Odomirok 26: Taxable Income

Question 1

What is Revenue Offset?

Answer 1

A 20% haircut. The procedure recognizes policy acquisition costs that are assumed to be 20% of the premium. UEPR is reduced by this magnitude.

Question 2

Statutory EP Formula

Answer 2

Statutory EP = WP – Change in UEPR

Question 3

Equations to determine Tax Basis EP:

Answer 3

WP - 80% Change in UEPR;

Statutory EP + 20% Change in UEPR

Question 4

Why does the IRC use discounted losses?

Answer 4

uses discounted losses in order to avoid having to offer a credit on the temporary loss that comes from undiscounted losses

Question 5

Statutory Incurred Losses Formula

Answer 5

Incurred losses = Paid losses + Change in undiscounted reserves

Question 6

Equations to determine Tax Basis IL:

Answer 6

Paid losses + Change in discounted reserves;

Statutory Incurred Losses - Change in Reserve Discount

Question 7

Portion of Tax exempt income that is taxed due to proration provision:

Answer 7

25%

Question 8

What is BEAT and when does it apply?

Answer 8

Tax on payment to related foreign company that has not elected to be taxed as a US taxpayer.

Applies when

1. The insurer is part of a U.S. group of companies that has average gross receipts in the past three years of at least $500M AND
2. Base erosion payments make up at least 3% of total deductions taken by the U.S group in its current tax return

Question 9

Calculation for BEAT

Answer 9

1. Determine if the insurer is subject to the BEAT
2. Determine the taxable income/ regular tax
3. Calculate the modified taxable income, which equals the regular taxable income + base erosion payment
4. Apply the BEAT tax rate to the modified taxable income. The BEAT tax rate was 5% in 2018, and then increased to 10% which will apply from 2019 to 2025. After this it will increase to 12.5%.
5. Compare the regular taxable liability to the BEAT. The insurer is responsible for the greater of the two.

Question 10

The discounted loss reserves are determined from what 3 components?

Answer 10

1. undiscounted loss reserves.
2. discount rate promulgated each year by the Treasury
3. loss payment pattern by LOB.

Question 11

Undiscounted Loss Reserves:

Answer 11

• From Schedule P, Part 1

- Must gross up reserves for tabular discount

Question 12

Discount Rate:

Answer 12

• Depends on the corporate bond yield at the time

- Does not change in future CYs

Question 13

Loss Payment Pattern:

Answer 13

• Payment pattern calculated by IRS for every line

- Calculated every 5 years