Thomson Reuters CheckPoint Learning   CPE COURSES  |  SALES & SUPPORT  |  LOGIN
graphic placeholder
News for Corporate Professionals from Checkpoint Learning
graphic placeholder
graphic placeholder
August 2014

In This Issue

Knowledge is power! Stay informed and be prepared with critical and timely corporate tax and accounting news. Click below to subscribe and continue to receive this free bimonthly newsletter.
Sign up for the Newsletter...
Sustainability Accounting Standards: What are they and will your entity be affected?
Sustainability Accounting Standards: What are they and will your entity be affected? Background

In 2010, researchers at the Initiative for Responsible Investment (IRI) at Harvard University began researching non-financial materiality and its application at an industry level. Due to an overwhelmingly positive response to the study, the researchers began exploring ways to develop a full set of industry indicators, including the creation of an independent nonprofit. To fill this need, the Sustainability Accounting Standards Board (SASB) was established in 2011. The SASB is a non-profit standard-setting body that develops industry-specific standards for use by companies to report on material environmental, social, and governance issues in mandatory filings to the Securities and Exchange Commission (SEC), such as the Form 10-K and 20-F. Sustainability accounting standards are intended as a complement to financial accounting standards, such that financial fundamentals and sustainability fundamentals can be evaluated side by side to provide a complete view of a corporation’s performance.


As it relates to corporate activities, and for the purpose of the SASB Standards, sustainability refers to environmental, social and governance (ESG) dimensions of a company’s operation and performance. More specifically, sustainability includes both the management of a corporation’s environmental and social impacts, as well as the management of environmental and social capitals necessary to create long-term value. It also includes the impact of environmental and social factors on innovation, business models, and corporate governance.

SASB’s sustainability topics are organized under five broad sustainability dimensions consistent with the original ESG nomenclature as follows:
  • Environment. This dimension includes corporate impact on the environment, either through the use of non-renewable natural resources as input to the factors of production (e.g., water, minerals, ecosystems and biodiversity) or through environmental impact, such as air and water pollution, waste disposal and greenhouse gas emissions.
  • Social Capital, or Dependencies. This dimension relates to the perceived role of business in society—or the expectation of business contribution to society in return for its social license to operate. It addresses the management of relationships with key outside stakeholders, such as customers, local communities, the public, and the government. It includes issues around access to products and services, affordability, responsible business practices in marketing, and customer privacy.
  • Human Capital. This dimension addresses the management of a company’s human resources (employees and individual contractors), as a key asset to delivering long-term value. It includes factors that affect the productivity of employees, such as employee engagement, diversity, and incentives and compensation, as well as the attraction and retention of employees in highly competitive or constrained markets for specific talent, skills, or education. It also addresses the management of labor relations in industries that rely on economies of scale and compete on the price of products and services, or in industries with legacy pension liabilities associated with vast workforces. Lastly, it includes the management of the health and safety of employees and the ability to create a safety culture for companies that operate in dangerous working environments.
  • Business model and innovation. This dimension addresses the impact of environmental and social factors on innovation and business models. It addresses the integration of environmental and social factors in the value creation process of companies, including resource efficiency and other innovation in the production process, as well as product innovation and looking at efficiency and responsibility in the design, use-phase, and disposal of products. It also includes management of environmental and social impacts on tangible and financial assets—either a company’s own or those it manages as the fiduciary for others.
  • Leadership and Governance. This dimension involves the management of issues that are inherent to the business model or common practice in the industry, and that are in potential conflict with the interest of broader stakeholder groups (government, community, customers, and employees), and therefore, create a potential liability or worse, a limitation or removal of license to operate. This includes regulatory compliance, lobbying, and political contributions. It also includes risk management, safety management, supply chain and resource management, conflict of interest, anti-competitive behavior, and corruption and bribery, as well as a risk of business complicity with human rights violations.
In the standards development process, the SASB identifies sustainability topics from an initial set of 43 generic sustainability issues organized under these five broad sustainability dimensions.

Recently-Issued Standards

The SASB issued its first set of standards in July 2013, beginning with the healthcare sector and focusing on pharmaceuticals, biotechnology, medical equipment and supplies, healthcare delivery, healthcare distributors, and managed care. For pharmaceutical companies, for example, the SASB developed standards on how to report on access to medicines, drug safety and side effects, safety of clinical trial participants, affordability and fair pricing, ethical marketing, counterfeit drugs, and efficiency in energy, water, and waste.

In February 2014, the SASB issued provisional standards for industries in the financial sector. The industries include commercial banks; investment banking and brokerage; asset management and custody activities; consumer finance; mortgage finance; security and commodity exchanges; and insurance. For commercial banks, for example, standards focus on the integration of ESG considerations in credit risk analysis, customer privacy and data security, responsible lending and debt prevention, legal and regulatory compliance, and systemic risk management.

In April 2014, the SASB issued provisional standards for industries in the technology and communications sector, which includes six industries: electronic manufacturing services and original design manufacturing; hardware; internet media and services; semiconductors; software and IT services; and telecommunications. Examples of issues included are waste and water management in manufacturing; data privacy and freedom of expression; and supply chain management and materials sourcing.

The standards, which are voluntary, will be tested over the next few years in a pilot program to see whether the costs of reporting such information match the benefits. The SASB briefs the SEC on its progress with quarterly updates and the evidence it gathers through research. Whether the SEC will actually enforce the standards on public companies is still an open question.
Now Every Business is a Software Business

Now Every Business is a Software Business Software development is a strong candidate for federal R&D tax credits. Many aspects of software development are tax credit eligible; these include preliminary scoping, prototyping, core build, testing, evolution, as well as integration with various platforms and operating systems. In addition, many companies are adding software-based components to their traditional product offerings. As more companies develop such features, more companies achieve R&D tax credit eligibility.

Every Company is a Software Company

Companies outside the traditional high-tech industry are becoming involved in software development. The November 2011 Forbes article, "Now Every Company is a Software Company” shows how some of America's most venerable companies are turning to software to enhance their product lines and find new growth. 

Ford Motor Company has equipped vehicles with WiFi receivers and other technological features guided by software – changing an automobile from a mere Point A to Point B transportation asset to an entertainment source. Similarly, Honeywell’s Smart Thermostat is operated by highly modernized software that is one of many technologies changing the way people can control home systems. Google’s acquisition of Nest, a home monitoring device company, is also indicative of the desire to optimize data in the home environment, including voice command software.

Booz & Company

In 2013, the Booz & Company annual study of R&D rated software and internet sector R&D as the fastest growing R&D category at 22.1% of all R&D. This growth is indicative of a major shift towards data driven solutions within global industry. If this shift continues as projected, the potential for R&D tax credits within the software industry will increase greatly.

Mobile Applications

The dominant presence of smartphones greatly expands the scope of mobile phone software development. Mobile application development has emerged as a leading category in the software industry, with enterprise applications earning more for developers than consumer applications. Developing this unique software for both iOS and Android platforms often requires extensive R&D efforts, making app developers prime candidates for an R&D tax credit.


Early stage start-ups are often highly R&D-intensive. Because the credit awards increased research activities; the increase in R&D expenses in start-ups can correlate to large tax credits. Because credits can be carried forward 20 years, establishing R&D tax accounting practices early often pays large dividends down the road. This is especially true for start-ups who see acquisition as their eventual end-game.


More companies are following the IBM model of using data to provide solutions to a wide array of problems. Even IBM has indicated their goal is to develop more software related to social media, cloud computing and mobile phones. Both software companies and companies delving into software-based features and solutions should examine their R&D tax credit eligibility.
Converged Revenue Recognition Standards

Converged Revenue Recognition Standards On May 28, 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). On the same day, the International Accounting Standards Board (IASB) issued IFRS 15, Revenue from Contracts with Customers. These standards represent converged revenue recognition standards between the FASB and the IASB.

FASB Chairman Russell Golden said in a news release, “The revenue recognition standard represents a milestone in our efforts to improve and converge one of the most important areas of financial reporting. It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance.”

In addition to simplifying U.S. GAAP as it applies to revenue recognition, the standard will add rigor to IFRS, which lacked sufficient details. Prior to these revised standards, U.S. GAAP and IFRS were significantly different, and both sets of standards were in need of improvement. With the issuance of ASU 2014-09, the FASB amended the Accounting Standards Codification and added Topic 606.

The goals articulated by the FASB and IASB were to create common revenue standards for U.S. GAAP and IFRS that would:
  • remove inconsistencies and weaknesses in revenue requirements,
  • provide a more robust framework for addressing revenue issues,
  • improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets,
  • provide more useful information to uses of the financial statements through improved disclosure requirements, and
  • simplify the preparation of financial statements by reducing the number of requirements.
The new standard impacts entities entering into contracts with customers. The contracts can be for either goods or services or the transfer of nonfinancial assets, unless those contracts are within the scope of other standards.

This new guidance is expected to have a significant impact on revenue recognition in the U.S., especially in industries with significant industry-specific guidance such as computer software and real estate. To work through transition issues, on June 3, 2014, the IASB and the FASB announced the formation of the Joint Transition Resource Group for Revenue Recognition (TRG). This group will inform the IASB and the FASB about potential implementation issues that could arise with the new standard in addition to providing stakeholders an opportunity to learn about the new standards. This group will not issue guidance. The group is comprised of professionals, including preparers and auditors of financial statements, across a multitude of industries and diverse geographic locations.

Any stakeholder can submit a potential implementation issue for discussion by this group. The IASB and FASB will evaluate and prioritize each submission. For more information about submitting issues to this group, refer to the IASB or FASB websites.

For a public company reporting under U.S. GAAP, ASU 2014-09 must be implemented for annual reporting periods beginning after December 15, 2016, including interim reporting periods. Early application of this standard is not permitted.

For non-public and not-for-profit entities under U.S. GAAP, ASU 2014-09 must be implemented for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early adoption is permitted, however the entity may not adopt before the effective date for public companies.
Supreme Court Holds Quality Stores' Severance Payments Are Taxable Wages for FICA Purposes

Supreme Court Holds Quality Stores' Severance Payments Are Taxable Wages for FICA Purposes The Supreme Court of the United States heard the case of United States v. Quality Stores, Inc., et al., 113 AFTR 2d 2014-1326, in January 2014 and issued their decision on March 25, 2014. The Supreme Court reversed earlier decisions by the Bankruptcy Court, the U.S. District Court for the District of Western Michigan, and the Sixth Circuit Court of Appeals when they held “the severance payments at issue were taxable wages for FICA purposes.”


Quality Stores, Inc., an agricultural-specialty retailer, terminated thousands of employees prior to entering bankruptcy. Severance payments were made to these employees under one of two plans. The payments were not tied to the receipt of state unemployment benefits under either plan. The payments under Plan 1 varied in amount based upon job grade, years of service, and management level.

The payments under Plan 2 were structured as retention payments to facilitate Quality Stores’ post-bankruptcy operations. In order to receive payments under Plan 2, the employees had to complete their last day of service as determined by the employer.

Quality Stores initially paid the employer’s share of FICA, withheld the employees’ portion of the FICA, and reported the severance payments as wages on Forms W-2. Next, Quality Stores asked 3,100 former employees for permission to file refund claims for FICA payments on their behalf. Approximately 1,850 former employees gave their permission and Quality Stores filed for a refund on their own behalf and on behalf of the former employees of slightly over $1 million. The IRS neither allowed nor denied the claim.

Quality Stores requested a refund of this amount in a Bankruptcy Court proceeding and the Bankruptcy Court ruled a refund was in order. The District Court and the Court of Appeals for the Sixth Circuit affirmed, concluding that severance payments were not “wages” under FICA. See In re: Quality Stores, Inc., 110 AFTR 2d 2012-5827 (6th Cir. 2012). Other Courts of Appeals, however, had previously ruled that at least some severance payments are wages subject to FICA taxes. The Government sought review, claiming FICA was due on the payments and the Supreme Court agreed to hear the case.


The first issue addressed by the Supreme Court was whether FICA’s definition of “wages” includes severance payments made to employees terminated against their will. The Sixth Circuit held that the payments were not wages taxed by FICA. To reach its holding, the Sixth Circuit relied not on FICA’s definition of wages but on IRC §3402(o), a provision governing income-tax withholding.

The Supreme Court, relying on Mayo Foundation for Medical Education and Research v. United States, 107 AFTR 2d 2011-341 (Sup. Ct. 2011), and IRC §§ 3101(a), 3121(a), and 3121(b), determined that severance payments are “remuneration for employment” and subject to FICA. Relying on Social Security Board v. Nierotko, 327 US 358 (1946), the Supreme Court went on to explain that the term “wages” used in the Social Security context is defined broadly and “means not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer.” In the Court’s eyes, severance payments are no different than other employee benefits beyond salary payments.

The second issue addressed by the Supreme Court was whether IRC §3402(o), relating to income-tax withholding, is a limitation on the meaning of “wages” for FICA purposes. The Court’s analysis weighed heavily on the fact that in the definitional sections for both FICA and Federal withholding Congress listed a series of specific exemptions reinforcing the broad scope of the definition of wages. Since severance payments were not specifically exempted by Congress, the Court ruled severance payments are within the definition of wages for both income-tax withholding and FICA purposes.

The Court also differentiated the severance payments in this Quality Stores case from isolated “supplemental unemployment compensation benefits” (SUB) plans that were negotiated by unions of major American employers such as Ford Motor Company in the 1950s and were later addressed by Revenue Ruling 90-72. The SUB plans of the 1950s provided funding to trusts that provided SUBs to temporarily furloughed employees to provide economic security to these regular employees. In order for these plans to work in conjunction with state unemployment compensation laws, the SUB payments could not be defined as “wages” from their employers.

Once the historical background of the SUB plan rule exclusion is understood, it is clear there was no intent to exclude severance payments that are not linked to state unemployment benefits from FICA wages. Thus, the severance payments in question in Quality Stores are taxable wages. In concluding, the Supreme Court noted that the IRS still provides that severance payments tied to the receipt of state unemployment benefits were not at issue in this case and are exempt not only from income-tax withholding but also from FICA taxation. See, e.g., Revenue Ruling 90-72.
The Robot Revolution and Tax Policy

The Robot Revolution and Tax Policy

After decades of key component improvements, robots are mainstreaming into the American economy. Key robot components that have greatly improved in recent years include:

  1. Vision systems (eyes)
  2. Gripping devices and end of arm effectors (hands and arms)
  3. Movement including rollers (legs and feet)
  4. Longer battery life that greatly enhances mobility
Moreover, the robots that are mainstreaming are much simpler, enabling easier and shorter implementation times. High volume robot sales are now occurring in multiple vertical markets including consumer goods, manufacturing, warehouse, medical, and agricultural markets.

The substitution of human workers by robots has multiple tax impacts. Human employment reduction will reduce payroll taxes, unemployment taxes and all employee related benefit costs. A robot can work 24/7, excluding time allocated for repairs and maintenance, and doesn't need time off. Multi-state corporations that utilize robots at a particular location will pay less state income taxes in that jurisdiction compared to other locations that do not utilize robots to the same extent. For example, a company with multiple warehouses that converts one warehouse to Kiva inventory picking machines may pay less corporate taxes to that jurisdiction.

This result occurs because state corporate income allocation will usually include a payroll allocation and reduced payroll in a jurisdiction means a lower corporate income allocation to that jurisdiction. On the other hand, robot purchases may be subject to state personal property taxes and possibly sales tax as well, depending on the intended use. State manufacturing exemptions may or may not be available for the purchase of robots used for packaging.

The chart below illustrates some of the growing high volume robot markets and brands.

Sample High Volume Robot Brands

Consumer Roomba vacuum cleaners Manufactured by iRobot. iRobot has sold over 10 million robots worldwide which includes vacuum cleaners, floor scrubbers, pool cleaners, etc.
Manufacturing Baxter self-programmable robots Designed and manufactured in the U.S. by Rethink Robotics, Baxter can learn as it works and is able to work in environments close to human workers. Baxter robots are being provided on a complimentary basis to many leading universities.
Warehouses Kiva automated material handling systems Kiva Systems, a wholly owned subsidiary of, consists of several components that work together to allow inventory and components to be moved to any operator at any time.
Medical da Vinci surgical robots Over the past decade, over 1.5 million surgeries have been performed worldwide using the da Vinci Surgical System. This robot is somewhat different than the others in that it is 100% controlled by a human but can be more precise than a human, thus allowing for a less invasive surgical process compared to traditional surgery.
Agricultural Harvest Automation agricultural robots Designed to perform material handling tasks in unstructured environments such as greenhouses and nurseries. Research continues in this rapidly developing field.

To date robots have not had a major impact on tax policy, however with increasing implementation of robots that process increasingly higher volumes of tasks, robots will impact tax policy in the near future.
Thomson Reuters ONESOURCE

Whether it's corporate income tax, tax provision, indirect tax, trust tax, tax information reporting, transfer pricing, data management, your internal processes or more—Thomson Reuters ONESOURCE provides leading technology and services that can help tax departments achieve greatness. Find out more here.

Heard about the latest tax developments? Managing Director Joe Harpaz is a regular contributor on Forbes. Explore his timely discussion around policy proposals and changes, breaking down complex issues. Find the blog hosted on Forbes at
Corporate Tax Webinar
Revenue from Contracts with Customers: An Overview of the New Standard
2 CPE credit Webinar: next date is August 5, 2014
Learn More
New Checkpoint Learning Corporate Advancement Package
New Checkpoint Learning Corporate Advancement Package
All-in-one subscription saves you time and money
Learn More 1-800-231-1860  
Follow Us! Facebook Twitter YouTube Pinterest Blog Thomson Reuters