expenses TCJA repealed the 50 percent deduction for entertainment expenses after Dec. 31, 2017 • If meals expenses are a subset of entertainment expenses, then meals expenses (including the vast category of client business meals) are generally nondeductible under the TJCA Questions? Email cbizmhmwebinars@cbiz. com 53

Meals and Entertainment Guidance The IRS stated in Notice 2018 -76 that taxpayers may continue to deduct 50 percent of an otherwise allowable business meal expense if: • The expense is an ordinary and necessary expense under Section 162(a) paid or incurred in carrying on any trade or business; • The expense is not lavish or extravagant under the circumstances; • The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages; • The food or beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and • In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. Questions? Email cbizmhmwebinars@cbiz. com 54

Qualified Transportation Fringe Benefits (QTFB) • QTFB expenses are not deductible for amounts incurred and • paid after Dec. 31, 2017 and through Dec. 31, 2025; however, QTFB amounts remain excludible from an employee's income. Impact on For Profit Companies • Proposed strategy: increase wages instead of paying for parking if employees opt in • New Publication 15 -B: "no deduction is allowed for qualified transportation benefits (whether provided directly by you, through a bona fide reimbursement arrangement, or through a compensation reduction agreement) incurred or paid after December 31, 2017. " Questions? Email cbizmhmwebinars@cbiz. com 55

Qualified Transportation Fringe Benefits (QTFB) • Parking Fringe Expenses • QTFB includes qualified parking • Two types of calculations: • Employer pays third party for the use of employee parking lot • Employer owns or leases parking lot • Third party contract: the expense disallowance is the amount the employer pays to the third party, but if this exceeds $260/employee, then the excess is excluded from disallowance • Employer owns or leases: employers may use any reasonable method to calculate the disallowance pending issuance of further guidance Questions? Email cbizmhmwebinars@cbiz. com 56

Qualified Transportation Fringe Benefits (QTFB) • Impact on Not For Profit Companies • Fringe benefits which are not deductible under the TCJA (such as QTFB expenses) also increase income subject to UBIT • IRS Chief Counsel: increasing wages paid to “employees [for parking] is still a QTFB, it is not additional compensation. “ • The additional income subject to UBIT is taxable at 21% • Smaller NFPs face an additional challenge -- providing qualified transportation fringe benefits will result in the requirement to file Form 990 -T, "Exempt Organization Business Income Tax Return. " • Previously these smaller NFPs did not have to file this form as they did not have income subject to UBIT. • Form is complex and can be daunting for those completing it for the first time • Some practitioners have suggested that the IRS should issue guidance and a simplified form for NFPs filing solely due to the payment of QTFBs. Questions? Email cbizmhmwebinars@cbiz. com 57

QOZ Proposed Regs • On Oct. 19, 2018, the IRS issued highly anticipated proposed regulations on opportunity zones. • Address several issues that are fundamental to the initial investment in and creation of a qualified opportunity fund (QOF) • Original use test • Substantial improvement test • Definition of a qualified opportunity zone business, including • reasonable working capital rules • how debt is treated in a QOF taxed as a partnership • The IRS contemporaneously issued Revenue Ruling 2018 -29 that addresses the application of the original use and substantial improvement tests to the purchase of land with an existing building in an opportunity zone as well as a draft QOF selfcertification form (Form 8996) and accompanying instructions. Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 58

QOZ Recap • What Are the Tax Incentives for Investment in an Opportunity Zone? • Special Rules: • Initial basis in the investment in the QOF is zero; • If the taxpayer holds for at least 5 years, basis increased by 10 percent of the deferred gain (so 10% permanently excluded); • If the taxpayer holds for at least 7 years, basis increased by additional 5 percent deferred gain (15% permanently excluded); • If the taxpayer holds for at least 10 years, the taxpayer can elect to have basis equal fair market value (FMV) on the date the investment is sold or exchanged (which means that post-acquisition gain is permanently excluded) Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 59

QOZ Recap • Three Separate Tax Benefits • Temporary capital gains deferral (through Dec. 31, 2026 latest), • Permanent exclusion of a portion of the deferred gain (for investments held five or seven years), and • Permanent exclusion of post-acquisition appreciation in the investment (for investments held 10 years) Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 60

QOZ Proposed Regs • Gains Eligible – Only “Capital Gains” • Any gain that a taxpayer is required to include in its computation of capital gain (including capital gain from an actual or deemed sale or exchange) is eligible to be deferred • Short-term and long-term capital gain • Section 1231 gain (gain from the sale of real estate used in a trade or business) and unrecaptured Section 1250 gain (which is “capital gain” taxed at a higher capital gains rate) • Section 1245 and Section 1250 depreciation recapture, which is taxed as ordinary income instead of being included in the taxpayer's computation of capital gain, is ineligible Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 61

QOZ Proposed Regs • Taxpayers Eligible • Any taxpayer that recognizes capital gain for federal income tax purposes is a taxpayer eligible to elect deferral under the opportunity zone rules • Individuals • C corporations (including a regulated investment company (RIC) or real estate investment trust (REIT)) • Partnerships • S corporations and • Trusts or • Estates Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 62

QOZ Proposed Regs • Pass-Through Entity Treatment • PTE can elect to defer all or part of the gain or, to the extent that the PTE does not so elect, the partner(s) to whom the entity allocates such capital gain may elect to defer all or part of the gain • 180 Day Rule • PTE -- begins on the date that the partnership sells or exchanges the asset • Partner – begins on last day of the partnership taxable year in which the realization event occurred (the date on which the partner “recognizes” its allocable share of the gain absent an election to defer) Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 63

QOZ Proposed Regs • Election made on Form 8949 • Multiple elections allowed for various parts of same deferred • • gain All of the deferred capital gain's tax attributes are preserved Investment in a QOF must be an equity interest -- debt does not qualify QOZ Fund interest may be pledged as collateral for debt The basis step-up election (allows taxpayer to exclude postacquisition gain on the sale of a QOF interest held for at least 10 years) applies only to a QOF investment made with eligible capital gain subject to a proper deferral election Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 64

QOZ Proposed Regs • Pre-existing entity can qualify as QOF, as long as it does not • own a significant amount of tangible property that it acquired prior to Dec. 31, 2017 At least 90 percent of a QOF's assets must be QOZP • qualified opportunity zone stock (QOZ stock), • qualified opportunity zone partnership interests (QOZ partnership interests), and • qualified opportunity zone business property (QOZBP) • Special rules for determining 90/10 Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 65

QOZ Proposed Regs • Qualified Opportunity Zone Business Property (QOZBP) • Tangible property (including real property) used in a trade or business if: • The property is acquired from unrelated party by purchase after Dec. 31, 2017; • Either § (a) the original use of the property in the zone commences with the QOF (or the QOZB) or § (b) the QOF (or QOZB) substantially improves the property; and • During substantially all of the holding period for the property, substantially all of the use of the property is in Portions excerpted from Starczewski article in Oct. 23 Daily Tax the zone Report Questions? Email cbizmhmwebinars@cbiz. com 66

QOZ Proposed Regs • Original Use and Substantial Improvement Applied to Land Building Purchase • Original use in the zone must commence with the QOF (or QOZB), or the QOF (or QOZB) substantially improves the property • Substantial improvement • During 30 -month period beginning after the date of acquisition, QOF has to “double down” -- additions to basis must exceed original basis in the property at the beginning of the 30 -month period (i. e. , basis needs to be doubled) • Rev. Rul. 2018 -29 clarifies that land does not have to be improved and basis does not need to be doubled Portions excerpted from Starczewski article in Oct. 23 Daily Tax Report Questions? Email cbizmhmwebinars@cbiz. com 67

JUDICIAL Questions? Email cbizmhmwebinars@cbiz. com 68

Namakian v. Comm’r, TC Memo 2018 -200 • Taxpayer failed to timely file his Federal income tax returns and to make • • estimated tax payments for tax years 2005 through 2013. Income dropped from over $400, 000 per year prior to 2007 to between $120 K-$200 K from 2011 -2013. This caused stress and anxiety, which were exacerbated by his mother-inlaw passing away in February 2011 (during this time his wife was preoccupied attending to her mother) and in 2014 his father-in-law passed away. In February 2013 Taxpayer was diagnosed with stress-induced anxiety and depression; his symptoms included insomnia and an inability to retain focus. He made a full recovery after a year of medical intervention. Taxpayer challenges IRS determination not to abate the additions to tax under section 6651(a)(1) and (2) (failure to file and failure to pay) for 2011, 2012, and 2013 and under section 6654 (failure to pay estimated tax) for 2012 and 2013. Questions? Email cbizmhmwebinars@cbiz. com 69

Namakian v. Comm’r, TC Memo 2018 -200 Section 6651(a)(1): Failure to File • Taxpayer Arguments • Stress he faced from his financial setbacks • Deaths of his mother-in-law and father-in-law • Uncertainty about the outcome of his Tax Court cases relating to his 2007 and 2008 tax years • Court Rebuttal • Reasonable cause may exist if the taxpayer's or a family member's illness or incapacity prevents the taxpayer from filing his or her tax return, but not if the taxpayer is able to continue his or her business affairs despite the illness or incapacity. • A taxpayer's selective inability to meet his tax obligations when he can conduct normal business activities does not excuse his late filing or failure to file. Questions? Email cbizmhmwebinars@cbiz. com 70

Namakian v. Comm’r, TC Memo 2018 -200 Section 6651(a)(1): Failure to File • Court Rebuttal • Taxpayer was not incapable of carrying on his normal business activities during the periods in question. To the contrary, he earned significant income during these periods. Consequently, his financial setback (which had been ongoing since at least 2007), the deaths of his mother-in-law and father-in-law, or his anxiety and depression did not constitute reasonable cause for failing to file his 2011, 2012, and 2013 returns on time • Pendency of litigation, even where the decision for an earlier year may affect the determination of a taxpayer's liability for a later year, is not reasonable cause for failure to timely file. • Taxpayer’s pattern of chronic noncompliance—going back to at least 2005—in failing to file his returns on time weighs against a finding of reasonable cause Questions? Email cbizmhmwebinars@cbiz. com 71

Namakian v. Comm’r, TC Memo 2018 -200 Section 6651(a)(2): Failure to Pay • Court • Taxpayer must have “made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship * * * if he paid on the due date. ” • Taxpayer’s decline in income does not suggest that Taxpayer was incapable of paying his tax liabilities Section 6654: Failure to Pay Estimated Tax • Court • Unlike section 6651(a)(1) and (2), section 6654 contains no provision relating to reasonable cause and lack of willful neglect • Taxpayer has failed to demonstrate that any exception pursuant to section 6654(e) applies Questions? Email cbizmhmwebinars@cbiz. com 72

Ford v. Comm’r, TC Memo 2018 -8; aff’d (6 th Cir. 2018) Tax Court: • Taxpayer was not allowed to deduct the losses associated with her music club because she did not intend to profit from the club. • No expertise in club ownership • Maintained inadequate records and disregarded expert business advice • Casually accepted the club’s perpetual losses and made no attempt to reduce expenses, increase revenue, or improve the club’s overall performance • Taxpayer earnestly devoted time and energy to her club but was primarily motivated by personal pleasure, not profit • Used the club’s losses to offset her trust and capital gain income • Owning the club allowed the taxpayer to further the careers of emerging songwriters, offered the taxpayer weekly opportunities to interact with country music fans and satisfied her love for promoting country music. Questions? Email cbizmhmwebinars@cbiz. com 73

Ford v. Comm’r, TC Memo 2018 -8; aff’d (6 th Cir. 2018) Sixth Circuit: • “Find a job doing something you love. ” Perhaps that is sound advice. But deducting business losses from your taxes when you are not trying to profit from the business you love is not a sound strategy. • Treas. Reg. § 1. 183 -2(b) provides nine factors to consider: • (1) the “[m]anner in which the taxpayer carries on the activity”; (2) “[t]he expertise of the taxpayer or his advisors”; (3) “[t]he time and effort expended by the taxpayer in carrying on the activity”; (4) the “[e]xpectation that assets used in activity may appreciate in value”; (5) “[t]he success of the taxpayer in carrying on other similar or dissimilar activities”; (6) “[t]he taxpayer's history of income or losses with respect to the activity”; (7) “[t]he amount of occasional profits, if any, which are earned”; (8) “[t]he financial status of the taxpayer”; and (9) “[e]lements of personal pleasure or recreation. ” Questions? Email cbizmhmwebinars@cbiz. com 74

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