SSAP 101: Advanced topics

Transcription

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2 SSAP 101: Advanced topics Session 506

3 Panel members Jeanine Kissinger, CPA Nationwide Insurance Aaron Maguire, CPA Dixon Hughes Goodman LLP Carrie Small, CPA Baker Tilly Virchow Krause, LLP 3

4 Agenda 1) General observations 2) Valuation allowances 3) Alternative minimum tax 4) Consolidated tax returns 5) Tax allocation agreements 6) Limitations 7) Tax rates 8) Tax loss contingencies 9) Tax planning strategies 4

5 Section one GENERAL OBSERVATIONS 5

6 General observations SSAP 101 Golden Rule ASSUME NOTHING 6

7 General observations Importance of tax allocation agreement Distinction between life and non-life companies (for tax purposes) important (same with ordinary vs capital) If done correctly, can be labor intensive If not labor intensive, increased risk of errors Added complexity in surplus and dividend planning, which in turn can create added complexity in admitted DTA planning Don t assume 3 years/15% 7

8 Section two VALUATION ALLOWANCES 8

9 Valuation allowances Valuation allowance (VA) More-likely-than-not (MLTN) that some portion or all of DTA will not be realized MLTN is a likelihood of more than 50 percent SSAP 101, Para. 2 Based on weight of all available evidence SSAP 101, Para. 7.e. Separate company, reporting entity basis SSAP 101, Q&A 2.5 9

10 Valuation allowances VA utilized strictly to calculate the adjusted gross DTA Consider VA before DTA admissibility test Gross deferred tax asset - Valuation allowance = Adjusted gross deferred tax asset VA results in a reduction of the gross DTA Not a statutory valuation allowance reserve within the financial statements Change in VA reflected in statutory rate reconciliation 10

11 Valuation allowances Example 1 Consolidated group with $1 billion of taxable income per year Subsidiary has $(1) million of taxable losses each year Tax allocation agreement states that consolidated group pays for subsidiary loss when utilized by the group Subsidiary has $2 million of DTAs (excluding NOLs) Is a valuation allowance necessary? 11

12 Valuation allowances Example 2 Company has pre-tax book losses of $100,000 each year from Year 1 to Year 3 resulting in a total pre-tax loss for the three years of $300,000 (company has 35% tax rate) No permanent differences and no timing differences other than NOL - $300,000 deductible temporary difference and $105,000 DTA. Projects book income of $20,000 in each year for Years 4 through 6 How much of $105,000 NOL DTA can Company admit? Is a valuation allowance necessary? Which first, admissibility or valuation allowance testing? 12

13 Section three ALTERNATIVE MINIMUM TAX 13

14 Alternative minimum tax AMT is a separate but parallel tax system Must be considered under SSAP 101 Maximum taxes recoverable under Para. 11.a. Maximum taxes expected to be realized under 11.b. If DTA admitted under 11.a. is limited due to AMT, any resulting AMT credit is not treated as a DTA. Q&A 4.4 Nuance between: Analysis of reversals (temp diffs) and admissibility (DTAs) See SSAP 101, Q&A See Example #1 14

15 Alternative minimum tax State Farm cases Computation of AMT in a life-nonlife consolidated return Compute AMT income (AMTI) separately for life and nonlife subgroups Compute adjusted current earnings (ACE) adjustments on a lifenonlife consolidated basis Allocate ACE adjustments on a reasonable, consistent basis between the life and nonlife subgroups See Example #2 15

16 Section four CONSOLIDATED TAX RETURNS 16

17 Consolidated tax returns A company s computation of adjusted gross and admitted adjusted gross DTAs is impacted by the filing of a consolidated federal income tax return. The amount of the DTAs and the amount admitted under Para. 11 is determined on a separate company, reporting entity basis SSAP 101, Para. 7, Footnote 2 17

18 Consolidated tax returns DTAs admitted under Para. 11.a. Taxes paid Limited to amount of taxes paid by or allocated to the entity May not exceed the amount that the entity could reasonably expect to have refunded by its parent (Para. 12.c.) Taxes paid represent the maximum DTAs that may be admitted Consolidated return won t increase, but may decrease the admissibility of DTAs Tax allocation agreement could further limit the amount admitted 18

19 Consolidated tax returns DTAs admitted under Para. 11.b. Admitted adjusted gross DTAs is limited to the amount that the reporting entity expects to realize within the applicable period following the balance sheet date on a separate company basis Entity must estimate its separate company taxable income Entity cannot admit DTAs based on income of other members of the consolidated group SSAP 101, Para. 7, Footnote 2 19

20 Consolidated tax returns Example Assume Company A, a life insurance company, joins in the filing of a consolidated federal income tax return Consolidated taxes paid in prior carryback years total $150, of which Company A paid $100 Company A has existing temporary differences that reverse by the end of the third calendar year following the balance sheet date that would give rise to a tax recovery of $125 How much of an admitted DTA can Company A record? 20

21 Consolidated tax returns Answer Under paragraph 11.a., Company A could record an admitted DTA of $100, equal to the taxes it paid. Additionally, under Para. 11.b., Company A could admit an additional $25, assuming it expects to realize such tax benefit based on its separate company analysis. Due to the consolidated return filing, the $100 admitted under Para. 11.a. could only be admitted provided this amount could reasonably be expected to be refunded by the parent and would be available pursuant to a written income tax allocation agreement. 21

22 Consolidated tax returns Paragraph 11.c. Under Para. 11.c., an entity may admit its adjusted gross DTAs, after application of Paras. 11.a. and 11.b., based upon offset against its own existing gross DTLs and not against gross DTLs of other members of the affiliated or consolidated group. 22

23 Section five TAX ALLOCATION AGREEMENTS 23

24 Tax allocation agreements Primarily related to cash settlements Depending on terms, calculation and settlement of taxes can get complicated. Issues are sometimes not addressed in the agreement Example: Use of losses on a separate company or consolidated group basis Important to handle matters in a reasonable and consistent basis 24

25 Tax allocation agreements Intercompany receivables not settled within 90 days of filing the consolidated return or receiving a refund are nonadmitted. SSAP 101, Para. 17 Tax allocation agreement should provide for settlement no later than these 90-day periods. Allocation of AMT between subgroups and within subgroups can be complicated. Consistent with return allocation? Entirely to common parent? Refer to Example #2 Regulatory concerns Reasonable and consistent 25

26 Tax allocation agreements Admitted DTA of an entity that files a consolidated return with affiliate(s) cannot exceed the amount that the entity could reasonably expect to have refunded from its parent. SSAP 101, Para. 12.c. Consolidated return won t help but may hurt the entity Only applies to admissibility under Para. 11.a. Potential implications: Entity with loss may be limited in booking current benefit Admitted DTAs of entity with sufficient separate company income may be limited due to consolidated group losses See Example #3 26

27 Section six LIMITATIONS 27

28 Limitations general Net operating losses Section 382 Separate return limitation year (SRLY) AMT 90% Credits Foreign tax AMT General business credits Capital losses Capital gains 28

29 Limitations insurance specific Net operating losses (NOLs) Carrybacks - subgroup-only Nonlife 35% Capital losses Carrybacks - subgroup-only DTA admissibility Taxes recoverable Capital and surplus Expected to be realized NOLs generated by reversals 29

30 Limitations Ordering Limitations based on tax law are applied first Limitations based on SSAP 101 are applied subsequently Example Utilization of NOL carryover may be limited under IRC Section 382 Recognition of current benefit for loss may be limited under the tax allocation agreement (See Example #3) DTA related to NOL may be nonadmitted because the loss is not expected to be realized within the next three years 30

31 Limitations Reversals generating NOLs With and Without Calculation Without With Without With Without With Reversing Reversing Reversing Reversing Reversing Reversing Temporary Temporary Temporary Temporary Temporary Temporary Benefits Benefits Benefits Benefits Benefits Benefits Temporary benefits reversing in year 1 30,000,000 Temporary benefits reversing in year 2 3,000,000 Temporary benefits reversing in year 3 3,000,000 Ref Projected taxable income before reversing deductible temp diffs 26,700,000 26,700,000 28,836,000 28,836,000 31,143,000 31,143,000 Reversal of deductible temporary differences - 30,000,000-3,000,000-3,000,000 Adjusted taxable income 26,700,000 (3,300,000) 28,836,000 25,836,000 31,143,000 28,143,000 Regular tax 35% (a) 9,345,000-10,092,600 9,042,600 10,900,050 9,850,050 Adjusted taxable income 26,700,000 (3,300,000) 28,836,000 25,836,000 31,143,000 28,143,000 AMT/ACE Adjustment 200, , , , , ,000 Adjusted taxable AMTI 26,900,000 (3,100,000) 29,036,000 26,036,000 31,343,000 28,343,000 AMT 20% (b) 5,380,000-5,807,200 5,207,200 6,268,600 5,668,600 Tax liability - the greater of (a) or (b) 9,345,000-10,092,600 9,042,600 10,900,050 9,850,050 Tax savings from reversing temporary benefits 11,445,000 9,345,000 1,050,000 1,050,000 Less admitted deferred tax assets under paragraph 11.a. 9,300,000 Admitted deferred tax assets under paragraph 11.b.i. 2,145,000 Capital and surplus limitation under paragraph 11.b.ii. 38,800, Not utilizing NOL resulting from reversing DTAs Admitted deferred tax assets under paragraph 11.b. 2,145,000

32 Limitations Reversals generating NOLs With and Without Calculation Without With Without With Without With Reversing Reversing Reversing Reversing Reversing Reversing Temporary Temporary Temporary Temporary Temporary Temporary Benefits Benefits Benefits Benefits Benefits Benefits Temporary benefits reversing in year 1 30,000,000 Temporary benefits reversing in year 2 3,000,000 Temporary benefits reversing in year 3 3,000,000 Ref Projected taxable income before reversing deductible temp diffs 26,700,000 26,700,000 28,836,000 28,836,000 31,143,000 31,143,000 Reversal of deductible temporary differences - 30,000,000-3,000,000-3,000,000 Net operating loss utilization - 3,300,000 - Adjusted taxable income 26,700,000 (3,300,000) 28,836,000 22,536,000 31,143,000 28,143,000 Regular tax 35% (a) 9,345,000-10,092,600 7,887,600 10,900,050 9,850,050 Adjusted taxable income 26,700,000 (3,300,000) 28,836,000 22,536,000 31,143,000 28,143,000 AMT/ACE Adjustment 200, , , , , ,000 Adjusted taxable AMTI 26,900,000 (3,100,000) 29,036,000 22,736,000 31,343,000 28,343,000 AMT 20% (b) 5,380,000-5,807,200 4,547,200 6,268,600 5,668,600 Tax liability - the greater of (a) or (b) 9,345,000-10,092,600 7,887,600 10,900,050 9,850,050 Tax savings from reversing temporary benefits 12,600,000 9,345,000 2,205,000 1,050,000 Less admitted deferred tax assets under paragraph 11.a. 9,300,000 Admitted deferred tax assets under paragraph 11.b.i. 3,300,000 Capital and surplus limitation under paragraph 11.b.ii. 38,800, Utilizing NOL resulting from reversing DTAs Admitted deferred tax assets under paragraph 11.b. 3,300,000

33 Section seven TAX RATES 33

34 Tax rates Changes in rates SSAP 101, Para. 7.c. DTAs and DTLs are computed using enacted tax rates Tax rate changes are not anticipated However, future tax rate changes based on enacted tax legislation are taken into consideration when calculating gross DTAs and DTLs Scheduling of reversals may be required SSAP 101, Para. 8 Changes in DTAs / DTLs attributable to tax rate changes are recognized as a separate component of gains and losses in unassigned funds (surplus) See Example #4 34

35 Tax rates Special rates Q&A 4.14, 4.15 and 6.3 Effect of AMT Companies that are perennially in AMT establish DTAs at the regular statutory rate (35%) and admit DTAs based on the tax rate that is expected to apply, if lower. DTLs are established using the enacted rate Q&A 3.5 Graduated tax rates may be considered If graduated tax rates are significant, use an average of the applicable tax rates Graduated rates are differentiated from phased-in rate changes 35

36 Tax rates SSAP 101, Para. 11.a. Insurance company may have paid tax at different rates in prior years Insurance company is capped at the amount of DTA it can admit under Para. 11.a. to the tax it paid in prior years SSAP 101, Footnote 2 See Example #5 36

37 Tax rate changes SSAP 101, Para. 11.b. Insurance companies take into consideration changes in future tax rates that have been enacted as of the reporting date when assessing the DTA expected to be realized. See Example #6 37

38 Section eight TAX LOSS CONTINGENCIES 38

39 Tax loss contingencies Impact on current taxes Current income taxes include tax loss contingencies for current and all prior years, computed in accordance with SSAP No. 5R SSAP 101, Para. 3.a. Tax loss contingencies Presume that reporting entity will be examined by relevant taxing authority that has full knowledge of all relevant information If estimated tax loss contingency is greater than 50% of tax benefit originally recognized, then tax loss contingency recorded is equal to 100% of the original benefit recognized SSAP 101, Para. 3.a.ii. 39

40 Tax loss contingencies Recognition and Measurement Example Example 1 Example 2 Uncertain tax position $1,000 $1,000 Is tax loss contingency more-likely-than-not and reasonably estimated? Yes Yes Management s best estimate of tax loss contingency $400 $600 Tax loss contingency recorded $400 $1,000 40

41 Tax loss contingencies Impact on deferred taxes Gross-up considerations Tax loss contingencies related to temporary differences Triggering event Definition is company-specific; consistency required Examples: Information document request, notice of proposed adjustment Requires reassessment of probability of adjustment Possible surplus impact Redetermination of admissibility of DTA See Example #7 41

42 Section nine TAX PLANNING STRATEGIES 42

43 Tax planning strategies Reporting entity shall consider tax-planning strategies in both: 1) Determining the amount of the statutory valuation allowance under Para. 7.e., and 2) The realization of deferred tax assets when determining admissibility under Para. 11 Mandatory or optional? 43

44 Tax planning strategies Other considerations SSAP 101, Para. 14: Any significant net-of-tax potential costs or losses associated with implementation of the strategy should reduce the adjusted gross DTA SSAP 101, Para. 15: Paragraph 3 related to tax loss contingencies shall be applied in determining admissibility Would a tax loss contingency be required to be recorded? If so, the admitted tax benefit of the tax planning strategy must be reduced by the amount of the tax loss contingency required. Benefit of tax planning strategy may be eliminated if the contingency exceeds 50% of the benefit. 44

45 Tax planning strategies Example Tax planning strategy provides for $100 admitted DTA Reporting entity estimates that a tax loss contingency reserve of $40 would be required if the strategy was implemented Admitted DTA resulting from the tax-planning strategy is reduced by $40 Since the admitted DTA is net of any applicable tax loss contingencies, no separate tax loss contingencies are recorded 45

46 Questions? 46

47 Disclosure The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International Baker Tilly Virchow Krause, LLP 47

48 Contact information Jeanine Kissinger, CPA, MST, Director, Tax Nationwide Insurance Aaron Maguire, CPA, Partner Dixon Hughes Goodman LLP Carrie Small, CPA, Director, Tax Baker Tilly Virchow Krause LLP

49 Please Complete the Session Evaluation Form on the Conference App.