Accounting Methods and Credits Update Colleen O’Connor Managing Director, WNT, Washington, DC William Stoddard Managing Director, Tax Short Hills, NJ

1 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Agenda ■Research and Development Credit Updates ■Section 199 Domestic Production Deduction ■New Method Change Guidance ■Odds and Ends ■Tax Impact of New Revenue Recognition Standards

Research Tax Credit

3 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. R&D tax credit overview What is the research tax credit (R&D tax credit)? ■An incentive for performing qualified research in the U.S. to develop new or improved products or processes ■R&D is found within technical developments, which seek to achieve an improved business component and encounter technical uncertainty at the outset of the development effort regarding the appropriate method, design or technical feasibility of the project ■Available for federal income tax purposes, and some states and foreign jurisdictions also offer R&D related incentives ■Can provide up to 13% ROI on incremental R&D Investment for Taxpayers filing under the Traditional Research Credit method and up to 9.1% ROI on incremental R&D Investment for Taxpayers filing under the Alternative Simplified Credit (“ASC”) method –Taxpayers conducting research in eligible states can increase this ROI upwards of 10% ■Favorable financial impacts include: –Increased cash flows resulting from a direct reduction of tax liabilities –Increased earnings per share as the permanent tax benefit may produce reduced tax expense as recorded in financial statements resulting in higher financial statement earnings –Reduced Federal and State Effective Tax Rates (“ETR”)

4 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Small Business Opportunities The Consolidated Appropriations Act, 2016 (a/k/a the Protecting Americans from Tax Hikes Act of 2015), retroactively extended the research tax credit for all of 2015 and made it permanent! The Act also made two changes to provide benefits to small businesses Businesses with average annual gross receipts of $50m or less can offset their AMT liability with the credits Qualified small businesses can elect to apply up to $250k of credit against their payroll tax liability instead of their income tax liability. These two changes are effective for tax years beginning after December 31, 2015

5 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Small Business Offset to AMT Liability An “eligible small business” is a non-publicly traded corporation, a partnership, or a sole proprietorship, if the average annual gross receipts for the 3-taxable year period preceding the credit year does not exceed $50 million. In applying the gross receipts test, section 38(c)(5)(C) applies rules similar to the rules under section 448(c)(2) and (3), which provides the following: 1.All persons treated as a single employer under section 52(a) and (b) or section 414(m) or (o) are treated as one person 2.If the small business was not in existence for the entire 3 year period, then the gross receipts requirement is applied on the basis of the period during which such entity was in existence 3.For a short taxable year, gross receipts is annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period 4.Gross receipts for any taxable year is reduced by returns and allowances made during such year Furthermore, for a partnership or S corporation, the gross receipts test must be met by its partner or shareholder for the taxable year

6 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Small Business Offset to Payroll Tax Liability Criteria to qualify as a qualified small business Gross receipts for the tax year are less than $5m Did not have gross receipts for any tax year before the five tax years ending with the taxable year Making the election Election is made by specifying the amount on or before the due date (including extensions) of the tax return. Election may only be revoked with the consent of the Secretary of the Treasury Taxpayers cannot make the election for a tax year if it made the election for 5 or more preceding tax years Election is made at the entity level

7 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Small Business Offset to Payroll Tax Liability Application of the credit Credit against section 3111(a) FICA tax liability for 1 st calendar quarter beginning after the date on which the qualified small business files its tax return Credit may not exceed the payroll liability for the calendar quarter on wages paid to all employees Any credit exceeding the payroll liability is allowed as a credit for the following calendar quarter

8 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Other Recent Developments  The Treasury Department released the FY17 budget in February that i ncludes numerous tax proposals affecting the R&D credit  Would repeal the so-called traditional credit leaving ASC as the only method for computing the credit  Would raise the ASC credit rate from 14% to 18%  Special rules for start-ups for a flat rate of 6% would be repealed  Would repeal rules that have limited the ability of an individual partner in a partnership or an S corporation shareholder to use a credit generated by the entity; they have been limited to offsetting the tax on the income generated by the entity for the year  Individual taxpayers would no longer need to deduct their research expenditures over 10 years in computing alternative minimum tax  Increase to 75% rather than 65% of certain contract research payments made to non-profit organizations (e.g. educational institutions)  The changes would be effective for research expenditures paid or incurred after 2016

Recent Research Tax Credit Developments

10 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. IRC Section 41 proposed regulations – Internal use software ■Proposed Regulations – Credit for increasing research activities involving computer software –On January 16, 2015, the Treasury Department and IRS released Proposed Regulations (REG ) concerning the application of the credit for increasing research activities for computer software that is developed by or for the taxpayer, for the taxpayer’s internal use –What is internal-use software?  Software that is developed by (or for the benefit of) the taxpayer for use in general and administrative functions that facilitate or support the conduct of the taxpayer’s trade or business i.e., back-office functions  Financial Management, Human Resources Management, Support Services  Software designed to provide administrative services to third parties (e.g., vendors) –When is internal-use software eligible for the research credit?  Internal-use software must meet the general research credit requirements (4-part test) as well as the additional 3-part “high threshold of innovation” test.

11 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. IRC Section 41 proposed regulations – Internal use software (continued) –What isn’t internal-use software?  Software that is developed to be commercially sold, leased, licensed, or otherwise marketed to third parties.  Computer software and hardware developed as a single product.  Software that enables a taxpayer to interact with third parties or allows third parties to initiate functions or review data on the taxpayer’s system. Examples in the regulations include software developed for/to:  Third parties to execute banking transactions;  Track the progress of a delivery of goods;  Search a taxpayer’s inventory for goods;  Store and retrieve a third party’s digital files;  Purchase tickets for transportation or entertainment; and  Receive services over the internet.

12 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. IRC Section 41 proposed regulations – Internal use software (continued) –Effective Dates  The proposed regulations, once finalized, will be prospective only, applicable in tax years ending on or after the date final regulations are published in the Federal Register.  However, the IRS will not challenge return positions consistent with the proposed regulations for tax years ending on or after January 20, 2015 –Additional Considerations  Dual function computer software  Modifications to high threshold of innovation test  Hearing at the IRS on April 17 th, 2015

13 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. IRS landscape – Internal use software ■FedEx Corporation v. United States Case on Research Credit Qualification Standard for Internal-Use Software –Key Takeaways of the FedEx District Court ruling:  The “Discovery Test” is not a requirement for a credit  Benchmark of innovation can be something less than “unique and novel”  Operational benchmarks should be acceptable  The ruling is “authority” that is relevant to IRS Appeals, penalty exposure, and tax opinion levels –Pre-FedEx Mindset:  Qualified internal use software projects must have been for obtaining knowledge that “exceeds, expands, or refines the common knowledge of skilled professionals” – The Discovery Test or satisfy a “Unique and Novel” threshold. –Post-FedEx Mindset:  Threshold of innovation can include activities that enable businesses to implement systems that significantly improve reliability, throughput (speed) and reduce costs – no longer have to be deemed unique and novel, intent can be to significantly improve functionality or improve performance.

14 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. IRS landscape – Internal use software (continued) ■IRS CCA –This CCA, dated May 29, 2014, affirms that the IRS will not challenge positions taken consistent with the FedEx case. This development could open up a larger set of software development activities to be considered as qualified research expenditures under section 41. Initiatives undertaken with the intent to significantly improve functionality or significantly improve performance in internal IT infrastructure, administrative, line of business, or operational support functions may now be legitimate sources of expenditures for identifying qualified research activities. ■Other Developments –Revenue Procedure (use of statistical sampling) –Abolition of Tier 1 (August 2012) –Increased Taxpayer Retention of R&D Tax Credit Benefits  Pre-Filing Agreement (PFA) Program, Early IRS Engagement

15 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Final Section 41 regulations – ASC election On February 26, 2015, treasury and IRS published final regulations (T.D. 9712), in Section (b)(2), relating to the Alternative Simplified Credit (“ASC”) election for purposes of the research credit that is available under section 41(c)(5). ■A taxpayer may now make an ASC election under section 41(c)(5) for a tax year on an amended return, but only if the taxpayer, or its controlled group, has not previously claimed the section 41 credit on its original return or an amended return for that tax year and only if that tax year is not closed by the period of limitations on assessment under section 6501(a). ■Generally effective for taxable years ending on or after February 27, However, taxpayers may rely on prior temporary regulations in Section T to make an ASC election for a tax year ending prior to June 3, 2014 if the taxpayer makes the election before the period of limitations for assessment of tax has expired for that year. ■A “protective” section 280C(c)(3) election on line 17 of Form 6765 (the line for regular research credit) made in a prior tax year does not, in and of itself, constitute a claim under section 41(a)(1) and accordingly does not preclude a taxpayer from making an ASC election on an amended return for that taxable year.

16 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Final Section 174 regulations: Development of tangible property On July 17, 2014, Treasury and IRS published final regulations (T.D. 9680) amending the definition of research and experimental (R&D) expenditures under section 174. ■Primarily focus on the proper treatment of amounts paid or incurred in connection with the development of tangible property. ■Include amendments to the definition of R&D expenditures under section 174 ■Offer numerous examples that taxpayers can follow when implementing these proposed changes.

17 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Final Section 174 regulations Provides that ultimate use of the research/subsequent events are not relevant ■Ultimate success, failure, sale or other use of the research or property resulting from the R&D activity is not relevant to a determination of eligibility under section 174. ■Adopts/Expands decision in T.G. Missouri decision, 133 T.C. 278 (2009) Clarifies that the “Depreciable Property Rule” is an application of the general definition of R&D expenditures and is not to be applied to exclude otherwise eligible expenditures. ■For land or depreciable property used in connection with R&D, the rule limits the amount that a taxpayer can treat as eligible section 174 expenditures to the related depletion or depreciation deductions for that property. ■The only expenditures related to the production of depreciable property that are deductible section 174 expenditures are amounts expended for R&D activities. Provides a definition of the term “pilot model” – i.e., any representation or model of a product that is produced to evaluate and resolve uncertainty concerning the product during the development or improvement of the product. ■This includes a fully functional representation or model of the product or component of the product

18 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Final Section 174 regulations (continued) Provides that the costs of producing a product after uncertainty concerning the development or improvement of a product is eliminated are not eligible under section 174 because these costs are not for R&D ■Increased emphasis on documenting the “entire” development process to establish where R&D stops and post-development production begins ■Should not apply if “new” development on an existing product begins Provides a “shrinking-back” provision – similar to the rule for the research credit ■Recognizes situations in which the costs of a component part of a larger product can qualify as R&D expense, even though the development of the overall product has passed the point at which uncertainties have been resolved. ■Provides specific examples to illustrate this point (development of new aircraft engine blade)

19 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Final Section 174 regulations (continued) Implications of the final section 174 regulations: ■Custom/Contract design & manufacturing activities ■Large-scale prototype & pilot model development ■R&D costs vs. Production costs – when is design uncertainty eliminated? ■Section 174 accounting method planning opportunities – capital projects, long term contracting

Domestic Production Deduction Section 199

21 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Agenda Overview New Regulations (Temporary & Proposed) Administrative Update Judicial Update Software Other Guidance

22 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. I.R.C. § Overview The I.R.C. § 199 Domestic Production Activities Deduction (“DPAD”) was created as part of the American Jobs Creation Act of 2004 to incentivize companies to keep and/or create jobs in the United States. I.R.C. § 199 allows the taxpayer to take a deduction for qualifying activities that is equal to a percentage of the lesser of: Qualified Production Activities Income (“QPAI”) or Taxable Income. The applicable percentage was phased in for tax years, as follows: : 3% : 6% 2010-Present: 9% The percentage is limited to 6% for oil-related income. Amended returns may be filed for prior tax years to claim the benefit. Limitation: The allowable DPAD may not exceed 50% of allocable W-2 wages paid by the taxpayer in the tax year.

23 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Immediate Relief for Short Taxable Years – Temp. Reg. – TD 9731 Temporary Regulations address a statutory drafting problem in section 199(b). Section 199 limits the available deduction to 50% of the W-2 wages paid during “the calendar year ending during the tax year” with respect to which the section 199 benefit is being claimed. ■The statutory language effectively precluded any section 199 deduction for production activities occurring in many short years ■In 2014, Congress provided IRS with authority to correct this drafting problem Under the temporary regulations ■If no calendar year ends within a short taxable year, the deduction is computed using the wages paid by the taxpayer during that short year ■If two taxpayers might otherwise be treated as an individual‘s employer during the same calendar year due to the acquisition or disposition of a business, wages are allocated ratably between them

24 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Proposed Section 199 Regulations – Reg IRS proposed revisions to section 199 regulations on August 27, 2015 Touches on a wide range of issues ■Oil-related QPAI ■Qualified films ■Activities in Puerto Rico ■“Item-by-item” determinations ■Qualifying production (MPGE) activities ■Benefits and burdens test ■Hedging transactions ■Construction activities ■COGS allocations ■Agricultural and horticultural cooperatives Proposed regulations are not effective unless and until finalized

25 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Scope of MPGE Proposed regulations exclude (using examples) specific activities from the definition of MPGE ■Gift baskets ■Stand-alone testing LB&I Exam Directive (LB&I ) Identifying several non-MPGE activities (per IRS) ■Cutting blank keys to a customer’s specification ■Mixing base paint and a paint coloring agent ■Decorating a cake that is not baked where sold ■Applying gas to agricultural products to slow or expedite fruit ripening ■Storing agricultural products in a controlled environment to extend shelf life ■Maintaining plants and seedlings The LB&I directive does not have the force and effect of law and query whether adding examples to the regulations is sufficient to achieve the IRS’s goal of overturning courts’ contrary interpretations of the regulations

26 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Contract Manufacturing In contract manufacturing arrangements, the current regulations award the deduction to the taxpayer having the “benefits and burdens of ownership” during the production process “Benefits and burdens” standard has been vexing for both IRS and taxpayers ■Entirely factual ■IRS has attempted to develop safe harbors, with limited success Proposed regulations would eliminate the benefits and burdens test altogether. Instead, the party “performing the activity” would be entitled to the section 199 benefit ■Aligns with position taken by many IRS exam teams ■Is less ambiguous than “benefits and burdens” standard Each transaction will have winners and losers under the new standard ■Tolling arrangements ■Store-brand goods ■Contract printers ■Software

27 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Other Administrative Guidance PLR W-2 wage limit for week year CCA treatment of receipts from video subscription packages, costs of programming license fees CCA allocation and apportionment of deductions for damages relating to litigation that commenced before the effective date of section 199 TAM – service vs. software license revenue

28 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Courts Consistently Reject IRS’s Narrow Application of Section 199 Precision Dose is the IRS’s third loss in court under section 199 ■Precision Dose, Inc. v. United States, 2015 U.S. Dist. LEXIS (N.D. Ill. Sept. 24, 2015) (medication packets) ■United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) (gift baskets) ■Gibson & Associates v. Comm., 136 T.C. 195 (2011) (highway and infrastructure reconstruction) IRS’s only victory has been a contract manufacturing dispute, in which the question was which party was entitled to the deduction, rather than whether a benefit was available to anyone ■ADVO, Inc. v. Commissioner, 141 T.C. 298 (2013) (direct advertising mailers; deduction awarded to printer) IRS trying to bolster its litigating position by revising section 199 regulations

29 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Precision Dose, Inc. v. U.S. (N.D. Ill. September 24, 2015) Taxpayer sells "unit doses" of medications as follows: Buys, in bulk, suitable drugs Develops cups and syringes to be produced by vendors Fills and tests single unit doses Issue considered was whether taxpayer’s activities constitute mere packaging, repackaging, labeling, and minor assembly Citing U.S. v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013), the court held that the taxpayer conducts a "complex production process that results in a distinct final product“ and is eligible under section 199

30 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Software Emerging issue ■On-line software generally ineligible for benefit ■Two safe harbor exceptions allow the benefit if there are “comparables” Potential benefits for banks, insurance companies, franchisors, others IRS has reservations ■GLAM (mobile banking software) disallowed section 199 benefit IRS and Treasury are developing revised software regulations

31 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. AM “GLAM” – December 5, 2014 Issue: Whether, for purposes of I.R.C. § 199, a taxpayer derives Domestic Production Gross Receipts (“DPGR”) from the disposition of computer software when a taxpayer allows customers to download its computer software application (“App”) free of charge and the App allows customers to access taxpayer’s online fee-based services (i.e., online banking services). GLAM Conclusion: Taxpayer does not derive DPGR from the disposition of computer software (i.e., download of an App) when the customer is allowed to download that App free of charge to access the taxpayer’s online fee-based services. Taxpayer does not make a qualifying disposition of computer software because its App is considered online software for purposes of I.R.C. § 199. Even if the download of the taxpayer’s App is a disposition, the gross receipts that the taxpayer derives are entirely from the provision of online fee-based services and not from a disposition of computer software. Taxpayer does not meet the third party comparable software exceptions under Treas. Reg. § (i)(6)(iii) with respect to its online software.

New Method Change Procedures

33 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Overview of New Method Change Procedures Rev. Proc ■Procedures for “automatic” and “non-automatic” consent method changes are now in one document –Replaces Rev. Proc and Rev. Proc ■Immediate effective date –New guidance applies to all Forms 3115 filed after January 16, 2015 for a year of change ending on or after May 31, 2014 Rev. Proc ■Lists the available automatic changes ■Replaces what was formerly the appendix to Rev. Proc Revised Form 3115 and instructions issued in January 2016

34 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. How to File if under Exam Old ProcedureNew Procedure Could not file if under examination – Exceptions  90-day window  120 window  With director consent Changes without audit protection – Under examination with issue pending (written notification of adjustment) – Issue under consideration before an appeals office – Issue under consideration before a federal court If under examination, file at any time but without audit protection and with a two year spread on positive 481(a) adjustment – Exceptions to no audit protection (as long as issue not under consideration):  *Three-month window (12 month rule / 24 month rule for CFCs)  *120 window (not available for CFCs)  *Present method not before director  *New consolidated group member (CAP)  Negative 481(a) adjustment  No examination imposed change *Also permit four-year spread – Issue is under consideration if exam has issued written notification (e.g., IDR) specifically citing treatment of item as issue under consideration

35 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 481(a) Adjustment General rule – 4-year spread for positive, 1-year for negative ■If taxpayer files method change while under IRS exam, the adjustment period is two taxable years unless an exception applies ■Taxpayers may elect to take a positive adjustment of less than $50,000 into account in the year of change ■Taxpayers may elect to take a positive adjustment into account in the year of change if change is made in the year of a “eligible acquisition transaction” –Applies if transaction occurs during the year of change or before the extended due date of the federal income tax return for the year of change –Election is irrevocable and applies to all changes filed for that year of change –Election can be made even if taxpayer has executed Consent Agreement with a longer adjustment period

Odds & Ends

37 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Depreciation – Protecting Americans from Tax Hikes Act of 2015 The PATH Act included several provisions concerning depreciation: ■Permanent provision of 15-year recovery period for Qualified Leasehold Improvement Property, Qualified Restaurant Property and Qualified Retail Improvement Property –Effective for property placed in service after December 31, 2014 ■Bonus depreciation is extended through 2019, but through a phased-down approach: –Bonus percentage for 2015, 2016 and 2017 is 50% –Bonus percentage for 2018 is 40% –Bonus percentage for 2019 is 30% –Starting in 2016, expanded eligibility for building improvements – bonus will apply to “qualified improvement property” ■Improvements are no longer required to be made pursuant to a lease ■Improvements are no longer required to be made more than three years after building placed in service

38 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tangible Property Regulations Update Recent Activity ■Rev. Proc –Provides a safe harbor method for determining the treatment of expenditures incurred to remodel or refresh qualified building property for taxpayers operating certain retail establishments and restaurants ■Guidance for natural gas distribution assets forthcoming ■Notice –Increases the de minimis safe harbor limit for taxpayers without an applicable financial statement to $2,500 –Effective for costs incurred during tax years beginning on or after January 1, 2016 ■IRS LB&I drafting Audit Technique Guide

Revenue Recognition

40 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Background Remove inconsistencies and weaknesses in existing requirements to improve comparability Provide a more robust framework for addressing revenue issues Provide more useful information through improved disclosure requirements Simplify the preparation of financial statements by reducing the number of requirements by having one revenue framework IASB / FASB Converged Standard

41 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Effective Date and Transition of New Standards Effective date Public entities: fiscal years, and interim periods within those years, beginning after December 15, 2017 Nonpublic entities: fiscal years beginning after December 15, 2018, and interim and annual periods thereafter Early adoption prohibited for public entities. Nonpublic entities can adopt with public entities Transition approaches Full retrospective Retrospective using one or more practical expedients Cumulative effect at the date of adoption

42 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The Core Principle and the Five-Step Model Identify the contract(s) with a customer 1 Identify the performance obligations in the contract 2 Determine the transaction price 3 Allocate the transaction price to the performance obligations in the contract 4 Recognize revenue when (or as) the entity satisfies a performance obligation 5 An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Core Principle

43 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Example Revenue Recognition Changes Existing StandardsNew Standard 100+ sources for revenue guidanceOne standard for all arrangements, all industries Must have “persuasive evidence” of arrangementMust have “legally binding” arrangement Fees must be fixed & determinableFees are estimated if sufficient history exists No recognition of contingent revenueNo similar prohibition; subject to estimation Unit of account based on “standalone value”Unit of account based on “distinct” No rules on accounting for modificationsModification rules can result in complicated acctg. Software industry held to higher standard (“VSOE”)Software guidance eliminated IP license recognized upfront or ratable based on practice IP license subject to specific rules on how to recognize revenue Capitalizing contract acquisition costs optionalCapitalizing contract acquisition costs required Revenue disclosures limited to policy discussionExtensive disclosures required

44 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Impact by Tax Type ■New Book/Tax differences required, where tax historically followed US GAAP methods – this will require tax specific data, processes, systems and controls ■Need for formal tax accounting method changes (Form 3115) ■Impact to tax compliance / planning (e.g., where new book standard accelerates revenue, tax deferral under RP will be limited) Federal Tax ■Changes in accounting methods may impact Pre-Tax Book Income, which may indirectly impact the effective tax rate (ASC 740) ■Impact to deferred taxes and deferred balances ■Impact to current taxes and taxes payable Accounting for Income Taxes ■Potential effects of determining revenue-based apportionment factors used for calculating state income tax expense and used for determining the applicable rate used to measure state deferred income taxes ■Impacts to state tax liabilities in gross receipt tax states (e.g., acceleration / deferral of income under new standard) State Tax ■Changes to sales and use tax positions and liability on account of changes in how revenues are allocated between separate performance obligations (e.g., software vs. services) Indirect Tax Transfer Pricing ■Changes to the amount and timing of revenue recognition as a result of the proposed revenue standard could have an impact on transfer pricing ■Entities using revenue or profit based methods may need to consider whether their strategies and documentation supporting transfer pricing need to be revised or updated Foreign Tax ■The impact of the new standard will affect the amount and timing of income recognition for CFCs, which could impact E&P, foreign tax credits and Subpart F ■Foreign Rate Differentials for Income Tax Expense (ASC 740 )

45 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Summary of Tax Accounting Method Implications Common approach: “tax follows books” ■More efficient, avoids book-tax differences ■However, tax requirements frequently differ from GAAP If “tax follows books” and books changes course, the options are ■Tax stays put (no change, creates book-tax difference) – Was former method consistent with tax law? – May need new process for tracking/compliance; ■ Tax shifts to follow the new book treatment – Is the new book method consistent with tax law?; or ■ Tax changes to something completely different If tax doesn’t follow book, reporting for book-tax difference continues ■ No concerns unless current tax method impermissible

46 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tax Impact: Get Plugged in Now Discussions and decisions may be underway now that directly affect tax Be aware of re-characterizations of revenue streams that may affect federal and state tax positions ■ Contracts from sale of goods may now be treated as both the sale of goods and the provision of services ■ Potential shifts in state or local tax position ■ Potential timing shift from “point in time” to “over time” Get plugged in as soon as possible to ensure input into: ■ Potential changes to systems needed to capture data for tax ■ Potential changes in book accounting that may – Create book/tax differences – Inadvertently result in a change in accounting method (without IRS consent) – Require obtaining IRS consent to change from prior book-driven method to an alternative method

47 © 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. What questions do you have?

Thank you Colleen O’Connor (202) William Stoddard (973)

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.