As 2015 draws to a close, it’s important to remember certain accounting and tax changes that can affect your 2015 financial statements and tax returns. The National Association of Insurance Commissioners (NAIC) met in Maryland in November 2015, and these are highlights of the issues and statutory accounting changes discussed in the Statutory Accounting Principles Working Group (SAPWG) meetings. This article also includes certain tax changes and matters that insurance industry professionals should keep in mind.
Adopted Nonsubstantive Revisions – During the NAIC meeting, SAPWG adopted the following nonsubstantive revisions to statutory accounting guidance; no substantive revisions were adopted.
Exposed Substantive Revisions – SAPWG exposed the following substantive revisions to statutory accounting guidance.
Exposed Nonsubstantive Revisions – SAPWG exposed the following notable nonsubstantive revisions to statutory accounting guidance.
Tax Extenders for 2015 – Similar to prior years, many tax provisions expired at the end of 2014. However, in mid-December, Congress passed the Protecting Americans from Tax Hikes (PATH) Act of 2015, extending or making permanent many of the frequently used provisions. BKD’s article on the PATH Act offers explanations of the Act. Some highlights for insurance companies include:
- Increased Internal Revenue Code (IRC) Section 179 expensing to $500,000 and increased phaseout of Sec. 179 investment amount to
$2 million made permanent
- 50 percent bonus depreciation extended through 2017 and reduced to 40 percent and 30 percent through 2019
- Research & experimentation tax credit expanded and made permanent
- 15-year recovery period for qualified leasehold improvement property made permanent
- Up to $250,000 of the cost of qualified leasehold improvement property as Sec. 179 property made permanent and eliminates the $250,000 cap starting with the 2016 tax year
- Work Opportunity Tax Credit extended through 2019
Repair & Capitalization Rules – Many taxpayers spent considerable time complying with the new tangible property regulations, also called the repair regulations, for tax years beginning on or after January 1, 2014. Now that the changes have been implemented, it’s important to consider how these new rules are incorporated into ongoing repair versus capitalization determinations. In making this determination, taxpayers should consider whether expenditures are considered a betterment, restoration or adaptation to a unit of property.
Certain elections still will need to be considered on an annual basis, such as the de minimis safe harbor, partial asset dispositions, book conformity and small taxpayer safe harbor. Under the de minimis safe harbor, a company with an applicable financial statement (including an insurance company’s annual statement and audited financial statements) can expense up to $5,000 per invoice or item in accordance with a written book capitalization policy in place at the beginning of the taxable year. Therefore, it’s important to review your company’s capitalization policy prior to year-end to ensure the appropriate policy is in place.
2014 Return True-Up – Now is the perfect time to make sure any true-ups to your tax accounts have been made from your 2014 tax return. Look at the amount due or overpayment from your tax return and compare it with the amount due or overpayment calculated at the 2014 year-end. The balance of deferred tax assets and liabilities also can be trued up based on tax returns as filed.
Year-End Accounting Considerations – In general, expense accruals aren’t deductible unless the amounts are fixed and determinable and economic performance has occurred. A bonus accrual, for example, may not be fixed at year-end if the payment is contingent on the employee being an employee of record on the date of payment. The “fixed” requirement often is overlooked and can be satisfied by simple changes to bonus plans to fix the liability at year-end.
The same methodology can be applied to policyholder dividends. A guarantee can be employed to accelerate the deductibility of policyholder dividends to the year accrued versus the year paid.
Certain prepaid expenses can be deducted in the year paid versus the year the services are performed under IRC Sec. 263. This can be done if the expense creates a right or benefit that doesn’t extend beyond the earlier of 12 months after the first date on which the taxpayer realizes the right or benefit or the end of the tax year following the year in which the expense was paid or incurred. All events must have occurred to establish the fact of the liability, the amount of the liability must be determinable with reasonable accuracy and economic performance must have occurred. It’s important to note this may necessitate the filing of a Form 3115 to effect a change in the tax treatment of the company’s prepaid expenses.
Each company’s situation is unique, so please contact your BKD advisor with any questions.