Tax reform: The impact on insurance organizations Mar. 19, 2018

Transcription

1 Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. Tax reform: The impact on insurance organizations Mar. 19, 2018

2 Presenter introductions Carrie Small, CPA, MST Baker Tilly Virchow Krause, LLP Tax Partner Carrie leads the insurance tax practice of Baker Tilly and has 16 years of experience providing tax compliance and tax consulting services, including research and tax planning, to both privately held and public insurance companies. Jeanine Kissinger, CPA, MST Nationwide Insurance Tax Director Jeanine is a tax director with Nationwide Insurance, a Fortune 100 company. Jeanine is involved in various aspects of tax accounting, reporting, and forecasting. Prior to joining Nationwide, Jeanine had many years of experience in both public accounting and industry. Aaron Maguire, CPA KPMG, LLP Tax Partner atmaguire@kpmg.com Aaron is a partner in the national insurance practice of KPMG and provides tax compliance and consulting services to both privately held and public insurance companies. Aaron is heavily involved in GAAP and statutory tax accounting under ASC 740 and SSAP

3 Agenda 1) 2017 year-end recap 2) 2018 key provisions 3) Q interim reporting 4) Process and procedures 5) Planning considerations 2

4 Overview On Dec. 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law. The tax reform legislation (H.R. 1) provides the most significant overhaul of the U.S. tax code in more than 30 years, lowering business and individual tax rates, moving the U.S. from a worldwide to a territorial tax system and countless other provisions meant to simplify the tax code. 3

5 year-end recap

6 2017 year-end recap Financial reporting > Timing of guidance: Staff Accounting Bulletin 118 (SAB 118) FASB Staff Q&A (SAB 118) NAIC Agenda Item /Form A NAIC INT 18-01: Updated Tax Estimates under the Tax Cuts and Jobs Act Accounting Standards Update (ASU ) on stranded tax effects FASB Staff Q&As (Repatriation, AMT, BEAT, GILTI) 5

7 2017 year-end recap Accounting for the TCJA at Dec. 31, 2017 > Key issues: Remeasurement of DTAs/(DTLs) Loss reserve discounting gross-up/transitional adjustment AMT credit carryforward treatment/sequestration International» Mandatory repatriation» Base Erosion Anti-Abuse Tax (BEAT)» Global Intangible Low-Taxed Income (GILTI) ASU and stranded tax effects Tax rates used for IMR/AVR for life companies 6

8 2017 year-end recap Admissibility testing at Dec. 31, 2017 > Key considerations: 11.a. life companies still have carryback potential for capital items; AMT still to be considered in hypothetical carryback calculations through Dec. 31, b. remove impact of AMT as of Jan. 1, c. consider any updates to reversal patterns as a result of the TCJA 11.a. carryback potential for tax years beginning before Jan. 1, 2018 still at 35% rate 11.b. future projections of income taxed at lower 21% rate 11.c. additional considerations for DTL reversals 7

9 key provisions

10 2018 key provisions Net operating losses > Key considerations: Change to carryback/carryforward provisions for life companies and general C corporations 80 percent limitation for life companies/general C corporations Impact on mixed group consolidations Tracking of net operating losses important (pre-2018 vs. post-2017 net operating losses) Changes to admissibility calculations for life companies Revisit valuation allowance assessments 9

11 2018 key provisions Loss reserve discounting > Key considerations: Nonlife reserves: must use IRS discount factors based on a corporate bond yield curve Life reserves:» Non-variable contract greater of net surrender value or percent of NAIC reserve» Variable contracts A. Greater of net surrender value or separate account reserve plus B percent of the excess of the total NAIC reserve over A Difference between reserves calculated under pre-tax reform and tax reform methods is spread over 8 years Changes needed to software/systems Measurement period application for SAB 118/FASB/NAIC 10

12 2018 key provisions Capitalization of policy acquisition expenses > Key considerations: Amortization over 180 months rather than 120 months Capitalization percentages increased» Annuity contracts 2.09 percent» Group life contracts 2.45 percent» All other specified 9.20 percent Updates to templates/calculations Considerations for 2018 quarterly estimates and Q interim reporting 11

13 2018 key provisions 2018 and future considerations: Dividends Received Deduction Entertainment expenses 162(m) limitations 807(f) basis spread FMLA credit R&D expenses Proration Accrued market discount 12

14 2018 key provisions Small life insurance company deduction Small insurance company election under 831(b) 13

15 3. Q interim reporting

16 Q interim reporting Estimated annual effective tax rate (AETR) > Discrete items Unusual in nature Infrequent in occurrence Discontinued ops/changes in accounting principle Changes in tax laws or rates Changes in prior year uncertain tax positions (UTPs) > Projected income Estimate full year income and total tax provision Estimated AETR then applied to YTD operating results 15

17 Q interim reporting Other interim reporting considerations > SAB 118 measurement period adjustments Adjustment to tax expense/(benefit) in the period determined Not to extend beyond one-year measurement period > Projected income Effect of reduced corporate tax rate TCJA provisions effective Jan. 1, 2018 Future regulatory guidance received during the period > ASU Accounting policy for the release of stranded tax effects 16

18 Q interim reporting Other interim reporting considerations > Disclosure requirements Tax effects of unusual or infrequent items Changes in estimates or provisions (i.e., valuation allowance changes) Fluctuations in effective tax rate ASU adoption SAB 118 measurement period adjustments > NAIC quarterly statements Meaningful change from Dec. 31, 2017? Potential footnote disclosure 17

19 4. Process and procedures

20 Process and procedures This is only the beginning... Template enhancements Data gathering/ collaboration Application of new tax provisions Monitoring tax law and other developments Controls processes Communication within and outside tax dept. 19

21 5. Planning considerations

22 Planning considerations Dec. 31, 2017 tax return planning > Accelerate deductions Repairs and maintenance Cost segregation studies Enhanced bonus depreciation 2 ½ month and 8 ½ month deductibility Accelerate pension contributions > Planning especially important if Dec. 31, 2017 is a loss year and company has carryback potential > Don t lose sight of capital loss carrybacks 21

23 Planning considerations State tax planning > States incorporate provisions of the federal tax code to varying degrees Approximately 18 states have rolling conformity, meaning they will conform to the new law automatically Approximately 19 states must update their fixed-date conformity status to adopt the new provisions Remaining states only conform selectively > Continue to watch for additional guidance 22

24 Corporate income tax conformity 23

25 Questions? Carrie Small, CPA, MST Baker Tilly Virchow Krause, LLP Tax Partner Jeanine Kissinger, CPA, MST Nationwide Insurance Tax Director Aaron Maguire, CPA KPMG, LLP Tax Partner

26 Appendix: Key provisions of the TCJA for insurance organizations

27 Corporate tax rate / Dividends received deduction Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Top corporate tax rate was 35% > The bill eliminates the graduated corporate rate structure and taxes corporate taxable income at 21% > Corporate taxable income taxed at flat 21% tax rate beginning after Dec. 31, 2017 > Deferred tax assets must be remeasured as of the Dec. 22, 2017 enactment date Dividends received deduction > Generally equal to 70% of the dividend received > Deduction was equal to 80% of the dividend received if from a 20% owned corporation > The bill reduces the 70% dividends received deduction to 50% > The bill reduces the 80% dividends received deduction to 65% > Individual company share calculations for general account and separate account DRDs of life insurance companies have been replaced with a fixed 70% 26

28 Corporate alternative minimum tax (AMT) Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > AMT was imposed to the extent a corporation s tentative minimum tax exceeded its regular tax > This tentative minimum tax was computed at the rate of 20% on the alternative minimum taxable income adjusted for preference and adjustment items > Corporation s net operating loss carryforward could not reduce AMT by more than 90% of AMTI determined without this deduction > The bill repeals the corporate AMT > The repeal eliminates complexity with tax returns, tax estimate calculations and tax provisions > 50% of the excess AMT credit carryforward (after current year utilization) is refundable in taxable years 2018, 2019 and 2020 with any remaining credits being fully refundable in 2021 > For refundable AMT credits, taxpayers should consider the reversal of any valuation allowances and the potential movement from DTA to receivable 27

29 Net operating losses Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > In general, an NOL could be carried back two years and carried forward 20 years to offset taxable income in such years > Life insurance companies had a three year carryback and 15 year carryforward > Extended carryback periods were allowed for NOLs attributable to certain casualty and disaster losses > Generally no carryback period and indefinite carryforward period > The provision limits the NOL deduction to 80% of taxable income (determined without regard to the deduction) > Taxpayers should ensure no carryback potential for losses arising in open tax years > Valuation allowances may still need to be considered for financial reporting purposes for NOLs > Tracking of NOLs will be extremely important Net operating losses of non-life insurance companies > Two year carryback and 20 year carryforward > Two year carryback and 20 year carryforward > No limitation on NOL deduction > May create complexities with mixed group consolidated returns 28

30 Interest expense Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Interest paid or accrued was generally deductible > Earnings stripping deduction disallowed for disqualified interest paid or accrued if two threshold tests are satisfied: Payor s debt-to-equity ratio exceeds 1.5 to 1.0 (safe harbor ratio) and Payor s net interest expense exceeds 50% of adjusted taxable income > Business interest deduction limited to the sum of: Business interest income and 30% of adjusted taxable income > Disallowed interest carried forward indefinitely > Limitation applies at the taxpayer level; in the case of an affiliated group filing a consolidated tax return, the limitation applies at the consolidated level > Adjusted taxable income is computed without regard to: Business interest or business interest income Amount of any NOL Deductions allowable for depreciation or amortization (for taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2022) > Limitation generally will not apply to insurance organizations due to their net interest income vs. net interest expense 29

31 Limitation on excessive employee compensation 162(m) Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Section 162(m) provided an explicit limitation on the deductibility of compensation expenses for public companies > Limited to no more than $1 million per year for covered employees > Exceptions to the limit include: Commissions Performance-based compensation Tax-favored retirement plans Miscellaneous fringe benefits Deferred compensation > Covered employee includes CEO, CFO and next three most highly compensated officers required to be reported on the proxy statement > Eliminates the exceptions for commissions and performance-based compensation for the deduction limitation > Proposed definition of publicly held corporation may include certain additional corporations that are not publicly traded, such as large private C corporations > Transition rule applies to compensation which is provided pursuant to a written binding contract which was in effect on Nov. 2, 2017 and not modified in any material respect on or after such date > Transition rule does not apply to new contracts entered into or renewed after Nov. 2, 2017 > Taxpayers should revisit compensation paid to covered employees to determine deductibility 30

32 Special rules for taxable year of inclusion Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Section 451 provided the general rules as to the timing of when certain items were to be included in gross income > Accrual basis taxpayers included amounts in gross income when the all events test was met, unless an exception provided for deferral or exclusion, or a special method of accounting applied > Interest income was generally included in gross income when received or accrued > Bill requires an accrual method taxpayer subject to the all events test to recognize such income no later than the taxable year in which reported as revenue in the financial statements > Income recognition rules under section 451 must be applied before the special rules under part V of subchapter P: OID Market discount Stripped bonds/coupons Discounts on ST obligations > Application of rules is a change in method of accounting for purposes of section 481, treated as initiated by the taxpayer and made with the consent of the secretary > In the case of income from a debt instrument having OID: Effective for taxable years beginning after Dec. 31, 2018 The related section 481(a) adjustment is spread over six years 31

33 Key provisions applicable to non-life insurance companies

34 Modification of proration rules Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > In calculating the deductible amount of the reserve for losses incurred, this amount was reduced by 15% of: Tax-exempt interest and Deductible portion of dividends received > Proration rule reflects the fact that reserves are generally funded in part from tax-exempt interest, from deductible dividends and other untaxed amounts > The bill replaces the 15% reduction under present law with a reduction equal to 5.25% divided by the top corporate tax rate > With a top corporate tax rate of 21% for 2018 and thereafter, the percentage reduction is 25% > The proration percentage will be automatically adjusted in the future if the top corporate rate is changed > Tax calculation templates (tax provision, tax return, tax estimates, etc.) have to be updated for change in percentages beginning Jan. 1, 2018 > The bill ensures the reduction to the deduction of the reserve for losses remains at 5.25% 33

35 Modification of discounting rules Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > To take into account the time value of money, discounting of unpaid losses was required; P&C loss reserves for each LOB were required to be discounted > Discounted reserves were calculated using a prescribed interest rate which was based on the applicable Federal mid-term rate ( mid-term AFR ) > An election was provided permitting a taxpayer to use its own historical loss payment pattern with respect to all lines of business > Discounted reserves are calculated using a prescribed interest rate determined by Treasury based on the corporate bond yield curve (a yield curve that reflects the average, for the preceding 60-month period, of monthly yields on investment grade corporate bonds) > The bill repeals the prior law election that permitted a taxpayer to use its own historical loss payment pattern > The change in the prescribed interest rate is expected to have the impact of lower discount factors which would create lower deductible tax reserves (higher taxable income) > Transitional rule exists to recalculate Dec. 31, 2017 reserves under TCJA provisions; adjustment is spread over eight taxable years beginning in

36 Special estimated tax payments Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Additional deduction was allowed for insurance companies not to exceed the excess of: The amount of undiscounted unpaid losses over The amount of the related discounted unpaid losses > Special loss discount account had to be established and maintained > Special estimated tax payments had to be made > The bill repeals section 847 > Balance of an existing account is included in income of the taxpayer for the first taxable year beginning after 2017 > Amount of existing special estimated tax payments are applied against the amount of additional tax attributable to this inclusion > Special estimated tax payments in excess are treated as estimated payments under section

37 Key provisions applicable to life insurance companies

38 Repeal of small life insurance company deduction Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > The small life insurance company deduction is 60% of the first $3 million of life insurancerelated income > The deduction is phased out at a rate of 15% of the excess of life insurance-related income over $3 million > The deduction is not available to life insurance companies with assets of at least $500 million > TCJA eliminates the small life insurance company deduction > The provision is said to eliminate special treatment for a segment of the insurance industry where the risk distribution benefits of risk pooling are the weakest 37

39 Repeal of 10-year recognition period for change in computing reserves Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Income or loss resulting from a change in the method of computing reserves is recognized ratably over a 10- year period > The rule applies if there is a change in basis in computing the federally prescribed reserve (as distinguished from the net surrender value) > Changes in when premiums are collected and claims are paid may have caused a change in method of computing the reserve > The 10-year recognition period is repealed > The income or loss resulting from the change in method is recognized in the same fashion as other accounting method changes: Recognized in one year if it results in a loss, or Recognized ratably over four years if it results in income > Change in method for computing reserves treated the same as other accounting method changes > Changes in life insurance reserve basis appear to remain an automatic accounting method change not requiring prior approval > Existing 807(f) amounts probably continue to be taken into account over their remaining spread period 38

40 Computation of life insurance tax reserves Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Life insurance companies include the net decrease in reserves into income and deduct any net increases > The deduction allowed for a contract was the greater of the net surrender value or the federally prescribed reserve (capped at statutory reserves) > The reserve calculation used the greater of the prevailing state interest rate (highest in at least 26 states) or the 60-month rolling average of the applicable federal mid-term rate > For non-variable contracts, tax reserves are computed as the greater of net surrender value or 92.81% of the NAIC reserve > For variable contracts, tax reserves are computed as the greater of net surrender value or the separate account reserve, plus 92.81% of the excess of the total NAIC reserve over the first component > Tax reserves cannot be less than the contract s cash surrender value or greater than the statutory reserve for the contract > The change in law attempted to eliminate any question about whether changes made by the NAIC to reserve methods should be reflected in the tax reserve > Transitional rule exists to recalculate Dec. 31, 2017 reserves under TCJA provisions; adjustment is spread over eight taxable years, probably beginning in

41 Repeal special rule for distributions form pre-1984 surplus accounts Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Prior to 1984, life insurance corporations deferred the tax on half of their income until it was distributed to shareholders > The income that was taxdeferred was tracked in a policyholder surplus account, and was taxed if distributions exceeded the regular corporate surplus account > The new tax law repeals the deferment of tax on the policyholder surplus account > The income that is still taxdeferred as of Dec. 31, 2017 will be picked up ratably over eight years beginning in 2018 > Life company losses are not allowed to offset the policyholders surplus account balance subject to tax > In 2005 and 2006, there was a two-year holiday where shareholder distributions first came out of the policyholder surplus account tax free > The holiday eliminated most life insurance companies policyholder surplus accounts > The provision is not expected to raise significant revenue 40

42 Modification of rules for life insurance proration (for DRD) Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Life insurance companies face a proration that reduces their deductions for reserves and DRD if they have tax exempt income, deductible dividends received, or other similar untaxed items > The deduction for reserves is reduced by policyholders share of tax exempt interest > The company s DRD is also prorated and the policyholders share of dividends do not receive the DRD > The bill modifies the life insurance company proration rule for reducing dividends received deductions and reserve deductions > For purposes of the life insurance proration rule, 70% is the company s share and 30% is the policyholders > The change will simplify the proration calculation by setting the company share and policyholder share percentages to fixed amounts 41

43 Capitalization of certain policy acquisition expenses Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Capitalization rates applicable to specified insurance contracts were as follows: Annuity contracts 1.75% Group life contracts 2.05% All other specified contracts 7.7% > 120-month amortization period > Special rule provided for 60- month amortization of the first $5 million subject to phase-out > The 120-month amortization period was changed to 180 months > The capitalization percentages were changed to the following: Annuity contracts 2.09% Group life contracts 2.45% All other specified 9.20% > Existing DAC balances as of Dec. 31, 2017 continue to be amortized on the existing schedule (continues over the previous 10-year period) > The bill does not change the special rule providing for 60-month amortization of the first $5 million subject to phase-out 42

44 Tax reporting for life settlement transactions Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > There is an exclusion from federal income tax for amounts received under a life insurance contract paid by reason of death > In the event a life contract is purchased, proceeds received in the death of the insured would create ordinary income per Revenue Ruling > Per Revenue Ruling , the basis of the life insurance or annuity contract is reduced by the cost of insurance > The new tax law implements reporting requirements in the case of purchasing existing life insurance contracts in a reportable policy sale > It also imposes reporting requirements on the insurance company issuing life insurance or annuity contracts > In determining the basis of a life insurance or annuity contract, no adjustment is made for mortality expense or other reasonable charges (known as cost of insurance ) > The change increases reporting requirements and requires the identification and reporting of seller information to the IRS > The new law reverses the IRS prior position in Revenue Ruling that the seller s basis on sale of a cash value life insurance contract is reduced by the cost of the insurance 43

45 Fixed asset considerations

46 Fixed assets bonus depreciation Prior law Bonus depreciation percentage Placed in service year Qualified property in general Longer production period property and certain aircraft % 50% % 50% % 40% 2020 None 30% > Bonus depreciation was allowed for both the regular tax and AMT > Taxpayer could elect out of the additional first-year depreciation for any class of property for any taxable year > Must be original use property (original use must commence with the taxpayer) 45

47 Fixed assets bonus depreciation Placed in Service Year TCJA Qualified Property in General Bonus Depreciation Percentage Portion of Basis of Qualified Property Acquired before Sept. 28, 2017 Longer Production Period Property and Certain Aircraft Sept. 28, 2017 Dec. 31, % 50% % 50% % 40% 2020 None 30% Portion of Basis of Qualified Property Acquired after Sept. 27, 2017 Sept. 28, 2017 Dec. 31, % 100% % 100% % 80% % 60% % 40% 2027 None 20% 46

48 Fixed assets bonus depreciation TCJA > Other items: Allows the additional first-year depreciation deduction for new and used property Provision generally applies to property acquired and placed in service after Sept. 27, 2017 A transition rule provides that for the first taxable year ending after Sept. 27, 2017, the taxpayer may elect to apply a 50 percent allowance instead of the 100 percent allowance 47

49 Fixed assets section 179 expensing Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Taxpayer could elect to deduct (or expense ) the cost of qualifying property, subject to limitation > Maximum amount a taxpayer could expense was $500,000 of the cost of qualifying property placed in service for the taxable year > The $500,000 was reduced by the amount by which the cost of qualifying property exceeded $2,000,000 > The $500,000 and $2,000,000 amounts were indexed for inflation for taxable years beginning after 2015 > Increases the maximum amount a taxpayer may expense under section 179 to $1,000,000 > Increases the phase-out threshold to $2,500,000 > The $1,000,000 amount is reduced by the amount by which the cost of qualifying property exceeds $2,500,000 > The $1,000,000 and $2,500,000 amounts are indexed for inflation for taxable years beginning after 2018 > The bill also expands the definition of qualified real property to include any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: Roofs Heating Ventilation Air-conditioning Fire protection and alarm systems Security systems > Taxpayers should revisit their fixed asset additions 48

50 Other key provisions

51 Research and development expenses Effective date Taxable years beginning after Dec. 31, 2021 Prior law TCJA Application > Generally, business expenses associated with the development or creation of an asset having a useful life extending beyond the current year must be capitalized and depreciated > Election may be made to currently deduct the amount of certain reasonable research or experimentation expenditures > Rev. Proc costs of developing computer software have been accorded treatment similar to research expenditures > Research or experimental expenditures are required to be capitalized and amortized ratably over a five-year period (15 years if research done outside of the U.S.) > Treated as a change in the taxpayer s method of accounting for purposes of section 481, initiated by the taxpayer, and made with the consent of the Secretary Cutoff basis Applies to amounts paid or incurred after Dec. 31, 2021 > Costs of developing internal use software (policy admin systems, etc.) that historically were immediately deductible have to be capitalized in the near future > R&D credit still available if certain requirements are met > If large software projects are on the horizon, consult with your tax advisor for tax planning purposes 50

52 Entertainment expenses Effective date Taxable years beginning after Dec. 31, 2017* Prior Law TCJA Application > No deduction was allowed with respect to an activity generally considered to be entertainment, amusement, or recreation ( entertainment ) unless directly related to the active conduct of business (in which case it was limited to 50%) > Certain employer-provided fringe benefits were excluded from an employee s gross income and wages for employment tax purposes, including qualified transportation fringes and meals provided for the convenience of the employer > No deduction is allowed for entertainment expenses > No deduction for expenses associated with providing any qualified transportation fringe to employees (except for safety) > Expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringe subject to 50% limitation for amounts incurred and paid after Dec. 31, 2017 and until Dec. 31, 2025 > Consider the tracking of meals and entertainment in the GL; it may be helpful to break out into separate GL accounts as of Jan. 1, 2018 > The provision for 50% nondeductible on food and beverages provided to employees through an eating facility is only through Dec. 31, 2025; amounts incurred and paid after Dec. 31, 2025 are not deductible > Consider impact on taxable income 51

53 Employee achievement awards Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > An employee achievement award is an item of tangible personal property given to an employee in recognition for length of service and presented as part of a meaningful presentation > Employer s deduction for the cost of an employee achievement award is limited to a certain amount > Employee achievement awards that are deductible by an employer are excludible from an employee s gross income (also excludible from wages for employment tax purposes) > The provision adds a definition of tangible personal property that may be considered a deductible employee achievement award > Tangible property shall not include: Cash or cash equivalents Gift cards, gift coupons, or gift certificates Vacations, meals, lodging, tickets, stocks, bonds or other securities > Revisit employee achievement award plan with HR if the taxpayer is trying to keep awards as deductible expenses for the Company > Generally, cash awards are not deductible for the employer unless included as compensation to the employee 52

54 Employer credit for paid FMLA Effective date Taxable years beginning after Dec. 31, 2017 Prior law TCJA Application > Prior law did not provide a credit to employers for compensation paid to employees while on leave > Eligible employers can claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees while on FMLA if the rate of payment is 50% of the wages normally paid to an employee > Credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50% > Does not apply to wages paid in taxable years beginning after Dec. 31, 2019 > Maximum amount of FMLA that may be taken into account is 12 weeks > Qualifying employee must be employed by the employer for one year or more, and who for the preceding year, had compensation not in excess of 60% of the compensation threshold for highly compensated employees ($120,000 for 2017) > Discuss FMLA policy with HR for 2018 and 2019 tax years 53

55 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 54