1. Accounting Methods update: Selected topics Tax Executives Institute, Inc. Carolinas Chapter Raleigh, NC April 29, 2016

2. 2 © 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. NDPPS 560299 Disclaimer All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Any similarity between any depiction in this course and any actual event, person or entity is purely coincidental.

3. 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. NDPPS 560299 Agenda —Domestic production deduction —Tax impact of new financial accounting revenue recognition standard (“rev rec”) —Odds & ends -Recent tax legislation -TPR guidance for restaurants/retailers -Revised method change procedures -Inventory accounting -Ratable service contracts -R&D credits

4. Domestic production deduction

5. 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. NDPPS 560299 Section 199 developments & emerging issues —Software —Another IRS loss in court —Proposed changes to the section 199 regulations —Immediate relief for “short tax year” issue

6. 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. NDPPS 560299 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 2014-008 (banking software) disallowed section 199 benefit, because (in IRS view) —App had no separate functionality if not connected to internet, so was “on-line software” and were no qualifying comparables —Bank derived no revenue from its own customer’s use of banking app -IRS has been inconsistent on examination —IRS and Treasury are developing revised software regulations

7. 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. NDPPS 560299 Precision Dose, Inc. v. United States Federal district court agrees that taxpayer is engaged in the production of qualifying personal property —Company purchases medication and packaging in bulk and produces single-dose packages of medications —District Court disagreed with IRS that taxpayer was engaged only in non-qualifying packaging and labeling activities —Court looked to earlier “gift basket” case to conclude that the taxpayer used a complex multi-step process to research and produce a final product distinct from its individual components

8. 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. NDPPS 560299 Courts consistently reject IRS’s narrow application of section 199 —Precision Dose is the IRS’s third loss in court under section 199 -Gibson & Associates v. Comm., 136 T.C. 195 (2011) (highway and infrastructure reconstruction) -United States v. Dean, 945 F. Supp. 2d 1110 (C.D. Cal. 2013) (gift baskets) -Precision Dose, Inc. v. United States, 2015 U.S. Dist. LEXIS 128115 (N.D. Ill. Sept. 24, 2015) (medication packets) —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

9. 9 © 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. NDPPS 560299 Proposed section 199 regulations —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

10. 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. NDPPS 560299 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

11. 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. NDPPS 560299 Scope of MPGE —Proposed regulations exclude (using examples) specific activities from the definition of MPGE -Gift baskets -Stand-alone testing —LB&I earlier issued an exam directive taking the position that several other activities are not MPGE -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

12. 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. NDPPS 560299 Relief for short taxable year situations —IRS also issued in August temporary regulations to 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

13. 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. NDPPS 560299 Immediate effect for W-2 wage regulations —The W-2 regulations are temporary regulations (rather than proposed regulations) and so are effective immediately —Taxpayers may have an opportunity to file amended returns for prior years in which no section 199 deduction was claimed with respect to short taxable years

14. 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. NDPPS 560299 Oil-related production activities —2016 Consolidated Appropriations Act purports to provide enhanced section 199 benefit for independent oil refiners -Generally, section 199 benefit is reduced to 6% for “oil-related QPAI” -Under new section 199(c)(3)(C), independent refiners (i.e., refiners other than integrated oil companies) exclude 75% of costs of transporting oil in computing “oil ‑ related QPAI” -Applicable only for tax years beginning after December 31, 2015 and before January 1, 2022 —Potential application to fuel blending (“splash blending”) -Potential benefit for retail fuel outlets -Generally must be “blender of record” for EPA purposes

15. The new “Rev Rec” standard: An overview

16. 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. NDPPS 560299 Relevance of new revenue recognition standard to tax What?When? —U.S. GAAP & IFRS Convergence: A single revenue recognition framework that replaces existing industry and transaction specific guidance under U.S. GAAP —Will significantly impact how and when a company’s U.S. GAAP revenue will be recognized – revenue may be accelerated or deferred for certain revenue streams —New processes/data elements may be required in order to account for revenues under the new standard —New disclosure guidance to provide sufficient information to enable users of the financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers —Public companies must adopt the new financial accounting standard (ASC 606) starting FY 2018 —Broad nature of change and manner of adoption (i.e., retrospective vs. cumulative) requires tax departments to understand impact immediately —Systems change efforts will likely begin significantly earlier than effective dates Who?How? —All businesses with contracts for the delivery of goods or services are potentially affected. —Implementation will involve many functions throughout the company, including Accounting, Finance, Tax, Internal Controls, IT —A change in revenue recognition for financial accounting may have a significant impact on the company’s tax data, processes, controls and tax compliance, planning and reporting. —Changes to the company’s current U.S. GAAP methods will require evaluating whether new book/tax differences will be required, and to identify data needs for tax and any changes to existing tax processes and controls. —Changes to the timing and allocation of revenue to each “performance obligation” of a contract can impact existing tax positions, policies and calculations

17. 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. NDPPS 560299 New book accounting standard for customer contracts New standard does not apply to: —Lease contracts —Insurance contracts issued by insurance entities within the scope of ASC Topic 944 —Financial instruments and other contractual rights or obligations (e.g., receivables, debt and equity securities, liabilities, debt, derivatives, transfers and servicing, etc.) —Guarantees (other than product or service warranties) —Non-monetary exchanges between entities in the same line of business to facilitate sales to customers. i.e., enforceable rights and obligations Contract EntityCustomer

18. 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. NDPPS 560299 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 Core principle 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

19. 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. NDPPS 560299 Tax revenue recognition standards The accrual basis standard for revenue recognition for tax purposes is the “all events test”: -All events have occurred which fix the right to receive the income, AND -The amount can be determined with reasonable accuracy -This generally translates to the earliest of when received, due, or earned Examples of specific rules for revenue recognition for certain items/industries -Deferral of advance payments for goods or services —Revenue Procedure 2004-34 —Treas. Reg. § 1.451-5 -Non-accrual experience method -Subscription income -Percentage of completion

20. 20 © 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. NDPPS 560299 Example – software license Separate performance obligations & transfer of control New standard requires revenue from sale of goods to be recognized when control is transferred either at a point in time or over time For tax, recognition of services income accrues as the service is completed, unless advance payment received Example – revenue from software license and support services $400$600

21. 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. NDPPS 560299 Example - on-time delivery bonus Variable consideration New standard requires an estimate of variable consideration (e.g., performance bonuses, incentives) to be included in transaction price if it is probable that amount will not result in significant revenue reversal when uncertainty is resolved For tax, variable consideration generally does not trigger income until contingency is resolved (similar to current GAAP treatment) Example – revenue from inventory sales – seller receives bonus for on-time delivery over three year period: Future Tax$200 $400

22. 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. NDPPS 560299 Impact by tax type Federal tax —New Book/Tax differences required, where tax historically followed U.S. 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 04-34 will be limited) Accounting for income taxes —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 State tax —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) Indirect 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) 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)

23. 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. NDPPS 560299 New lease accounting standard Effective dates -2019 for public companies and 2020 for private companies -Early adoption permitted -Retrospective adjustments Impact -Lessees will recognize most leases on-balance sheet, increasing reported assets and liabilities. This may impact: —Deferred taxes: new, or changes to, temporary differences —State apportionment —Non-income based taxes —Real estate taxes —Sales and use tax -Lessors will classify leases similar to current US GAAP, as (1) sales-type, (2) direct financing, or (3) operating leases -Sale-leaseback transactions -Expanded disclosures

24. Odds & ends

25. 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. NDPPS 560299 “PATH” Act of 2015 —Permanent Extensions -Research Credit -15-year depreciation recovery period for portions of a building that are qualified leasehold improvements, qualified retail improvements, or qualified restaurant property for property placed in service on or after January 1, 2015. -$500,000 limitation on the amount of depreciable property that may be expensed under section 179 in the year placed in service. —5 Year Extensions -50% “bonus depreciation” deduction. However, the deduction percentage is reduced to 40% for property placed in service in 2018, and to 30% for 2019. -The election allowing a corporation to forgo bonus depreciation on its qualified property, and instead to accelerate the ability to use additional alternative minimum tax (AMT) credits. -The allowance of bonus for qualified leasehold improvement (QLI) property is modified. The modified category is called “qualified improvement property”. Improvements to an interior portion of a commercial building with be bonus eligible whether or not the improvement is to a leasehold in the building, and improvements will qualify even if they are made before the building has been in service for three years. —Long-term extensions of energy credits with phase-outs

26. 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. NDPPS 560299 Rev. Proc. 2015-56: Retail/restaurant remodel/refresh safe harbor —A qualified taxpayer’s deductible repair expenses for qualified buildings each year is equal to 75% of its qualified remodel-refresh costs for the year —Similarly, a qualified taxpayer’s capital improvements under section 263(a) and section 263A related to the above pool of costs are equal to 25% of its qualified costs —Statistical sampling is allowed —General asset accounting is required —Partial disposition losses are not allowed —Automatic consent procedures are available

27. 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. NDPPS 560299 Expanded Income Deferral for Certain Gift Cards —TAM 201610017: allocable portion of gift cards redeemable for either goods or services may be deferred for up to 2 years -Some companies interpreted regulations permitting two-year deferral as restricted to gift cards redeemable only for goods or integral services -IRS National Office clarified that section 1.451-5 can be read more broadly —Allocate combined year-end balance of all gift cards sold that year between -Goods -Integral services -All other —Portion allocable to goods and integral services potentially eligible for the two-year deferral under section 1.451-5; balance potentially eligible for shorter deferral under Rev. Proc. 2004-34 —No specific methodology required for allocation -Statistical sampling allowed —CAVEAT: IRS position is that section 1.451-5 does not apply to “giftco” structures, or to most gift card programs administered by franchisors for independent franchisees

28. 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. NDPPS 560299 New method change procedures Rev. Proc. 2015-13 —Procedures for “automatic” and “nonautomatic” consent method changes are now in one document -Replaces Rev. Proc. 2011-14 (automatic) and Rev. Proc. 97-27 (non-automatic) —New guidance applies to all forms 3115 filed after January 16, 2015 for a year of change ending on or after May 31, 2014 -Transition relief – may file under Rev. Proc. 2011-14 for years ending on or after May 31, 2014, and on or before January 31, 2015 Rev. Proc. 2015-14 —Contains all the available automatic changes New Form 3115 —Must be used after April 19, 2016

29. 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. NDPPS 560299 Significant changes – eligibility rules Old procedure – “scope limitations”New procedure – “eligibility” Under examination Section 381 transaction Final year of a trade or business Prior five year overall method change Prior five year item change Section 381 transaction Final year of a trade or business Prior five year overall method change Prior five year item change

30. 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. NDPPS 560299 Significant changes – under examination 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) – Exceptions to no audit protection (as long as issue not under consideration): *Three-month window (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

31. 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. NDPPS 560299 Inventories – proposed regulations – negative section 263A costs Overview —Two basic steps: -Identification of capitalizable costs (includable, excludable, mixed service costs) -Allocate additional 263A costs between ending inventory and cost of goods sold Negative section 263A costs? -Certain costs capitalized for books that are not required to be capitalized for tax -Examples include unfavorable book-tax differences, overcapitalized amounts -Interim guidance exists in Notice 2007-29 Proposed guidance -Negative additional section 263A costs permitted: —Simplified resale method —Smaller (<$10 million average annual gross receipts) taxpayers using simplified production method -However, negative amounts generally prohibited under traditional simplified production method -Negative amounts would be allowed under modified simplified production method

32. 32 © 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. NDPPS 560299 Modified simplified production method “Preproduction Ratio” “Production Ratio” Preproduction Add. Section 263A Costs X RM 471 Costs in EI = Allocable Preproduction 263A Costs Total Section 471 Raw Material Costs Production Add. Section 263A Costs X 471 Labor/Overhead in EI = Allocable Production 263A Costs Total Section 471 less Raw Material Costs

33. 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. NDPPS 560299 Expense accrual - ratable service contracts —Rev. Proc. 2015-39 provides a safe harbor for deducting amounts incurred under “ratable service contracts” -Contract provides for similar services to be provided on a regular basis, such as daily, weekly, or monthly -Each occurrence of the service provides independent value -The term of the contract does not exceed 12 months (contract renewal provisions are disregarded) -Typical examples —Janitorial contracts —Landscape maintenance —IT support (“help desk”) —Taxpayer may treat economic performance as occurring on a ratable basis over the term of the service contract —Benefits eligible contracts spanning taxable years -Provides relief from Caltex Oil Venture v. Comm., 138 T.C. 18 (2012), holding that all services must occur within 3 ½ months of year end, or no portion may be deducted in Year 1.

34. 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. NDPPS 560299 Research credit update Research Credit – Permanent Extension —On December 18, 2015, President Obama signed into law the Consolidated Appropriations Act, 2016 (the 2016 Act). —The Act seamlessly reinstated the Research Credit retroactively for qualified research expenses (QRE) paid or incurred on or after January 1, 2015. —The current methods of computing the research credit have not changed: i.e., a “traditional” regular credit at a nominal rate of 20%, or the Alternative Simplified Credit (ASC) at a nominal rate of 14%. Potential Future Updates for R&D —Improved ASC Application (i.e., 17% or 20% credit rate) —Elimination of the “traditional” regular credit —"Innovation Box”

35. 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. NDPPS 560299 Proposed regulations on internal use software January 16, 2015 the Treasury Department and the IRS released for publication in the Federal Register a notice of proposed rulemaking (REG-153656-03) concerning the treatment under Section 41 of costs incurred to develop internal use software. —Definition of internal use software -Software that is developed by or for the taxpayer for use in general and administrative functions that facilitate or support the conduct of the taxpayer’s business -Intended to target back-office functions of the taxpayer (financial management, HR, etc.) —High threshold of innovation test -Economically significant reduction in cost, improvement in speed, or other measurable improvement -Significant economic risk (at the outset of the development) -Software is not commercially available —Examples for application of the Process of Experimentation requirement

36. 36 © 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. NDPPS 560299 Software development Many companies are implementing large software systems which include the customization of existing software packages. Often the largest expenses relate to this software customization portion of the project. GAAP requires capitalization of most of the expenses including internal salaries. —Tax allows the expensing of many of these costs per the guidance in Rev Proc 2000-50. —Analysis does require the detailed review of the contracts and invoices. —Consider additional benefits for Research Credit (Proposed IUS Regs)

37. 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. NDPPS 560299 What questions do you have? ASK Question Answers Apply Answer Why Query Understand Who Where What How When Questions

38. 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. NDPPS 560299 Speakers Carol Conjura Partner, Washington National Tax Washington, D.C. cconjura@kpmg.com Eric Lucas Principal, Washington National Tax Washington, D.C. ejlucas@kpmg.com

39. Thank you

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. NDPPS 560299 The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. kpmg.com/socialmedia