Presented by Thomas F. Wheeland, CPA Dale L. Scholl II, CPA. Tax Update and SSAP101 Boot Camp

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2 Presented by Thomas F. Wheeland, CPA Dale L. Scholl II, CPA Tax Update and SSAP101 Boot Camp

3 AGENDA 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

4 PATH ACT PROVISIONS Protecting Americans from Tax Hikes Act passed in December 2015 Bonus Depreciation extended through 2019 (50% for ; 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)

5 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

6 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)

7 CONSOLIDATED APPROPRIATIONS ACT Two year delay of Cadillac tax on highcost 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

8 2015 HIGHWAY BILL DUE DATE CHANGES 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)

9 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)

10 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)

11 2015 HIGHWAY BILL DUE DATE CHANGES

12 TAX REFORM 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

13 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

14 RESEARCH & EXPERIMENTATION CREDIT SOFTWARE Development/Improvement Contract Research at 65% Back 1 Year PROCESS Development/Improvement ELIGIBLE COSTS Deduct 174 Credit Eligible (A) Base Period (B) Excess of (A) - (B) Credit = 14% Alternative Simplified Method PRODUCT Development/Improvement Internal Wages, Supplies at 100% Prior 3 Year Average Costs x 50% Reduced Credit = 14% x 65% Forward 20 Years

15 RESEARCH & EXPERIMENTATION CREDIT Illustration Assume consistent R&E spending of $2,000/yr for (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

16 SSAP101 Boot Camp

17 GAAP TAX ACCOUNTING [ASC740] 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

18 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

19 GAAP TAX ACCOUNTING [ASC740] Permanent differences Tax-exempt interest Dividends received deduction Proration/policyholder share Meals & entertainment Lobbying expenses Club dues Spousal travel Penalties

20 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

21 GAAP TAX ACCOUNTING [ASC740]

22 SSAP101 OVERVIEW 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

23 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

24 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

25 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

26 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

27 SSAP101 UNCERTAIN TAX POSITIONS 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 reevaluation of the contingency & its probability of assessment

28 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

29 SSAP101 STATUTORY VALUATION ALLOW. 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)

30 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

31 SAP TAX ACCOUNTING [SSAP 101]

32 Provision Documentation Best Practices

33 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)

34 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

35 LOSS RESERVES 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

36 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

37 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

38 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

39 ANNUAL STATEMENT ACCTG. VS. THE CODE State Farm case [110 AFTR 2d , 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

40 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

41 ANNUAL STATEMENT ACCTG. VS. THE CODE TAM IRS believes the inclusion of compensation related accruals (in this instance, retiree medical benefits) in LAE should not result in an immediate reserve deduction trumps 832

42 ACCRUED POLICYHOLDER DIVIDENDS Mass Mutual case [109 AFTR 2d , 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

43 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)

44 ACCRUED POLICYHOLDER DIVIDENDS New York Life case [112 AFTR 2d , 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)

45 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

46 ACCRUED POLICYHOLDER DIVIDENDS PLR 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

47 ACCRUED COMPENSATION SEC 461 FAA F 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

48 ACCRUED COMPENSATION SEC 461 Rev. Rul 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

49 ACCRUED COMPENSATION SEC 461 CCA 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

50 REPAIR REGULATIONS 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)

51 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

52 QUESTIONS?

53 THANK YOU! Thomas F. Wheeland, CPA Partner Dale L. Scholl II, CPA Senior Manager