Tax Update and SSAP101 Boot Camp - IASA...• Illustration Assume consistent R&E spending of...

Tax Update and SSAP101 Boot Camp

Presented by Thomas F. Wheeland, CPA Dale L. Scholl II, CPA

• Recent Developments in Tax Legislation PATH Act, Appropriations Bill, Highway Bill Tax Reform Research & Experimentation Credit

• SSAP 101 Boot Camp • Best Practices for Provision Documentation

AGENDA

• Protecting Americans from Tax Hikes Act passed in December 2015

• Bonus Depreciation – extended through 2019 (50% for 2015 - 2017; 40% for 2018; 30% for 2019) Generally available for new property with class

life of 20 years or less • Section 179 Expensing - $500,000 annual

maximum indexed for inflation Phase-out starts at $2 million of eligible property

placed in-service (also indexed for inflation)

PATH ACT PROVISIONS

• “Qualified Improvement Property” New definition for improvements to interior

portion of non-residential real property • Excludes enlargements, elevator/escalator, or

structure framework improvements Eligible assets are qualified for bonus

depreciation • Previously only qualified leasehold improvements

qualified (15-year property) Tax life of remaining basis is still 39 years

PATH ACT PROVISIONS

• R&E Credit – extended permanently • Sec 831(b) Small Insurers Increase Sec 831(b) threshold from $1.2 to $2.2

million for tax years after 2016 (indexed for inflation) Must meet “risk diversification” test (No

policyholder may make up more than 20% or greater of net or direct written premiums) OR “Relatedness” test (certain owners of the insured

must own a share of the business equal to or greater than what they own in the insurer)

PATH ACT PROVISIONS

• Two year delay of “Cadillac” tax on high-cost employer-sponsored health coverage (delay until years beginning after 12/31//2019)

• “Cadillac” tax is now tax deductible • Annual fee on health insurance premiums

for 2017 calendar year has been suspended

CONSOLIDATED APPROPRIATIONS ACT

• Corporations – Original due date changed from March 15 to April 15 Extended due date remains at September 15

until 2026 when it changes to October 15 • Partnerships – Original due date changed

from April 15 to March 15 No change to extended due date (still

September 15)

2015 HIGHWAY BILL – DUE DATE CHANGES

• State Forms – Watch for state returns still due in March, even though Federal due date changed to April (depends on the state)

• Exempt Organizations – Form 990 extension will be a single, 6-month automatic extension (no changes to due dates)

2015 HIGHWAY BILL – DUE DATE CHANGES

• FinCEN Report 114 (“FBAR”) – Due April 15 with extension until October 15

• W-2 / 1099 Info Reporting – W-2 & 1099-MISC due to IRS by January 31 All other 1099 forms due February 28 (March 31

if filed electronically)

2015 HIGHWAY BILL – DUE DATE CHANGES

2015 HIGHWAY BILL – DUE DATE CHANGES

• With Election this fall, don’t expect to see anything major until 2017

• Topics that have come up in previous proposals Reduced top corporate tax rate (25%, 28%) Repeal AMT & revise NOL rules Eliminate exclusion of performance-based

compensation from Sec 162(m) Life reserves – increase discount rate used to compute

tax reserves Non-life reserves – increase in discount rate, loss

payment pattern lengthening, no company election Increase DAC percentages Change proration rules for non-Life companies

TAX REFORM

• Repeal Sec 833 for BCBS entities • Remove or adjust benefits for small life &

non-life insurers • Limit COLI interest expense exception to

20% owners for new contracts • Repeal Sec 847 – Special Estimated Tax

Payments • International provisions

TAX REFORM

RESEARCH & EXPERIMENTATION CREDIT

PRODUCT Development/Improvement

SOFTWARE Development/Improvement

PROCESS Development/Improvement

ELIGIBLE COSTS Contract

Research at 65% Internal Wages,

Supplies at 100% Deduct §174

Credit Eligible (A)

Credit = 14%

Excess of (A) - (B)

Base Period (B)

Alternative Simplified Method Forward 20 Years Back 1 Year

Prior 3 Year Average Costs x

50%

Reduced Credit = 14% x 65%

• Illustration Assume consistent R&E spending of $2,000/yr for

2013-2015 (base period) & 2016 (current period) Assume all costs are internal wages & credit eligible Excess of CY cost ($2,000) over 50% of base

period ($1,000) is $1,000 Credit is 14% ($140) and reduced credit (to account

for the fact that amounts were already deducted under Sec 174) is 65% of $140

Credit is $91 or 4.55% of eligible costs

RESEARCH & EXPERIMENTATION CREDIT

SSAP101 Boot Camp

• Current Tax Expense/(Benefit) [I/S] Based on expected tax return results (including

carryback of losses/credits, if avail.)

Include true-up of prior year tax & tax authority audit adjustments

Include changes in tax contingencies as appropriate for uncertain tax positions

Assumes an audit by taxing authority Reduces benefits to those more likely than not

realizable

GAAP TAX ACCOUNTING [ASC740]

• Deferred Tax Expense/(Benefit) [I/S] Based on changes in basis differences in assets &

liabilities Valuation allowance reduces DTAs to more likely

than not standard of realization

GAAP TAX ACCOUNTING [ASC740]

• Permanent differences Tax-exempt interest Dividends received deduction Proration/policyholder share Meals & entertainment Lobbying expenses Club dues Spousal travel Penalties

GAAP TAX ACCOUNTING [ASC740]

• Temporary differences & carryforwards Loss/policy reserves Deferred & uncollected premiums Depreciation/amortization Other than temporary impairments (OTTI) Deferred market discount Compensation accruals Policyholder dividends Unrealized gain/loss Net operating loss & operating loss deductions Alternative minimum tax & foreign tax credits

GAAP TAX ACCOUNTING [ASC740]

GAAP TAX ACCOUNTING [ASC740]

• Effective for 2012 & subsequent year quarterly & annual filings

• Based upon GAAP tax accounting model; however, no state deferred taxes are booked

• Current Expense/(Benefit) [I/S] • Deferred Expense/(Benefit) [Surplus] • Deferred tax assets tested for

admissibility

SSAP101 OVERVIEW

• Admissibility – A 3-Part Test DTAs are reduced by statutory valuation

allowances before being tested for admissibility Reversals of DTAs are scheduled out to

determine reversals over next 3 tax years

SSAP101 OVERVIEW

Paragraph 11a – Hypothetical Carryback • Assumes zero future taxable income before

reversals • Tax losses from reversing temporary differences

are carried back to offset current year & prior taxable income

• Carryback rules differ between ordinary & capital gain/loss as well as for life & non-life companies

SSAP101 OVERVIEW

• Admissibility – A 3-Part Test Paragraph 11b – Future Income Offset

• DTAs not recovered in 11a carryback are used to offset future projected taxable income (period depends on capital thresholds in SSAP101)

• Based on a with & without test, i.e., start with actual expected taxable income & then back-out the reversal

• Admitted amount is the tax benefit you will receive because of reversing temporary deduction

• Again, need to consider character of future income

SSAP101 OVERVIEW

• Admissibility – A 3-Part Test Paragraph 11c – DTL Offset

• DTAs not admitted in 11a or 11b tests are netted against DTLs

• Offset capital DTAs against capital DTLs first • Any excess capital DTLs can be combined with

ordinary DTLs to offset ordinary DTAs • Capital DTAs cannot be netted with ordinary

DTLs

SSAP101 OVERVIEW

• Apply to Federal and foreign income taxes only (no state) using a more likely than not standard (similar to GAAP)

• Assumes a review by relevant Federal/foreign taxing authority with full knowledge of facts

• Surplus impact may be avoided on temporary items Temporary UTP would result in offsetting DTA SSAP101 indicates UTPs related to temporary

differences need not be booked “…until such time as an event has occurred that would cause a re-evaluation of the contingency & its probability of assessment…”

SSAP101 – UNCERTAIN TAX POSITIONS

• If estimated contingency is greater than 50% of tax benefit originally recognized, recorded UTP equals 100% of the original tax benefit (departure from GAAP)

• Schedule UTP may be required with Federal tax return

SSAP101 – UNCERTAIN TAX POSITIONS

• Almost identical to GAAP standard under ASC740

• Will DTAs more likely than not result in realization of tax benefit?

• No fixed window of time on realization (other than tax law)

SSAP101 – STATUTORY VALUATION ALLOW.

• Q&A emphasizes SVA assessment is performed on separate company, reporting entity basis [Q&A 2.5]

• Four sources of income considered Income in carryback period Reversals of taxable temporary differences Tax planning strategies Future income

SSAP101 – STATUTORY VALUATION ALLOW.

SAP TAX ACCOUNTING [SSAP 101]

Provision Documentation Best Practices

• Contemporaneous documentation of UTP & SVA analysis

• Support for reversal pattern assumptions • Support for income projections, especially if

projections are significantly different from current & prior years

• Documentation of tax planning strategies used to support admissibility (especially for reinsurance strategies)

DOCUMENTATION BEST PRACTICES

• Memorandum outlining application of tax allocation agreement on current & deferred taxes

• GAAP filers should also include Reconciliation of GAAP & SAP deferred tax

inventories Memo reconciling GAAP & SAP UTP &

VA/SVA conclusions, if different

DOCUMENTATION BEST PRACTICES

• If applicable, document how your situation fits with the Acuity Decision Taxpayer’s reserves found to be “fair and

reasonable” Diversified writer with increasing premiums &

changes in product mix Reserves developed by internal actuary &

within outside actuary’s range

LOSS RESERVES

Outside actuary’s range was under 20% (14.6%) Taxpayer’s conservative reserve assumptions

(“implicit margin”) supported by actual loss experience & exercise of professional judgment

Court cited State Farm & Sears in deferring to annual statement

Credentialed actuary employed multiple methods & complied with SSAP 55 & ASOPs

History of positive development not determinative

LOSS RESERVES

Utah Medical parallels where management chose reserves w/in range Differentiated from Minnesota Lawyers where

range was excessive Court acknowledged that wider range

appropriate for monoline companies

LOSS RESERVES

• Coordinated Issue Paper (CIP) on Reserve Margins Reserves must be fair & reasonable &

represent actual unpaid losses Additions must be based upon actual loss

experience Actuary’s opinion not entitled to any

presumption or deference Note: Effective 1/21/2014, all CIPs have been

de-coordinated

LOSS RESERVES

• State Farm case [110 AFTR 2d 2012-5778, 08/31/2012] 7th Circuit decision involved punitive damages

treated as part of loss reserves for SAP purposes Taxpayer relied upon annual statement

treatment in claiming a deduction (on a discounted basis) for estimated punitive damages

ANNUAL STATEMENT ACCTG. VS. THE CODE

Court ruled in favor of IRS reasoning that the NAIC’s guidance only allowed for the inclusion of compensatory damages in loss reserves & did not provide such guidance with regard to punitive damages Also addressed an AMT issue holding that the

ACE adjustment should be made on a consolidated basis & then allocated to the life & non-life subgroups

ANNUAL STATEMENT ACCTG. VS. THE CODE

• TAM 200939019 - IRS believes the inclusion of compensation related accruals (in this instance, retiree medical benefits) in LAE should not result in an immediate reserve deduction - §404 trumps §832

ANNUAL STATEMENT ACCTG. VS. THE CODE

• Mass Mutual case [109 AFTR 2d 2012-837, 01/30/2012] Court of Federal Claims decision involved a

mutual life dividend guarantee, but is applicable to non-life dividends as well The court determined that the requirements of

the “all events” test of §461 were met

ACCRUED POLICYHOLDER DIVIDENDS

• The fact of the liability (although the identity of recipients was unknown) was established with reasonable accuracy

• Economic performance had occurred (the guaranteed amount was always paid out)

• The taxpayer had elected the recurring item exception (an important finding was that the dividend was akin to a rebate or refund)

ACCRUED POLICYHOLDER DIVIDENDS

• New York Life case [112 AFTR 2d 2013-5555, 08/01/2013] Second Circuit decision involving January

dividends (credited in preceding December) & a minimum liability dividend (calculated as the lesser of the annual dividend or termination dividend)

ACCRUED POLICYHOLDER DIVIDENDS

• January dividends credited in December did not meet “all events” test as policyholder could surrender the policy with no right to the credited dividends

• Minimum liability dividend failed to meet the “all events” test as well because insurer was under no contractual or statutory obligation to pay a termination dividend when the policyholder surrendered policy

ACCRUED POLICYHOLDER DIVIDENDS

• PLR 200948042 IRS ruled that insurer’s “practice” of paying

January anniversary dividends did not trump the terms of the policy Taxpayer’s argument that it must pay either a

termination or policyholder dividend was rejected as well

ACCRUED POLICYHOLDER DIVIDENDS

• FAA 20134301F Formula approved in year of accrual Do not have to be an employee on date of payment to receive bonus Failed on 3 counts •Company retained right after year-end to modify or eliminate bonuses

•Committee approval required after year-end; role not merely ministerial

•Subjective individual performance rating impacted bonus

ACCRUED COMPENSATION – SEC 461

• Rev. Rul. 2011-29 Must be employee on date of payment to

receive bonus The “fact of the liability” for bonuses established

by resolution or objective formula Amounts forfeited are re-distributed to other

employees

ACCRUED COMPENSATION – SEC 461

• CCA 200949040 Must be employee on date of payment to

receive bonus Bonus plan whereby amounts forfeited would

be paid to a charity Different timing rules exist under §170 and

§461; deduct in year of payment

ACCRUED COMPENSATION – SEC 461

• Effective for tax years beginning on or after 1/1/2014

• Incidental materials & supplies can be deducted in the tax year the cost is paid

• Non-incidental materials can be deducted if under the de minimis expense rule ($5,000 per invoice)

REPAIR REGULATIONS

• Capital expenditures are capitalized for tax purposes if they constitute a Betterment, Restoration or Adaptation May be opportunity to capitalize for book &

expense for tax as a “repair” Document these conclusions now to support

additional tax deductions

REPAIR REGULATIONS

QUESTIONS?

Dale L. Scholl II, CPA Senior Manager Dale.Scholl@ey.com 614.232.7346

Thomas F. Wheeland, CPA Partner twheeland@bkd.com 314.802.0213

THANK YOU!