november 19, 2015end+webinar+materials... · aca key concepts •applicable large employer (ale):...
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November 19, 2015
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Presented by: Tia Bonkowski, CPA
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Tia Bonkowski, CPA
Senior Manager
• Services provided include accounting, consulting and tax services.
• Works with closely held businesses, not-for-profit organizations and high net worth clients
[email protected] 248.579.1127
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Objectives
• Key concepts
• Key employer requirements
• 2015 reporting requirements and deadlines
• 2016 Affordable Care Act (ACA) changes and current legislation
• 2015 and 2016 potential penalties
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ACA key concepts
• Applicable large employer (ALE): 50+ full-time and/or full-time equivalent (FTE) employees.
• Full-time equivalent (FTE): FTE, part-time and variable-hour employees combined using various measurement options to determine the number of equivalent full-time employees. The calculation can be very complicated.
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ACA key concepts - continued
• Control groups: Businesses with common ownership must combine employees to determine if they are considered ALEs. Even if each business individually has less than 50 full-time and FTE employees, they must offer minimal essential coverage with minimum value to full-time employees if the combined total full-time + FTE employees is =>50.
• Requirement to provide insurance is based on full-time + FTE employees. You must offer insurance to full-time employees (even if you have less than 50 full-time employees) if you have a total of 50 or more full-time + FTE employees.
• Please contact me if you would like Rehmann to assist with determining if your businesses are a control group and/or to assist with the calculation of full-time and FTE employees.
• Tia Bonkowski 248.579.1127 or [email protected]
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Key employer requirements at a glance
• Employee notice requirements: At time of hire, employers must notify employees whether or not they offer health insurance and whether or not the employee is eligible.
• ALE must offer affordable coverage that provides minimum value to full-time employees and their dependents.
• Eligible employees must be offered insurance within 90 days of start date.
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Key employer requirements at a glance
• ALEs are required to file annual reports providing information to IRS and employees regarding employee health coverage.
• Self-funded group health plans of any size must file annual reports to IRS and employees regarding health coverage.
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Key employer requirements at a glance continued
• For 2016, health insurance coverage must meet cost-sharing minimums. An employee’s in-network, out-of-pocket maximum costs (copays, coinsurance, deductibles) cannot exceed $6,850 for individuals and $13,700 for families.
• If employers are required to file forms 1094 and 1095: – Forms are due to IRS by February 28 if filing on paper
or March 31 if filing electronically. – Forms are due to employees by January 31.
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2015 employer 1094/1095 filing requirements
ACA Reporting Decision Tree
• Employers with < 50 FTE employees do not have a filing requirement unless they offer health insurance through a self-insured, employer-sponsored health plan. Employers with self-insured plans must:
– file Forms 1094-B and 1095-B with the IRS.
– issue Form 1095-B to responsible individuals.
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2015 employer 1094/1095 filing requirements
ACA Reporting Decision Tree
• ALE: Employers with ≥ 50 FTE employees
– Self-insured plans: File Forms 1094-B and 1095-B with the IRS and file Form 1095-B to responsible individuals. There are additional filing requirements for non-employees (directors) and former employees.
– Employer-sponsored health plan: File Forms 1094-C and 1095-C (Parts I and III) with IRS and file Form 1095-C or a simplified statement to employees. There are additional filing requirements for non-employees (directors) and former employees.
– Employers with no health plans: File Forms 1094-C and 1095-C (Parts I and II) with IRS and provide Form 1095-C (Parts I and II) to employees.
– Rehmann has a solution for employers that need assistance with determining filing requirements and preparing filings. If you need assistance, please contact me as soon as possible as preparing the information for filing the reports is extensive and time consuming.
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6 ACA changes for 2016
1. New definition of “small employer” for insuring purposes only:
– Until 12/31/15 small employer defined as 50 or fewer FTE employees.
– As of 1/1/16, the definition changes to include 1-100 FTE employees.
– What does this mean?
• Employers with 50-100 FTE employees will now have to meet requirements for small group employers, unless the employer offers grandfathered plans (plans that cover essential health benefits and meet rating requirements).
• This could increase premiums approximately 18%, which could cause many employers to go to self-funded plans, further increasing premiums to others.
– The Senate and House passed “The Protecting Affordable Coverage for Employees Act” (PACE), which is expected to be signed by the president.
• This amends the definition of small businesses and protects then from possible increases in healthcare premiums under the Patient Protection and Affordable Care Act (PPACA). However, states would have the option of expanding the definition to cover up to 100 employees.
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6 ACA changes for 2016
2. Employers with 50-99 FTE employees will still be considered ALEs for employer mandate penalty.
– Required to offer minimum essential health coverage that is affordable and provides minimum value to 95% of its full-time employees and the dependents (up to age 26).
– For 2015, the requirement was applicable to employers with 100+ FTE employees.
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6 ACA changes for 2016
3. In 2016, ALE (50+ FTE employees) must offer to 95% of full-time employees compared to the 70% required in 2015 to avoid penalties.
– These employers must pay a penalty if a full-time employee receives a tax credit or subsidy through the Marketplace if the employer provided insurance was unaffordable or did not meet the minimum value requirements.
– ALE will receive IRS notices if an employee receives a Marketplace subsidy or credit.
– Penalty calculation changes:
• In 2015, the first 80 full-time employees were excludable from counting toward the fee.
• In 2016, only the first 30 full-time employees will be excluded.
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6 ACA changes for 2016
4. Starting November 15, 2015, employers with 51-100 FTE employees can use SHOP (Small Business Health Options Program) Marketplace.
– SHOP was previously only open to employers with 50 or less FTE employees.
5. In 2016, the annual in-network, out-of-pocket maximum costs (deductibles, copays, coinsurance) allowed before health coverage starts increases:
– Individual coverage is $6,850.
– Family coverage is $13,700. Maximum for each individual, employee or dependent is $6,850 before family coverage starts.
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6 ACA changes for 2016
6. 2015 and 2016 penalties for failing to meet ALE reporting requirements will go up, as will caps. – “Pay or play” penalty (the employer mandate)
• ALE must offer affordable and adequate insurance coverage (minimal essential coverage and minimum value) to their full-time employees and their dependents.
• <50 FTE: No penalty for failing to offer coverage. • 50-100 FTE: No penalty for failing to offer coverage in 2015 (if
requirements of transition rule are met), but will be subject to “pay or play” penalty in 2016.
• 100+ FTE employees: Subject to pay or play penalty in 2015. Must offer coverage to 70% of full-time employees in 2015 and 95% in 2016 and future years. One employee going to the Marketplace and receiving a subsidy or credit triggers the pay or play penalty.
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6 ACA changes for 2016
6. 2015 and 2016 penalties for failing to meet ALE reporting requirements will go up as will caps. – “Pay or play” penalty (the employer mandate)
• The big penalty: For not offering coverage to required number of full-time employees, the penalty is $2,000/year ($166.67/month) multiplied by the number of full-time employees in excess of 80 employees for 2015 (in excess of 30 employees in 2016 and future years).
• The small penalty: For offering coverage to required employees but not affordable and/or minimum value, the penalty is $3000/year ($250/month) multiplied by the number of full-time employees who obtain a premium tax credit from the exchange (not to exceed the big penalty).
• Coverage must be offered by the 1st day of the 4th full calendar month of employment.
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Thank you!
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Presented by: Ryan Whitman, CPA, CGMA
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Ryan A. Whitman, CPA, CGMA
Senior Manager
• Experience includes serving closely held business clients in real estate and construction
• Areas of service – Tax consulting
– Partnership taxation
– Closely held businesses
– Individual income tax
[email protected] 419.867.2313
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Where are we at?
• Regulations effective for tax years 1/1/14
• 2014 work
– Reviewed prior year assets being depreciated
– Reviewed 2014 activity for proper treatment
– Change of accounting method forms were filed
– Appropriate elections filed
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Small taxpayer exclusion
• Revenue procedure 2015 - 2020
• Adopt TPR w/o filing 3115s
• Adopted on a prospective basis
• Missed opportunities?
• Applies to small taxpayers – Gross receipts < 10M (three-year average)
– OR
– Total assets < 10M
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Why is this still important?
• 2015 additions
– Review for capitalization or expense
• Consistent with book as required
• Annual elections
• Partial asset disposition
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Capitalize or expense?
• Three-part test
– What is the unit of property?
• Betterment
• Adaptation
• Restoration
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Determining unit of property (UOP)
• Step 1: Apply the “functional interdependence” standard unless a special rule applies – all components that are functionally interdependent comprise a single UOP. – Components of property are functionally interdependent if the
placing in service of one component is dependent on the placing in service of the other component.
• Step 2: Apply special rules for: 1) buildings; 2) leased property; 3) plant property (separate if performs a discrete and major function or operation); 4) condominiums; 5) co-ops and 6) network assets.
• Step 3: Determine if components of the UOP are treated differently for tax depreciation.
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UOP – Buildings
• Special rules apply to buildings.
• Unit of property = building and its structural components.
• Expenditures restore UOP if they restore the building structure or 1 of 9 defined “building systems.”
• A roof is considered part of the building structure (shell).
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UOP – Buildings
• Apply repairs standards separately to the building structure and the nine defined “building systems.” 1. HVAC 2. Plumbing systems 3. Electrical systems 4. Escalators 5. Elevators 6. Fire protection and alarm systems 7. Security systems for protection of building and occupants 8. Gas distribution system 9. Any other system defined in published guidance
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UOP – Building “repairs” may need to be
capitalized
• If a building constitutes up to 9 UOPs, it appears likely that some repairs will require capitalization.
– Whether replacement of roof components are capitalized improvement is determined by considering the effect on the building structure, rather than the effect on the entire building (as was the case under prior law).
– Whether maintenance costs on building’s restrooms are capitalized improvement is determined by considering the effect on the building’s plumbing system, not the effect on the entire building.
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Betterment
• An amount paid results in a betterment only if it: 1. Ameliorates (fixes) a pre-existing material
condition or defect at the time you acquired the property (regardless of whether the taxpayer was aware of the defect),
2. Results in a material addition, or 3. Results in a material increase in capacity,
productivity, efficiency, strength, quality or output.
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Betterment
• Replacements due to technological improvements or product enhancements do not necessarily require capitalization.
• Key is to compare the condition of the property
after the expenditure to the condition of the property when initially placed in service.
• Taxpayer’s treatment of the expenditure on its
financial statements is not a factor to be considered.
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Example 1: Building refresh is not a betterment
• Replacing and reconfiguring display tables and racks to provide better exposure of the merchandise.
• Make corresponding lighting relocations and flooring repairs.
• Move one wall to accommodate the reconfiguration of tables and racks.
• Patch holes in walls.
• Repaint the interior structure with a new color scheme to coordinate with new signage.
• Replace damaged ceiling tiles.
• Clean and repair wood flooring throughout the store building and
power wash building exteriors.
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Example 2: Building remodel is a
betterment*
• Replace large parts of the exterior walls with windows.
• Replace the escalators with a monumental staircase.
• Add a new glass-enclosed elevator.
• Rebuild the interior and exterior facades.
• Replace vinyl floors with ceramic flooring.
• Replace ceiling tiles with acoustical tiles. * Because the refresh occurred at the same time as the remodel, Treasury requires the refresh expenses to also be capitalized because “… while not betterments by themselves, [the costs] directly benefitted and were incurred by reason of the improvement to the buildings’ structures …”
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Example 2: Building remodel is a
betterment* • Remove and rebuild walls to move changing rooms and create
specialty departments.
• Upgrade the electrical system.
• Remodel all bathrooms by replacing contractor-grade plumbing fixtures with designer-grade fixtures that conserve water and energy.
• Clean debris, patch holes in walls, repaint existing walls with a new color scheme to match the new interior construction, and power wash building exteriors to enhance the new exterior façade.
* Because the refresh occurred at the same time as the remodel, Treasury requires the refresh expenses to also be capitalized because “… while not betterments by themselves, [the costs] directly benefitted and were incurred by reason of the improvement to the buildings’ structures …”
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Summary of conclusions from the 23
betterment examples
Not a betterment (expense) • Replacement of asbestos insulation with similar non-asbestos
insulation. • Minor repairs and maintenance shortly after purchase. • Retail refresh limited to cosmetic and layout changes. • Relocate cash registers. • Add concrete lining to meat plant. • Replace the roof membrane. • Removal of drop ceiling. • Replace 2 of 10 HVAC units that are 10% more efficient.
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Summary of conclusions from the 23
betterment examples
Betterment (capitalize) • Remediation of soil by previous owner. • Bring assisted living building up to higher standards. • Retail refresh along with increased storage and second loading dock. • Major remodel of retail. • Relocate machines to increase capacity. • Doubling depth of channel. • 25% increase in depth of channel. • 50% reduction in energy or power costs. • Add restaurant drive-through.
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Adaptation to new or different use
• Capitalizable improvement if paid to adapt a UOP to a new or different use.
• Capitalizable improvement if the adaptation is not consistent with the taxpayer’s ordinary use of the UOP at the time originally placed in service by the taxpayer.
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Summary of adaptation examples
Not a change in use (expense) • Combine 3 leased retail spaces
into 1 leased retail space. • Implement minor refresh of
building in anticipation of sale. • Clean up contamination after
closing manufacturing plant. • Convert a portion of grocery
store space to a sushi bar. • Convert a portion of hospital
emergency room to an outpatient surgery center.
Change in use (capitalize) • Convert manufacturing
plant to showroom space. • Regrade land to
accommodate sale of land for residential development.
• Reconfigure part of a retail pharmacy to a walk-in clinic.
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Restoration
• Amount is paid to restore UOP if it:
1. Returns the UOP to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;
2. Results in the rebuilding of the UOP to a like-new condition after the end of its ADS class life; or
3. Is for the replacement of a part or a combination of parts that comprise a major component or a substantial structural part of a UOP.
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Restoration
4. Is a replacement of a UOP and the taxpayer has properly deducted a loss for that component;
5. Is for the replacement of a component of a UOP and taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component.
6. Is for the repair of damage to a UOP for which the taxpayer has properly taken a basis adjustment as a result of a casualty loss or casualty event (but only to the extent of the claimed casualty loss).
– It is this provision the IRS uses to say roof replacements now must be capitalized.
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UOP – Major component or substantial structural
part
• Capitalization required for an amount paid for the replacement of a major component or substantial structural part:
• Major component: Part or combination of parts that perform a discrete and critical function in the operation of the UOP.
• Substantial structural part: A part or combination of parts that comprise a large portion of the physical structure of the UOP or that perform a discrete and critical function in the operation of the UOP.
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UOP – Major component or substantial
structural part
• The final regulations continue with a highly subjective facts-and-circumstances approach, but clarify the approach by adding new definitions.
• Incidental component, even though it performs discrete function, is not restoration.
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Summary of conclusions from 31 restoration
examples
Not a restoration (expense) • Replace power switch. • Replace roof membrane. • Replace 1 of 3 furnaces in HVAC system. • Replace of 3 of 10 roof-mounted HVAC units. • Replace 30% of electrical. • Replace 8 of 20 sinks. • Replace 100 of 300 exterior windows comprising 8.3% surface area. • Replace lobby floors which comprise <10% square footage. • Replace 1 of 4 elevators.
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Summary of conclusions from 31 restoration
examples Restoration (capitalize) • Replace entire roof. • Replace single chiller in HVAC. • Replace sprinkler system. • Replace entire electrical system. • Replace all toilets and sinks with similar quality and function. • Replace 200 of 300 exterior windows comprising 16.67% surface area. • Replace 100 of 300 exterior windows comprising 30% of surface area. • Replace floors in all public areas comprising 40% of square footage. • Replace 1 of 4 elevators and claim partial disposition loss.
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Materials and supplies
• Defined as tangible property that is used or consumed in the taxpayer’s operations that is not inventory and that are:
1. Components acquired to maintain, repair or improve a UOP;
2. Comprised of fuel, lubricants, water and similar items that are reasonably expected to be consumed in 12 months of less;
3. A UOP with an economic useful life of 12 months or less;
4. A UOP costing $200 or less; OR
5. Identified as such in guidance.
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Materials and supplies
• General rule for when deducted: • Incidental (not inventoried) – deduct when paid (provided it
clearly reflects income).
• Non-incidental (inventoried or track consumption) – deduct when first used or consumed in taxpayer’s operations.
• Rotable, temporary, emergency spare parts – deduct when part is disposed; deduct when used (and include in income when removed from service); treat as depreciable property.
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Annual elections
• De minimis safe harbor
• Routine maintenance
• Capitalize repairs
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De minimis safe harbor (DMSH) election
• Annual election made in tax return.
• Allows taxpayer to deduct expenditures below a set threshold.
• Threshold is $500 per invoice or per item unless the taxpayer has an applicable financial statement (AFS). If AFS, threshold is $5,000.
• AFS = audited or government-required financial statement.
• Taxpayer must maintain a written accounting policy.
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De minimis safe harbor (DMSH) election
• Book treatment must match tax treatment.
• Applies to property with a useful life of 12 months or less if the amount per invoice (or item) does not exceed the $500/$5,000 threshold.
• The $500/$5,000 threshold are safe harbor amounts – taxpayers may elect a higher capitalization threshold if they can justify the amount.
• Threshold is $200 if the taxpayer does not have an accounting policy or if the annual election is not made.
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Routine maintenance safe harbor
• Routine maintenance consists of recurring activities that are expected to be performed on a building or other UOP as a result of its use to keep the asset in its ordinary, efficient operating condition.
• Taxpayer must reasonably expect to perform the activities more than once during the useful life of the asset (or a 10-year period for a building) beginning at the time the asset is placed in service.
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Routine maintenance safe harbor
• Routine maintenance includes inspections, cleanings and replacement of damaged or worn parts with comparable parts.
• The safe harbor does not apply to any expenditure that would be considered betterment, restoration or adaptation.
• Must file an automatic change in accounting method (Form 3115) to adopt the safe harbor method.
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Election to capitalize repairs
• Taxpayer may elect to capitalize repair and maintenance costs on an annual basis. – Costs must be incurred in the taxpayer’s trade or business. – Book and tax treatment must be the same.
• Taxpayer is not required to capitalize ALL repairs and maintenance. – Election only applies to those repairs and maintenance costs treated
as capital expenditures by the taxpayer for books.
• Annual election attached to tax return. • Election may be beneficial if the taxpayer capitalizes certain
expenditures which potentially could be classified as repairs and maintenance. A backup plan should be provided in the event of IRS auditor attempts to disallow depreciation claiming the asset should have been expensed as a repair.
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Partial asset disposition (PAD) rule • New regulations provide that the disposition rules apply to a partial
disposition of an asset.
• This rule allows taxpayers to elect to claim a loss upon the disposition of a structural component of a building or upon the disposition of a component of any other asset (properly included in one of the asset classes 00.11 through 00.4 of Rev. Proc. 87-56) without identifying the component as an asset before the disposition event.
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What is “any reasonable method”?
• Taxpayer uses the information that is available and extrapolates to determine some reasonable allocation.
• Determine replacement cost and use CPI to determine estimated costs in year originally placed in service.
• Taxpayer performs a study to determine the original cost of the roof based on standard cost estimating procedures.
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What is “any reasonable method”?
• Taxpayer has records of the original costs from when the building was purchased.
• Taxpayer has records of the original cost from when the building was built and then extrapolates that cost to the price paid by the taxpayer upon purchase.
• Taxpayer uses a relative percentage method based on the cost of the new roof/the FMV of the entire building after the new roof was completed.
• Some other form of comparative allocation.
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Partial asset disposition landlord/tenant
issues
• An LLC owns a building.
• An operating company rents from LLC.
• The building needs a new roof.
• Who pays for it?
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Thank you!
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Presented by: Tracy S. Marrin, CPA
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Tracy Marrin, CPA
Principal
• Specializes in international taxation, as well as tax planning and compliance for businesses and individuals
• Leader of Rehmann’s Southeast Region Tax department
[email protected] 734.761.2005
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• Delinquent International Information Forms
• FATCA: Documentation for payments by U.S. payers.
• Entity structure: Planning for timely elections.
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Delinquent International Information returns (5471, 5472 etc.) may still be filed under current program without penalty if:
• Delinquency is due to reasonable cause.
• Not under IRS investigation (civil or criminal).
• Have not been notified by the IRS regarding delinquent forms.
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File Information Returns along with a statement of facts regarding the reasonable cause. Attach statement and form to an amended return and file according to amended return instructions.
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Foreign Account Tax Compliance Act
(FATCA)
• Came into law March 18, 2010 (HIRE Act)
• Creation of chapter 4 of IRS Code
• Objective is to improve reporting for foreign financial assets – the result of non-compliance is withholding.
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U.S. withholding agents are required to withhold 30% on:
1. Certain payments to foreign financial institutions (FFI) that do not agree to report the required information to the IRS regarding their U.S. accounts.
2. Certain payments to certain nonfinancial foreign entities (NFFE) that do not provide information on their substantial U.S. owners to the withholding agent. (Withholding effective starting 06/30/14.)
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A withholding agent under chapter 4 is any person, U.S. or foreign, in whatever capacity acting, having the control, receipt, custody, disposal or payment of any withholdable payment.
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FATCA – Documentation for withholding by
U.S. payers
• U.S. payers (withholding agents) need documentation regarding payees. Get the documentation before payment is made.
• U.S. person – W-9
• Non-U.S. person – W-8 series of forms
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W-8BEN-E – Certificate of Entities Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
• Replaces form W-8BEN for entities.
• Covers chapter 3 and chapter 4 withholding
(W-8BEN is now used only for individuals.)
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When investing in a foreign entity it is important to understand at the onset:
• Tax treatment in U.S.
– Corporate
– Flow through
• U.S. filing requirements
– Corporate – form 5471
– Flow through – form 8865 or 8858
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• U.S. structure is not based on foreign treatment, it is based on U.S. default and check-the-box rules.
• U.S. default rules for foreign entities are different than for domestic (U.S.) entities.
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Default rules:
• Taxed as a corporation if all members have limited liability.
• Taxed as a partnership if two or members and at least one member do not have limited liability.
• Taxed as a disregarded entity if one member and that member does not have limited liability.
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Electing out of the default rules
• Form 8832
• In general, the election cannot take effect more than 75 days prior to the date the election is filed.
• The election cannot take effect later than 12 months after the election is filed.
• Late election relief is available in some circumstances.
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• Per Se corporations are not eligible to elect out of corporate status.
• New status or out of status can be elected once every 60 months.
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Take aways
• File delinquent international informational forms to avoid potential penalties.
• Acquire documentation (W-9 or W-8 Series) to verify status of payees.
• Consider entity elections based on U.S. tax treatment of foreign entities.
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Thank you!
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Q&A session
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Net investment income tax planning
Presented by: Diane Ferris, CPA, CGMA, MST
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Diane Ferris, CPA, CGMA, MST
Principal
• Background in public accounting and private industry
• Experience in tax, consulting and planning
• Qualified to service clients in a variety of industries, such as real estate, construction, equipment leasing, manufacturing and professional services
[email protected] 616.975.2888
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Session objectives:
1. Overview: Briefly review the 3.8% Medicare Surtax (better known as the Net Investment Income Tax or NIIT) as it pertains to individual taxpayers.
2. Opportunities: Discuss planning ideas for reducing MAGI (Modified Adjusted Gross Income) or reducing Investment Income to reduce the NIIT.
3. Planning: Discuss planning for the individual who owns various and multiple business interests.
4. Conclusion
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NIIT – Individual taxpayers overview
• Investment income – Effective 1-1-2013, IRC Section 1411 imposes a 3.8%
Medicare “surtax” to all taxpayers whose income exceeds a certain “threshold amount.” This surtax raises the marginal income tax rate for certain taxpayers. The tax is imposed on the taxpayer’s NII.
– For example, a taxpayer in the 39.6% tax bracket (currently the highest marginal income tax rate) would have an increased marginal rate of 43.4% if subject to the NIIT.
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NIIT – Overview
• The NIIT and the additional Medicare taxes on compensation income may apply to the same taxpayer in the same tax year, but not to the same items of income.
– NIIT only applies to net investment income.
– The additional Medicare tax applies only to wage and self-employment income.
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NIIT – Overview
• The NIIT is equal to:
1. Net Investment Income
3.8% X OR
the lesser of
2. The excess (if any) of
- Modified Adjusted Gross Income (MAGI) over the …
- Threshold amount
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NIIT – Overview
• Three terms to become acquainted with regarding the NIIT are – Net Investment Income; – Threshold amount; or – Modified Adjusted Gross Income (MAGI)
Meaning – There are just two ways to reduce the NIIT: 1) Reduce the amount of NII; or 2) Reduce the amount of MAGI.
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NIIT – Overview
Includes: • Taxable interest • Dividends • Annuity income/distributions • Rents • Passive royalties • Income derived from a passive
activity • Net capital gain derived from the
disposition of property
Does NOT include: • Wages or any form of compensation • Distributions from IRAs or qualified
plans(401(k), pension); RMDs or Social Security income.
• Any income subject to self-employment tax.
• Gain on the sale of an active interest in a Partnership or S Corporation.
• Items which are otherwise excluded or exempt from income under the income tax law, such as interest from tax-exempt bonds, capital gains excluded under IRC 121, active royalties, veterans benefits, etc.
First: Net Investment Income
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NIIT – Overview
Second: Threshold amount
• The key factor in determining the “lesser of” formula for purposes of calculating the surtax.
Threshold amounts:
• Single taxpayers - $200,000
• Married taxpayers & surviving spouses - $250,000
• Married filing separate taxpayers - $125,000
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NIIT – Overview
Third: Modified Adjusted Gross Income (MAGI) • MAGI is the amount that is compared to the “threshold amount” to
determine the “net investment income” that is subject to the surtax.
MAGI equals: • Adjusted gross income (from Form 1040); and • Net foreign-earned income exclusion (i.e., gross income excluded under
the foreign-earned income exclusion less certain deductions or exclusions that were disallowed due to the foreign-earned income exclusion).
This means for the majority of taxpayers, MAGI equals: • AGI (Adjusted Gross Income)
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NIIT – Overview
Example 1
Heniit Wit
• Single taxpayer
• $100,000 of wage income
• $50,000 of net investment income
MAGI is $150,000
3.8 surtax would NOT apply
MAGI is less than threshold $200,000 for a single taxpayer
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NIIT – Overview
Example 2
Sheniit Wit
• Single taxpayer
• $0 of wage income
• $225,000 of net investment income
MAGI $225,000
Threshold - $200,000
Excess of MAGI over threshold
= $25,000
3.8% surtax would apply to $25,000
NIIT does not apply to the entire amount of MAGI or the
total amount of Net Investment Income
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NIIT – Overview
Example 3
Spender & Saver
• Married filing joint tax return
• $400,000 combined wages
• $50,000 of net investment income
3.8% surtax would apply to $50,000
MAGI $450,000
Threshold - $250,000
= $200,000
Lesser of $200,000 or NII of $50,000
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NIIT – Overview
Example 4
Balanced & Budget
• Married filing joint tax return
• $200,000 combined wages
• $150,000 of net investment income
3.8% surtax would apply to $100,000
MAGI $350,000
Threshold - $250,000
= $100,000
Lesser of $100,000 or NIT of $150,000
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NIIT – Overview
Example 5 Irene Renee Smith (IRS to her friends) • Single taxpayer • $200,000 of net investment
income • $125,000 RMD from an IRA or
pension income or tax-exempt interest income
3.8% surtax would apply to $125,000
MAGI $325,000
Threshold - $200,000
= $125,000
Lesser of $125,000 or NII of $200,000
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Opportunities – Reduce MAGI
• Roth IRA Conversions lower taxable income long term. • Charitable Remainder Trusts (CRTs): Split-interest trusts
consisting of an income interest and a remainder interest that goes to charity.
• Non-grantor Charitable Lead Trusts (CLTs): Split-interest trusts consisting of an income interest and a remainder interest with the income going to charity.
• Installment Sales: A sale of an asset in exchange for a promissory note paid over a period of time.
• Maximize contributions to retirement plans (401K, SEPs, etc.).
• IRC Section 1031 Exchange (Like-kind exchange).
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Opportunities – Reduce NII
Investments that do not produce income subject to the NIIT.
If the income is not subject to federal income tax, then it is not subject to NIIT:
• Municipal bonds
• Tax-deferred annuities
• Life insurance
• Rental real estate
• Oil & gas working interests (special rules apply)
• Non-passive business income …
– Income derived from an active trade or business
• Non-passive gain …
– Net gain from the disposition of property that is held in an active trade or business
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Planning opportunities for the business owner
• Income from a “passive” trade or business is NII subject to the NIIT.
• If a taxpayer “materially participates” in the “ordinary course of a trade or business,” the income is not subject to the NIIT.
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Ordinary course of a trade or business
• Where business is conducted through a partnership or S corporation, determination of a trade or business is made at the entity level.
• Trade or business has the same meaning for section 1411 (the NIIT) as for section 162 (deduction of ordinary and necessary business expenses).
• A “rental activity” is automatically treated as a passive activity under the Passive Activity Loss (PALs) rules. Generally, for purposes of the NIIT, it is necessary to determine if the rental activity constitutes a trade or business under section 162.
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Example –
Portfolio income (i.e. interest) derived in
the ordinary course of a trade or business
• Partnership or S corp has two partners/shareholders, Niit and Wit.
• The entity operates a retail store and collects interest on customer receivables outstanding in the normal course of business.
• Niit is active in the business.
– Interest income is not included in NII.
• Wit is not active in the business.
– Interest income might be included in NII, depending on whether Wit is subject to SET (self-employment tax) on the income.
Ptshp or S Corp
Partner/shareholder Partner/shareholder
Retail business
Interest on customer
receivables
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Materially participates
Key terms: active and passive
• Where business is conducted through a partnership or S corporation, determination of whether the business is “active” or “passive” to the taxpayer is made at the partner or shareholder level.
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Material participation defined:
For individuals, satisfy 1 of 7 tests: 1. Participate more than 500 hours per year. 2. Participation is substantially all of the activity of all individuals. 3. Participate more than 100 hours per year and no other individual
participates more. 4. Activity is a significant participation activity (SPA) and the individual’s
aggregate participation in all significant participation activities exceeds 500 hours in a year.
5. Individual materially participated in the activity for 5 of past 10 taxable years.
6. Activity is a personal service activity and the individual materially participated in the activity for any 3 preceding taxable years.
7. Based on all facts and circumstances, the individual participates in the activity on a regular, continuous and substantial basis during the year.
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Material participation – activity grouping
• Grouping of activities to meet a material participation test
• Activities may generally be aggregated if they constitute an “appropriate economic unit.” – Determination depends on relevant facts and circumstances
– Taxpayer may generally use any reasonable method to group activities
– However, five factors are given greatest weight in determining whether or not the multiple activities constitute an appropriate economic unit:
Geographic Location
Common Ownership
Common Control
Similarities and
Differences in Type of Business
Business Interdepen-
dencies
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Identifying income not subject to NIIT
Self-charged and incidental rental income • If rental income is treated as non-passive because:
– Re-characterization of what otherwise would be passive rental income from a taxpayer’s property as non-passive when the taxpayer rents the property for use in an activity in which the taxpayer materially participates; or
– Because the rental activity is properly grouped with a trade or business activity and the grouped activity is a non-passive activity.
Then, the gross rental income is deemed to be derived in the ordinary course of a trade or business and therefore not subject to NIIT. • Final regulations for treatment of gains and losses on assets associated with the
rental activity: – Those that are treated as non-passive gain or loss will also be treated as gain or loss
attributable to the disposition of property held in a non-passive trade or business.
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Example – self rental rules
• Taxpayer (Member 2) is a member of A and is active in the business. • Taxpayer is also a member in B, which owns a building and rents space to
various tenants. One of those tenants is A. • Taxpayer does not participate at all in the B rental activity.
– The general rules would treat taxpayer's share of B’s rental income as NII. – However, due to the “self rental rule,” the taxpayer’s share of rental income
received from the taxpayer’s activity is treated as active.
A B
Member 1 Member 3 Member 2
Trade or Business Activity Building
Building
Rent
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Identifying income not subject to NIIT
Self-charged interest:
• A taxpayer who lends money to a pass-through entity in which the taxpayer materially participates is only subject to NIIT on the interest payable by the portion of the entity allocated to other investors.
• In the case of self-charged interest received from a non-passive entity, the amount of interest income excluded from NII will be the taxpayer’s allocable share of the non-passive deduction.
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Example – Self-charged interest rules
• TP owns 60% of an LLC which operates a trade or business. • TP is active in the trade or business of LLC. • LLC paid TP $10,000 in interest on a loan made to the LLC. Solution … • TP will owe NIIT on $4,000.
($10,000 x (100%-60%) = $4,000)
LLC
Other members
40%
Trade or business
$10,000 Interest
TP 60%
Loan
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Identifying income not subject to NIIT
Investment in real estate
• Rents from real estate are “per se” passive under section 469 for most taxpayers, as such, the rents are subject to NIIT.
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Identifying income not subject to NIIT
Safe Harbor for real estate professionals
• If: – More than 50% of the taxpayer’s work is in real estate
trades or business; and
– The taxpayer performs more than 750 hours of service during the year in those real estate trades or business;
• Then: – Per the IRS, you are considered a real estate
professional.
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Identifying income not subject to NIIT
Safe Harbor for real estate professionals • If:
– You are a real estate professional; and – At least 500 of those 750 hours are in rental activities (or
500 hours for any 5 of the preceding 10 years);
• Then: – The rental income associated with that activity is deemed
to be derived in the ordinary course of a trade or business. As such, the rental income and any subsequent gain from the sale of the rental property will be excluded from NII and not subject to NII tax.
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Example - Real estate professional
Scenario Are the
Rents NII?
The investor is not a real estate professional:
A. And the income is not derived from a trade of business. YES
B. But the income is paid from an active trade or business of the investor (self-charged rule), to the extent of their share of such trade or business.
NO
C. But the rents are properly grouped with an active trade or business of the investor (incidental rents).
NO
The investor is a real estate professional:
A. But does not qualify for the safe harbor nor is the income derived from a trade or business.
YES
B. But the investor qualifies for the 500-hour safe harbor. NO
C. And the income is derived from a trade or business. NO
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Identifying income not subject to NIIT
Significant participation activities (SPA) For purposes of meeting the material participation test • A “significant participation activity” is a trade or business in which the taxpayer
participates for more than 100 hours in the year but less than 500 hours. • MP Test #4: Activity is a significant participation activity and individual’s aggregate
participation in all significant participation activities exceeds 500 hours in a year. • Assume 3 significant participation activities – activities in which the taxpayer
participates 101-500 hours a year in each. – Activity 1 175 hours per year – Activity 2 200 hours per year – Activity 3 150 hours per year
525 hours
• Together, the taxpayer meets the material participation requirement for all 3 significant participation activities. All income and losses are non-passive and not subject to NIIT.
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Identifying income not subject to NIIT
Re-characterization of Income –SPAs
• The passive loss rules include a special rule for significant participation activities which re-characterizes income, but not losses, from a significant participation activity as “not from a passive activity.”
• A taxpayer participates for 101-500 hours a year in an activity, the income is re-characterized to non-passive (cannot offset passive losses against non-passive income) and… the re-characterized income is not subject to NIIT.
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Participation - Summary
Material participation (more than 500 hours) Income is non-passive; not subject to NII tax.
Losses are non-passive.
Significant participation (101-500 hours) Income is non-passive; not subject to NII tax.
Losses are passive.
Neither (100 hours or less) Income is passive and subject to NII tax.
Losses are passive.
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Re-characterization of income – SPAs
Example – special rule
Activity 1 Income $500
Deductions ($100)
Net $400
Activity 2 Income $200
Deductions ($500)
Net ($300)
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Calculate what portion of each activity’s income is re-characterized to non-passive. The numerator is the total net income for all significant participation activities. The denominator is the total of the gain for all significant participation activities that had net gains. Activity 1 had a net gain of $400 – included Activity 2 had a net loss of ($300) – not included $100 is the numerator and $400 is the denominator. The fraction is 100/400 or 25%. So 25% of each activity’s net income is re-characterized as non-passive. #1 – 25% of 400 = $100 and is not subject to NIIT #2 – The entire loss remains passive
Re-characterization of income – SPAs
Example – special rule
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Planning opportunities for the business owner
Entity structuring to avoid the NII tax
• Regulations provide that if income is subject to self-employment tax, it is not subject to NII tax, and vice versa.
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• S Corp – Flow through income from an S Corp is not subject to self-
employment tax, as long as the owner receives “reasonable compensation.”
• Partnership – A partner’s distributive share of trade or business income is
subject to self-employment tax, but there is an exception for a limited partner in a limited partnership.
• LLC – Income flowing through to an LLC member who participates in
management will most likely be subject to self-employment tax. Planning opportunities exist for a manager-managed LLC if the LLC owner is not a manger.
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Conclusions
1. Be aware of the amounts of your NII & MAGI 2. Know your investments and what type of income they produce 3. Business ownership – know if you are active or what it takes to be
active in the trade or business • Do you have self-rentals? Can you increase your rent? • Do you have self-charged interest? • Look at the Schedule K-1s you receive – do they provide the
information for your CPA to accurately prepare your tax return?
4. Are you a REP (real estate professional)? Does the Safe Harbor apply?
5. Do you have SPAs (significant participation activities)? 6. Entity restructuring possibilities? 7. Keep your wits about you – your CPA can help!
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Thank you!
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Presented by: Jessica Dore, CISA
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Jessica Dore, CISA
Senior Manager
• Technology risk management
• Specializes in technology consulting & security
• Experience in leading teams and performing IT security assessments for clients
[email protected] 989.797.8391
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The pace of change is picking up
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Data is exploding
Source: spotfire.tibco.com
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Communication is changing …
www.bates-communications.com
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The way we interact is changing …
pafamilylaw.foxrothschild.com
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Processes are changing …
siliconangle.com
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We are connected 24 x 365 x 7
Source: www.innovata-llc.com
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With all of this connectivity comes
Source: news.hitb.org
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Fraud, cyber crime and the bottom line
$400 billion lost annually to fraud and misappropriation
by U.S. organizations
6% of annual revenue lost to fraud and abuse by the
average organization
$5.4 million to resolve the average data breach, not including liability issues
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Source: progressbangladesh.com
Cyber crime is here to stay
• Cyber warrior ‘mercenaries’ for hire worldwide
• Cyber crime is a multi-billion dollar underground economy
• Cyber crime is an industry of suppliers, distributors and manufacturers
• Information is the commodity
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60% of organizations FAIL within 6 months
of being hacked
• Loss of cash from bank accounts
• Cost of breach repair and recovery
• Cost of notification
• Cost of compliance
• Cost of lost clients
• Cost of reputation loss
Source: www.greenskyproductions.co.uk
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Small organizations: A big target
• Don’t believe they will be attacked
• Cybersecurity not a priority
• Weak cybersecurity/outdated tools
• Poor employee training
• Poor or no data breach response plan
• Lead to bigger fish
Source: ameriscope.com
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Major cyber attacks
• 80 million identities – Anthem
• 47,000 SSNs + threats – Sony
• 76 million bank records – J.P. Morgan
• 56 million credit cards – Home Depot
• 100 million credit/debit cards – Target
• 145 million or more emails – eBay
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Cost of average cyber breach
• Average cost of a breach $5.4 million
• Each lost record costs $188 average
• ($188 x 10,000 records = $1,880,000)
• Disruption alone costs $937,000 per breach
• Plus: Liability issues for identity theft, etc.
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The cyber crime toolkit
Spyware Malware
Phishing/
Pharming
Skimming
Trojans/
Viruses
Watering Hole
Keylogging
Ransomware
Social
Engineering
Dumpster
Diving
Bot Bot
DDOS
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Social engineering scams
• Email from you
• Email from your internal staff
• Message from friend overseas and in trouble
• Nigerian email scam
• “Your tax refund is already taken care of”
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Social engineering
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Ransomware
• Your data taken “hostage”
• Ransom email
• Today $300
• Tomorrow more
• If you don’t pay, they destroy your data
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What do they do with the information?
• Cyber criminals sell personal identifying information or use it to:
– Open false bank accounts
– File false IRS returns
– Open false credit cards
– Steal from bank accounts
– Hack into other accounts/businesses
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Employees are the weakest link
• Negligent insiders are the top cause of data breaches
• Clicking on links in emails
• Sending work email to personal accounts
• Using data on insecure lines
• Not following corporate policies
• Not securing mobile devices
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Vulnerability: Weak IT security
• Poor access controls
• Poor patch management
• Improper device configuration
• Lack of security audits
• Weak enforcement of remote login policies
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Where should you focus?
• Data
• Perimeter
• Access
• Governance
• Vendor
• Mobile
• Human
Source: www.lifehack.org
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Data management
• Data: What is it and where is it?
• Risks: What is it worth?
• Access paths: How can you get to the data and what are the control points?
• Access: Who can get to your data?
www.intelymind.com
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Perimeter management
• Do you have a firewall?
• Do you have a DMZ?
Source: www.linklogger.com
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Segregate the network
www.automation.comwww.automation.com
• Is the network
virtualized?
• Do you leverage
VLANs to segregate
the network?
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IDS/IPS: Alerts
infosecprimer.wordpress.com
• Do you have an intrusion
detection system?
• Do you have an intrusion
prevention system?
• Are alerts turned on?
• Are they monitored?
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Monitor
• Conduct:
– External vulnerability test
– Internal vulnerability test
– Social engineering test
dstudio.ubc.ca
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Access management
Source: blog.lookout.com
• Access control
• Restrict administrative access
• Perform access reviews
• Leverage least privilege
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Software patching
• How often do you patch?
• Best practice = 30 Days
Source: www.gfi.com
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Backups
• Daily backups
• Rotated off-site
• Testing
www.itservicesalbuquerquenm.com
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Vendor management
• Selection due diligence
• Contract reviews
• Annual due diligence
www.questproductsinc.com
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Cloud
www.data-hive.com
How do you know you are making the right decision?
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Storage
mr2solutions.com
Where is the data stored?
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Mobile
Source: mobileappbuilders.co
• Mobile device strategy
• Acceptable use agreements
• Authentication & encryption
• Secure transmission
• Device management
• Employee training
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Training
• Train users on:
– Information security program
– Incident response plans
– Business continuity plans
– Security threats
afgenvac.org
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Close the loopholes
Create and enforce security policies
Educate employees
Update security software
Backup and encrypt data
Secure devices
Purchase cyber insurance
Have an IT security assessment performed
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Source: blog.zopim.com
In the end …
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Q&A session
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Thank you!
Tia Bonkowski, CPA
Phone: 248.579.1127
Email: [email protected]
Ryan Whitman, CPA
Phone: 419.867.2313
Email: [email protected]
Tracy Marrin, CPA
Phone: 734.761.2005
Email: [email protected]
Diane Ferris, CPA, CGMA, MST
Phone: 616.975.2888
Email: [email protected]
Jessica Dore, CISA
Phone: 989.797.8391
Email: [email protected]
© 2015 Rehmann