Part 24 (Odomirok 26) Flashcards
Income Taxes
What does the IRS not want about Statutory accoutning
Statutory accounting defers the recognition of premium, which can lead to companies getting tax refunded.
What does Tax accounting do
Tries to better match EP and Expense Recognition
What is the revenue offset adjustment to and amount
to UEPR and is 20% of premium
Tax Basis EP
two formulas
NWP - 80% * change in UEPR
or
SAP NEP + 20% * change in UEPR
SAP NEP = Stat net earned prem
SAP EP calculation
WP - change in UEPR
SAP incurred losses are based on what, and why is this a problem for tax
So what does the IRS do instead?
based on undiscounted losses
- There may be an underwriting loss initially
IRS uses discounted losses
Tax basis incurred losses formula 2x
Paid Losses + Change in discounted reserves
or
SAP Incurred losses - change in Reserve discount
Tax free investment income like on Municipal bond interest is treated differently. How so, and from what?
It is tax exempt for companies in most industries
Proration Provision makes it not completely tax exempt
Proration Provision calculation
25% * Taxable Income
then add this amount to the regular taxable income
Regular Taxable Liability
21% * Taxable income
What is the tax rate
21%
What is BEAT
Base Erosion and Anti-Abuse Tax
When does BEAT apply
- Insurer is part of US group that has avg premium in the past 3 years > $500M
- Payments being made to companies overseas (base erosion payments) > 3% of total deductions taken by teh US group in its current tax return
Calculate BEAT
- Determine if subject to BEAT
- Determine taxable income and regular tax
- Calculate Modified Taxable income
- Appy BEAT tax rate of 10% to the modified taxable income
- Insurer is responsible for max(taxable liability, BEAT)
Modified Taxable income formula
Regular Taxable income + base erosion payment
What is the BEAT tax rate
10%
Discounted reserves are determined from 3 components
- Undiscounted loss reserves
- Discount Rate
- Loss payment pattern by line
Where are undiscounted loss reserves taken from,
why is this important
Schedule P, Part 1
Net of tabular discount and gross of non-tabular discount
necessary to gross up the reserves for the tabular discount before the application of the IRS discounting procedure
How does the discount rate vary and based on what
By AY, based on the corporate bond yield curve
What will the rate for an AY be for discounting in reserves (attribute)
How is it treated in future CYs
Fixed, and will apply to the AY in all future CYs
Loss payment pattern is calculated by the IRS when, and what is it based on
every 5 years
on paid loss development from the industry aggregate Schedule P, Part 1 data
