advanced topics - iasa 2015/session… · · 2016-10-31va utilized strictly to calculate the...

IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

SSAP 101: Advanced topics

Session 506


Panel members

Jeanine Kissinger, CPA

Nationwide Insurance

Aaron Maguire, CPA

Dixon Hughes Goodman LLP

Carrie Small, CPA

Baker Tilly Virchow Krause, LLP

3


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

GENERAL

OBSERVATIONS

Section one

5


General observations

SSAP 101 Golden Rule

ASSUME NOTHING

6


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

VALUATION

ALLOWANCES

Section two

8


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



VA utilized strictly to calculate the “adjusted gross DTA” • Consider VA before DTA admissibility test

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

Gross deferred tax asset

- Valuation allowance

= Adjusted gross deferred tax asset



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



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

ALTERNATIVE

MINIMUM TAX

Section three

13


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 4.17 - 4.19

• See Example #1

14


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 life-

nonlife consolidated basis

• Allocate ACE adjustments on a reasonable, consistent basis between

the life and nonlife subgroups

See Example #2

15

CONSOLIDATED TAX

RETURNS

Section four

16


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

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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



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

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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?

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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



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

TAX ALLOCATION

AGREEMENTS

Section five

23


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



Intercompany receivables not settled within 90 days of filing

the consolidated return or receiving a refund are non-

admitted.

• 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



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

LIMITATIONS

Section six

27


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

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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


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

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Limitations – Reversals generating NOLs

With and Without

Calculation

2013 2014 2015

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



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


AMT/ACE Adjustment 200,000 200,000 200,000 200,000 200,000 200,000

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. 38,800,000

Admitted deferred tax assets under paragraph 11.b. 2,145,000

Not utilizing NOL resulting from reversing DTAs

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Limitations – Reversals generating NOLs

With and Without

Calculation

2013 2014 2015

Without With Without With Without With

Reversing Reversing Reversing Reversing Reversing Reversing

Temporary Temporary Temporary Temporary Temporary Temporary

Benefits Benefits Benefits Benefits Benefits Benefits




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 -


Regular tax 35% (a) 9,345,000 - 10,092,600 7,887,600 10,900,050 9,850,050


AMT/ACE Adjustment 200,000 200,000 200,000 200,000 200,000 200,000

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. 38,800,000

Admitted deferred tax assets under paragraph 11.b. 3,300,000

Utilizing NOL resulting from reversing DTAs

32

TAX RATES

Section seven

33


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


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


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


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

TAX LOSS

CONTINGENCIES

Section eight

38


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.


• 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



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

Recognition and Measurement Example

40



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

TAX PLANNING

STRATEGIES

Section nine

42


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



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



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

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Questions?

46


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. © 2015 Baker Tilly Virchow Krause, LLP

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Contact information

Jeanine Kissinger, CPA, MST, Director, Tax Nationwide Insurance

614 677 2781

[email protected]

Aaron Maguire, CPA, Partner Dixon Hughes Goodman LLP

404 575 8960

[email protected]

Carrie Small, CPA, Director, Tax Baker Tilly Virchow Krause LLP

414 777 5451

[email protected]

48


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advanced topics - iasa 2015/session… · · 2016-10-31va utilized strictly to calculate the...

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