Insurance Tax Update

Carl BarksonTax Senior ManagerColumbus, OH

Erika HoyTax ManagerGrand Rapids, MI

September 18, 2015

Agenda• New Provisions• ASC 740 Basics• SSAP 101• Questions

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New Tax Legislation

New Tax Laws• Highway and Transportation Funding Act of 2015 (H.R.

3236)- Due date modifications

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Return New Due Date Current Due Date

Extension

Partnerships (1065)

March 15 (15th

day of 3rd

month after year-end for fiscal filers)

April 15 Maximum of six months

Corporations (1120, 1120-S, 1120-PC)

April 15 (15th

day of 4th

month after year-end for fiscal filers)

March 15 Varies

ASC 740 Basics

• In arriving at net income or loss on their financial statements, companies generally must take into account income tax expense or benefit. Guidance relative to the accounting for income taxes is found in Section 740 of the FASB’s codification.

• The objectives of accounting for income taxes are to recognize (a) the amount of taxes payable or refundable for the current year, and (b) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in a company’s financial statements or tax returns.

ASC 740 - Overview

• A current tax asset or liability is recognized for the estimated taxes payable or refundable on tax returns for the current year.

• A deferred tax asset or liability is recognized for estimated future taxes created by temporary differences.

• The measurement of current and deferred taxes is based on the provisions of the enacted tax law. Deferred taxes are recognized based on rate that will apply when the

item turns.

ASC 740 - Basic Principles

Components of Income Tax Expense• Current Tax Expense reflects the amount of taxes actually payable (or

the actual refund to be received) by the company as a result of its operations during the current period.

• Deferred Tax Expense reflects the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns (but not yet in both).

Current Tax Expense (benefit)+ Deferred Tax Expense (benefit)

Total Income Tax Expense (benefit)

Current Tax Expense• The amount of taxes payable (or refundable) in the current year after applying

the enacted tax rate (what is the tax liability on the tax return).

Pretax Book Income+/- Schedule M-1 adjustments (Perm)+/- Schedule M-1 Adjustments (Temp)

Taxable Income Before NOL Carryforward

- NOL CarryforwardTaxable Income

x Applicable Current Tax Rate

Current Tax Provision before Credits- Applicable Tax Credits

• Expected Current Tax Expense

Deferred Tax ExpenseThe amount of taxes payable (or refundable) in a future year

after applying the enacted tax rate.

+/- Temporary DifferencesX Tax Rate

Deferred Tax Expense (Benefit)

Deferred Tax Expense - Balance Sheet Approach

Net DTA or (DTL) at end of yearLess: Net DTA or (DTL) at beginning of year

Deferred income tax expense (benefit)

Deferred Tax Asset/LiabilityDTA = [(Deductible temporary differences + loss and deduction carryforwards) X applicable federal rate] + tax credit carryforwards. In other words, tax attributes that will provide you with a benefit in future years (positive cumulative temporary differences).

DTL = Taxable temporary differences X applicable tax rate. In other words, tax attributes that will cause you to incur tax in future years (negative cumulative temporary differences).Example: Depreciation

Provision to Return (True-Up’s)• After tax returns are completed, a comparison is performed to identify

any differences between the amounts calculated in the tax provision and the amounts used on the tax return (temporary and perm differences).

• In an ideal world, these should be booked once the tax returns are finalized (typically Q2 or Q3). This way you segregate this portion from your tax provision entries. However, what usually happens… we end up booking everything at once.

Rate ReconciliationThe objective of the rate reconciliation is to reconcile the “expected” federal statutory income tax rate with the company’s “actual” or “effective” tax rate. This is reported in the F/S.

Pretax Book Income+/- Schedule M-1 adjustments (Perm)

X Tax Rate

= Effective Tax Rate

= Rate Reconciliation

= Total Tax Expense

Rate Reconciliation• Common items that Impact the Effective Tax Rate:

• State taxes (net of federal benefit) • Foreign taxes • Permanent differences• Tax Exempt Interest• Dividends Received Deduction• 15% “Haircut” on TEI and DRD (P&C only)• Changes in the valuation allowance• Income tax credits• Permanent true-up’s and changes in prior year tax• Changes in tax rates• Changes in contingency reserves and/or interest and

penalties (ASC 740-10/FIN 48)• Changes in APB 23 assertion

Income Tax Payable

Analysis of the income tax payable (account rollforward)

Beginning Balance+/- Current Tax Expense+/- Payments/Refunds

+/- FIN 48 (if applicable)Ending Balance

SSAP 101

SSAP 101 Basics• In general, adopts the concepts of ASC 740 with modifications.

ASC 740 SSAP101

State Income Taxes

Deferred SIT are recognized No deferred SIT are recognized

Valuation Allowance

Gross DTAs are reduced by a valuation allowance if it is more likely than not that some portion or all of the DTAs will not be utilized

Gross DTAs are reduced by a statutory valuation allowance adjustment that is determined on a separate company, reporting entity basis

Changes in Deferred Tax Assets and Liabilities

Included in income tax expense or benefit and are allocated to continuing operations, discontinued operations, extraordinary items and charged directly to shareholders’ equity

Recognized as a separate component of gains and losses in surplus, except to the extent allocated to changes in unrealized gains and losses

SSAP 101 Basics

• SSAP 101 requires deferred and current taxes to be determined on a separate entity basis, regardless if the entity is part of a larger consolidated group

• Character of deferred taxes and current taxes are required to be separately disclosed – ordinary vs. capital

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SSAP 101 – Admissibility Tests

• SSAP 101, Paragraph 11 contains the details regarding the three admittance tests to be used in determining the admitted portion of the Gross DTA

• The gross amount of DTAs that are tested for admittance must be reduced by any valuation allowance established for each entity

• Admissibility is determined on a separate company basis

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(a) Admits DTA to the extent that deductible temporary differences

reversing in succeeding years can be carried back to recoup prior year taxes paid

For 11(a), carry back period is current tax year and 1st preceding tax year for non-life companies

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(b) Admits DTAs which are expected to be realized / reversed within

the “applicable period”

Future taxable income projection calculations are required to be analyzed “with and without” the reversing temporary differences to ensure ability for the DTA to be utilized

The admitted DTAs subject to Paragraph 11(b) cannot exceed the “applicable limit” based on separate company surplus and capital determination.

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(b) - Continued “Applicable period” : Can be between Zero to Three years

“Capital and Surplus” Limit: Can range between 0% to 15% of Capital and Surplus

Both the applicable period and surplus limit are based on the company’s Authorized Control Level (“ACL”) Risk-Based Capital (“RBC”) ratio.

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(b) - Continued For RBC reporting entities, the limitations are as follows (based on

an ACL RBC ratio excluding DTA):

RBC Ratio >=300% - 3-year reversal period, 15% capital limitation

RBC Ratio between 200-299% - 1-year reversal period, 10% capital limitation

RBC Ratio < 200% - No admittance allowed under Paragraph 11(b)

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(b) - Continued

For non-RBC reporting entities, the limitations are based the ratio of a Company’s adjusted gross DTA and Adjusted Capital and Surplus: DTA/Capital Ratio 0-50% - 3-year reversal period, 15% capital limitation

DTA/Capital Ratio 51%-75% - 1-year reversal period, 10% capital limitation

DTA/Capital Ratio > 75% - No admittance allowed under Paragraph 11(b)

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(b) - continued “Capital and Surplus” is defined to be the statutory capital and

surplus as required to be shown on the statutory balance sheet for the current reporting period

Excludes any net DTA, EDP equipment and operating system software, and any net positive goodwill included in the Company’s surplus

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SSAP 101 – Admissibility (cont.)

• Paragraph 11(c) Admits DTAs that can be used to offset against existing gross DTLs

The character of the DTA and DTL (ordinary vs. capital) must be considered when determining the offset allowed under Paragraph 11(c)

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SSAP 101 – Disclosures

• SSAP 101 requires certain disclosures to be included in a company’s statutory financial statements

• “Income Taxes Incurred” – Includes current year estimates of federal and foreign income taxes, including refunds anticipated from carryback claims. P&C and Life insurers must separately disclose the portion of income

taxes related to realized capital gains and losses

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SSAP 101 – Disclosures

• SSAP 101 tax footnote must contain the following items: Components of net DTA or DTL, including admitted vs. non-admitted

“Paragraph 11” tests and detail, statutory valuation allowance, character of DTA/DTL balances

Net operating loss carryforwards

Substance of any tax allocation agreement and listing of consolidated group members

Disclosure of tax planning strategies and/or tax contingencies – more discussion to follow

• See SSAP 101 disclosure example on next slides

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SSAP 101 – Disclosures

SSAP 101 – Disclosures

SSAP 101 – Disclosures

SSAP 101 – Disclosures

SSAP 101 – Disclosures

• Tax Contingencies SSAP 101 requires that a tax contingency be established to the

extent it is “more likely than not” that a liability would become due.

Companies must assume that the taxing authorities have full knowledge of all relevant information

If the estimated tax contingency is greater than 50% of the tax benefit originally claimed, the recorded tax contingency shall equal 100% of the tax benefit.

Generally included in the current provision and reported as part of “income taxes incurred”.

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SSAP 101 – Disclosures

• Tax Planning Strategies

• SSAP 101 defines tax planning strategies as strategies that are:

Prudent and feasible

A reporting entity ordinarily might not take, but would take to prevent an operating loss or tax credit from expiring unused, and

Would result in realization of existing DTAs. Generally included in the current provision and reported as part of “income taxes incurred”.

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Most Commonly Missed Items in a SSAP 101 Tax Provision

• DTA reversals not appropriately considered/documented• With/Without calculation incorrectly applying the DTA

reversal patterns, NOL/AMT credit utilization• Change in DTA/DTL on unrealized gain/loss incorrectly

booked through surplus• Deferred Tax Assets not booked for non-admitted assets• Rate reconciliation not reconciling to appropriate number

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Questions?

Questions & AnswersFor additional questions please contact:

Carl BarksonTax Senior Managercbarkson@bdo.com614-573-7781

Erika HoyTax Managerehoy@bdo.com(616) 776-3776

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