Insurance tax for non-tax professionals: A year-end update of tax changes and insights

Transcription

1 Insurance tax for non-tax professionals: A year-end update of tax changes and insights December 9, 2015 Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International.

2 Agenda 1) Deferred taxes 2) Valuation allowance considerations 3) Admissibility of deferred tax assets 4) Current taxes 5) Effective tax rate 6) Disclosures 7) Best practices 8) Tax law updates 2

3 Section one DEFERRED TAXES

4 Deferred taxes Balance sheet approach Foundation of accounting for income taxes under both ASC 740 and SSAP 101 > Focus on difference between statutory and tax bases of assets and liabilities > Deferred taxes also recognized for carryforward items Temporary differences produce taxable income or result in tax deductions when the related asset is recovered or the related liability is settled. 4

5 Deferred taxes Common temporary differences Investment related items (DTA/DTL) Insurance policy reserves (DTA) Fixed assets (DTA/DTL) Unearned premiums (DTA) Compensation related items (DTA) Nonadmitted assets (DTA) 5

6 Section two VALUATION ALLOWANCE CONSIDERATIONS

7 Valuation allowance considerations 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 > Based on weight of all available evidence Separate company, reporting entity basis 7

8 Valuation allowance considerations 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 8

9 Section three ADMISSIBILITY OF DEFERRED TAX ASSETS

10 Admissibility of deferred tax assets 3 part test that when added together equals the admitted adjusted gross deferred tax asset 11.a. considers carryback potential 11.b. considers future projected taxable income 11.c. considers reversals of taxable temporary differences Admitted adjusted gross deferred tax asset 10

11 Life versus non-life Important to distinguish between life and non-life companies under paragraph 11.a. Different carryback periods: Life companies Non-life companies 3 year ordinary carryback 2 year ordinary carryback 3 year capital carryback 3 year capital carryback How is life versus non-life determined? > Annual statement versus tax return 11

12 Hypothetical NOLs Nonlife Reporting Entity 12/31/15 Reporting Year Ordinary loss carryback Taxes paid Taxes paid Estimated taxes paid One-year reversals (hypothetical loss) Two-year reversals (hypothetical loss) Three-year reversals (hypothetical loss) Capital loss carryback Legend = 2015 capital loss carrybacks = 2015 ordinary loss carrybacks = 2016 capital loss carrybacks = 2016 ordinary loss carrybacks = 2017 capital loss carrybacks 12

13 RBC/Surplus limitations Three-part comparison under 11.b. Lesser of: > Remaining gross DTA that is reversing within prescribed period > Amount expected to be realized > Stated percentage of adjusted capital and surplus Know which Realization Threshold Limitation applies > Contingent upon ExDTA RBC ACL ratio > 0 yrs / 0% or 1 yr / 10% or 3 yrs / 15% > Full 3-yr / 15% requires ratio of more than 300% > Adjusted capital and surplus determined as of current period > Know ExDTA ACL RBC percentage 13

14 Expected to be realized Expected to be realized (with and without calculations) > Inherently subjective > Consolidated groups that don t forecast on a separate entity basis > Reversal patterns consistent with 11.a. Projections > Consistency with other projections (i.e. board, ratings agencies, regulators) > Explanation of differences tax planning strategies > History of strong forecasting? 14

15 Considerations Practical considerations related to scheduling Relationship between valuation allowance and 11.c. Character considerations Consistency from year to year 15

16 Indefinite lived intangible Example: Mis-matched DTA / DTL > LifeCo has DTA for tax intangible related to state licenses that reverses over next 15 years > LifeCo can admit DTA for intangible that reverses over the next 3 years under 11.a. > LifeCo s only DTL is for book basis of these state licenses. However, this DTL is not expected to reverse in the foreseeable future. Can LifeCo admit the DTA for tax-basis intangible that reverses beyond 3 years under 11.c.? If LifeCo has large NOLs and determines a valuation allowance is necessary, does the valuation allowance bring the net DTA balance to $0? What would impact be if LifeCo s policy were to net as 1 DTA/DTL? 16

17 Section four CURRENT TAXES

18 Current taxes Definition of current income taxes > Current year estimates of federal and foreign income taxes payable or refundable based on tax returns for the current and prior years > Also includes tax loss contingencies (included related interest and penalties) for the current and prior years computed in accordance with SSAP No. 5R Annual statement placement > Only federal taxes are included in the taxes incurred line of the income statement > State taxes are included in the expense exhibit 18

19 Current tax receivable Verify components of ending balance > Not just a rollforward of prior year end balance Analyze all components for admissibility > Check current receivable for admissibility > Not just deferred tax asset Example > Under TSA, entity projected tax benefit in 2013 at provision > Set up current tax receivable from parent > 2013 tax return filed 9/15/2014 > At 12/31/2014, receivable from parent still outstanding > Should the receivable be nonadmitted? 19

20 Section five EFFECTIVE TAX RATE

21 Effective tax rate reconciliation Performed on total basis, not just current Current taxes include both ordinary and capital taxes Includes: > Change in gross DTA related to statement of operations > Change in nonadmitted assets included in deferred inventory Final check to make sure tax provision works 21

22 Section six DISCLOSURES

23 Disclosures Required disclosures under SSAP No. 101 > Components of the net DTA or DTL > Significant components of income taxes incurred (i.e. current income tax expense) and the changes in DTAs and DTLs > Nature of significant reconciling items to get from federal statutory rate to the effective tax rate > Amounts, origination dates and expiration dates of operating loss and tax credit carryforwards available > Amount of federal taxes incurred in the current year and each preceding year which are available for recoupment 23

24 Disclosures Required disclosures under SSAP No. 101 > The use of any reinsurance-related tax-planning strategies > Tax loss contingencies for which it is reasonably possible that the total liability will significantly increase within 12 months of the reporting date > An estimate of the range of the reasonably possible increase in tax loss contingencies or state that an estimate of the range cannot be made 24

25 Section seven BEST PRACTICES

26 Best practices Before year end 1) Don t rely solely on mechanical formulas 2) Build in cross-checks/proofs within template 3) Confirm expectations regarding exdta ACL RBC percentages before quarter close 4) Confirm expectations regarding capital and surplus before quarter close 26

27 Best practices During provision 1) Use rate reconciliation to verify total tax - Not useful in assessing accuracy of current expense 2) Compare reversal patterns from year to year 3) Review draft financial statements before calculation is final 4) Perform high-level analysis of tax footnote 27

28 Best practices Planning 1) Be aware of changes expected in taxable income - Separate company and consolidated group 2) Be aware of amended returns, RARs, etc. that could change prior year taxes paid under paragraph 11.a. - Consider gross-up for temporary tax loss contingencies 28

29 Best practices Planning 3) Understand impact that affiliates entering or leaving group will have on taxes recoverable 4) Analyze potential changes in admissibility in future quarters - Determine if significant increases or decreases are anticipated in capital and surplus, and RBC percentages 29

30 Section eight TAX LAW UPDATES

31 Tax law updates 1) Bonus Depreciation 2) Research and Development Credit 3) Capitalization Policy 4) Change to Federal Tax Return Due Date (2016 YE) 31

32 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 32