January 12, 2023
New law significantly increases complexity of SSAP No. 101 for insurance companies
The Corporate Alternative Minimum Tax (CAMT) included in H.R. 5376, "An Act To Provide For Reconciliation Pursuant To Title II Of S. Con. Res. 14," commonly known as the "Inflation Reduction Act of 2022" (the Act, enacted on August 16, 2022) is a new 15% tax based on a corporation's "book" income and is expected to raise approximately $222.2 billion over 10 years.1 The CAMT will substantially increase the complexity of the Internal Revenue Code (IRC)2 and may cause statutory accounting for income taxes to be significantly more challenging.
Despite recent guidance from the U.S. Department of Treasury (Treasury) in Notice 2023-7,3 many major unanswered questions remain as to how to compute the CAMT; significant questions appear likely to remain unanswered well into 2023. This Alert provides an overview of the CAMT and identifies several of the tax accounting issues and considerations in applying the provisions of Statement of Statutory Accounting Principles No. 101, Income Taxes (SSAP No. 101) that insurance companies may want to consider.
CAMT general overview
The CAMT applies to any corporation (other than an S corporation, regulated investment company, or real estate investment trust) whose average annual "adjusted financial statement income" (AFSI) exceeds $1 billion for any three consecutive tax years ending after December 31, 2021, and preceding the current tax year (Average Annual AFSI Qualification Test).4 A corporation that meets the Average Annual AFSI Qualification Test will be considered an "applicable corporation." For example, a calendar-year corporation would be an applicable corporation in 2023 if it met the Average Annual AFSI Qualification Test for the three-year period that includes tax years 2020, 2021, and 2022. For purposes of determining the Average Annual AFSI Qualification Test, the Act generally treats AFSI of all persons considered a single employer with a corporation under IRC Sections 52(a) and 52(b) as AFSI of the corporation. Once a corporation is an applicable corporation, it remains an applicable corporation, even if its average AFSI drops below $1 billion, unless an exception applies.
For a corporation that is a member of a foreign-parented multi-national group, the Average Annual AFSI Qualification Test is met if the three-year average annual AFSI is (1) over $1 billion from all members of the foreign-parented multi-national group, and (2) $100 million or more of income from only the US corporation(s), a US shareholder's pro rata share of the AFSI of a controlled foreign corporation (CFC), effectively connected income and certain partnership income. A foreign-parented multi-national group means two or more entities if (i) at least one entity is a domestic corporation and another is a foreign corporation, (ii) the entities are included in the same applicable financial statement, and (iii) the common parent of those entities is a foreign corporation (or the entities are treated as having a common parent that is a foreign corporation).
IRC Section 56A defines AFSI as the net income or loss of the taxpayer set forth on the taxpayer's applicable financial statement, with certain adjustments. A taxpayer's applicable financial statement is determined under the hierarchy rules in IRC Section 451(b)(3). The hierarchy rules under IRC Section 451(b)(3) are as follows (listed in order from highest to lowest priority):
The calculation of AFSI starts with a corporation's financial statement net income or loss attributable to members of the taxpayers' US consolidated tax return group. Adjustments are then made to increase or decrease AFSI, including, among other items:
Financial statement NOLs are the net losses reported on the entity's consolidated financial statements for tax years ending after December 31, 2019. Financial statement NOLs can be carried forward indefinitely.
The adjustments for partnership distributive shares and defined benefit pensions apply only to a corporation in determining its AFSI to compute the CAMT amount. In contrast, when applying the Average Annual AFSI Qualification Test, AFSI is determined without regard to these adjustments (i.e., AFSI is based on defined benefit pension amounts included in book income and partnership income that must be aggregated under IRC Section 52).5
Calculating the CAMT
The CAMT is calculated by first determining the tentative minimum tax (TMT), which is done by multiplying AFSI by 15% and reducing that amount by CAMT foreign tax credits (FTCs). The TMT is compared to an applicable corporation's regular tax liability, plus its base erosion and anti-abuse tax (BEAT) liability. The applicable corporation's regular tax liability is the tax liability before consideration of tax credits other than FTCs.
If the CAMT liability is greater than the regular tax liability plus the BEAT liability, the applicable corporation pays the CAMT. After determining the CAMT, a corporation will then determine the amount of general business credits (GBCs) to be used in a particular tax year, since the Act amends the limitation on GBCs to include the amount of CAMT paid.
CAMT FTCs, which are allowed only if the taxpayer chooses to credit foreign taxes for regular income tax purposes, are the sum of "direct" and "indirect" foreign income taxes that qualify as foreign income taxes under IRC Section 901. Direct CAMT FTCs are the foreign income taxes paid or accrued by the taxpayer and taken into account in the taxpayer's applicable financial statement. No limitation applies to the usage of direct CAMT FTCs, but they do not carry forward and expire immediately if unused. Indirect CAMT FTCs are equal to the taxpayer's pro rata share of foreign income taxes paid or accrued by CFCs (for which the taxpayer is a US Shareholder) and included in the CFCs' applicable financial statements. Indirect CAMT FTCs are generally limited to 15% of the taxpayer's pro rata share of the CFCs' AFSI. Excess indirect CAMT FTCs have a carryforward period of five years.
A minimum tax credit (MTC) will be earned for taxes paid on the CAMT basis and carried forward indefinitely. The MTC will then be used to reduce the regular tax liability in future years if the regular tax liability exceeds the CAMT liability.
The Act directs Treasury to issue regulations or other guidance relating to the CAMT, including clarifying the definition of an applicable corporation, and providing guidance on the starting point for, and adjustments to, AFSI. Regulations and additional guidance may also address additional AFSI adjustments to prevent duplication or omission of items, treatment of financial statement NOLs and determination of the CAMT FTC.
The CAMT is effective for tax years beginning after December 31, 2022 (i.e., for calendar-year taxpayers, the 2023 tax year). For a more detailed analysis of the CAMT, see EY Tax Alert 2022-1237.
Major unanswered questions about the CAMT
What is "book" income?
New IRC Section 56A(a) defines AFSI as "net income or loss of the taxpayer set forth on the taxpayer's applicable financial statement for such taxable year … ". Net income is typically a defined term that, in financial statements prepared under accounting principles generally accepted in the United States (US GAAP), includes income or loss from continuing and discontinued operations; it does not include items of other comprehensive income (OCI), such as unrealized gains and losses on securities classified as available-for-sale (AFS). However, mark-to-market adjustments on equity holdings and other types of securities are included in net income from continuing operations. As under US GAAP, statutory-basis financial statements also contain a line item on the income statement titled "Net income." Statutory accounting, however, has its own unique items (i.e., gains on reinsurance transactions) that are recorded through surplus (equity) and differ from US GAAP.
The Act instructs Treasury to issue, among other things, guidance to prevent the omission or duplication of any item. Could Treasury use that authority to require the inclusion of unrealized gains and losses in AFSI, even if those gains and losses are not recorded through net income? A colloquy6 between Senator Wyden (D-OR), Chairman of the Senate Finance Committee, and Senator Cardin (D-MD) clarified that Congress did not intend for OCI to be included in financial statement income for CAMT purposes.7 Time will tell if Treasury sets forth guidance consistent with those remarks (in Notice 2023-7, Treasury asked for comment on the extent to which (if any) items in OCI should be included in AFSI).
Given the increasing interest rate environment, many insurers are experiencing significant unrealized losses in OCI during 2022 from AFS debt securities. As insurers hold AFS debt securities to recovery or if interest rates begin to decline, income will emerge in OCI. As a result, insurers may be faced with large CAMT liabilities in the future if OCI items are included in AFSI.
For insurance companies, however, an even more overarching question is whether Treasury might provide rules that either permit or require insurance companies that report on the statutory basis of accounting to use those financial statements as their applicable financial statement for purposes of determining AFSI. If so, many other questions exist on basing AFSI on statutory income. For example:
Other unanswered questions relate to how Treasury will handle, if at all, various accounting standard changes. For example, will Treasury provide transition relief for the implementation of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, under US GAAP or the implementation of IFRS 17 Insurance Contracts? Many insurers will be recording negative adjustments to equity in order to transition to these new accounting standards and may expect greater financial statement income in the future as a result. Without transition relief, certain insurers may have greater CAMT liabilities simply due to the transition to these new accounting standards.
Adjustments to AFSI for corporate equity and partnership investments
Insurance companies computing the CAMT will often have significant investments in corporate equities and partnerships. In many cases, these are recorded on the balance sheet at fair value, with changes in value recorded through net income for US GAAP reporting.8 With respect to an investment in a corporation that is not included on a consolidated return with the taxpayer, the taxpayer's AFSI with respect to the other corporation is determined by only taking into account the dividends received from the other corporation and other amounts that are includible in gross income or deductible as a loss under the tax code.9 Similarly, if the taxpayer is a partner in a partnership, its AFSI with respect to the partnership only takes into account the taxpayer's distributive share of adjusted financial statement income of that partnership.10 Are these rules intended to remove changes in fair value associated with corporate equities and partnership investments from the computation of AFSI even if they are recorded through net income for financial reporting purposes? Seemingly aware of this point, Treasury has also asked for comment, in Notice 2023-7, on whether and to what extent mark-to-market unrealized gains and losses should be included in AFSI, and how to interpret the term "distributive share" of a partnership's AFSI.
Life/non-life consolidation rules
IRC Section 1503(c) limits the non-life NOL that can be used against life insurance income (35% of the lesser of qualifying NOLs or life subgroup taxable income) for affiliated groups that (1) include one or more life insurance companies and one or more non-life insurance companies or other non-insurance companies; and (2) elect to file a consolidated tax return under IRC Section 1504(c)(2). The consolidated return regulations under Treas. Reg. Section 1.1502-47 provide additional rules for "life/non-life" consolidated groups and provide limitations and ordering rules around other mechanics, such as NOL and capital loss carrybacks. While the Act does not reference the life/non-life consolidation rules, will future guidance from Treasury apply these rules for purposes of the determining the CAMT?
Foreign tax credits
The CAMT FTC rules are generally separate from the FTC rules for regular income tax purposes and will require separate tracking and analysis of FTCs for CAMT purposes, which will undoubtedly generate many issues and questions. The statute provides a specific grant of regulatory authority to address the treatment of current and deferred taxes, including the time at which those taxes are properly taken into account for AFSI purposes. Insurance companies with significant direct FTC carryforwards for regular tax purposes (particularly carryforwards relating to taxes paid or accrued before the corporation becomes an applicable corporation) may be more likely to incur a CAMT liability in the year(s) the carryforwards are utilized.
Loss carrybacks and carryforwards
Under current law, most corporations may carry NOLs forward indefinitely. NOL deductions, however, are limited to 80% of taxable income in the year to which the NOL is being carried. NOL carrybacks are not permitted. IRC Section 172(b)(1)(C) provides an exception to the general rule for non-life insurance companies and allows for a carryback period of two years, a limited carryforward period of 20 years, and no 80% limitation on the use of NOL carryforwards. Similarly, current tax law allows capital losses to be carried back three years and carried forward five years for all corporations.
The CAMT allows financial statement NOLs to be carried forward indefinitely, subject to an 80% limitation similar to the general IRC rule for corporations. The Act does not mention exceptions for non-life insurance companies or any other type of entity, nor does it distinguish between ordinary and capital losses. Treasury has, however, been granted regulatory authority in this area and has asked for comment in Notice 2023-7 on whether certain limitations, such as those provided in IRC Sections 382 and 383, as well as Treasury Regulations Sections 1.1501-21(c) and 1.1502-15, should apply. The potential disconformity between regular tax NOLs and financial statements NOLs may cause non-life insurance companies to incur CAMT liabilities when regular tax NOLs are utilized. Insurance companies, both life and non-life, may be disproportionately affected by disconformity in capital losses due to the importance of investing activities to their business model. Also, in the future, carrying back regular tax NOLs to a year in which the CAMT is in effect (i.e., when the carryback period includes the 2023 tax year and beyond) may provide little cash tax benefit.
SSAP No. 101 Considerations
Timing of accounting for enacted tax law changes
SSAP No. 101 adopts the concepts from the historical US GAAP guidance of FASB Statement No. 109, Accounting for Income Taxes (FAS 109), with modifications described in SSAP No. 101 Q&A 1.11 FAS 109 paragraph 27 requires the effects of changes in tax rates and laws to be recognized in the period that includes the enactment date.12 The enactment date of the Act is August 16, 2022, the date President Biden signed the bill into law.
The Act does not contain a change in tax rates; rather, it includes the CAMT, which is an entirely new minimum tax system based on "book" income. An insurer's 2022 year-end current tax provision is not affected by the CAMT, as the new minimum tax does not apply until tax years beginning after December 31, 2022. As described more fully later, based on recent guidance from the Statutory Accounting Principles Working Group (SAPWG), the CAMT also will not apply in the calculation of deferred tax assets (DTAs), including the need to recognize a statutory valuation allowance and determine the admissibility of deferred tax assets through at least the first quarter of 2023. While this temporary deferral of the requirement to consider the CAMT in the tax provisions of SSAP No. 101 will be helpful to an industry sorting through the many challenges noted previously, it still remains a question of how the CAMT will ultimately fit into the construct of SSAP No. 101.
Statutory valuation allowance considerations in the period of enactment
FAS 109 paragraph 19 requires the regular tax rate to be used to measure deferred tax liabilities and assets even when a company expects to be a CAMT taxpayer in the future.13 However, when a company expects to be a CAMT taxpayer indefinitely, this may affect its ability to realize the entire amount of tax benefits for deductible temporary differences, credits and other carryforwards under the regular tax system. Thus, the effect of the CAMT system and the ability to realize future CAMT credits may need to be considered in evaluating the need for and the amount of a statutory valuation allowance in future periods.
Questions have arisen about whether companies should consider the effects of being subject to the new CAMT in the future when they assess the realizability of tax benefits from deductible temporary differences and carryforwards, as well as tax credits.
In response to a technical inquiry, the FASB staff said, because ASC 740 does not specifically address this issue, a company could make an accounting policy election to either (1) consider the effect of the CAMT system when evaluating the need for, and the amount of, a valuation allowance, or (2) account for the effects on deferred tax assets and carryforwards and tax credits in the period they arise. The policy elected should be consistently applied. The FASB staff said the application of this view is limited to the accounting for the new US CAMT, and a company should have transparent disclosures about its policy election.
SSAP No. 101 adopts the concepts from the historical GAAP guidance of FAS 109, with modifications described in SSAP No. 101 Q&A 1. Accordingly, new guidance from FASB regarding the application of ASC 740 does not automatically apply to SSAP No. 101. Absent additional guidance from SAPWG, these accounting policy elections would not be available to insurance companies when determining the valuation of deferred tax assets under SSAP No. 101.
Admissibility of DTAs
SSAP No. 101 paragraph 11 provides for the admission of DTAs based on a three-component calculation made on a separate-reporting-entity basis. The following is a high-level overview of each component of the admissibility test and considerations around the CAMT.
SSAP No. 101 paragraph 11.a.
The first component of the admissibility test, SSAP No. 101 paragraph 11.a., links the hypothetical loss carryback to the IRC loss carryback provisions, not to exceed three years. The adjusted gross DTA admitted under paragraph 11.a. equals the "federal income taxes paid in prior years that can be recovered through loss carrybacks for existing temporary differences that reverse during a timeframe corresponding with IRS tax loss carryback provisions, not to exceed three years." Ordinary losses for non-life (e.g., property and casualty or P&C) insurance companies can be carried back two years;14 life insurance companies cannot carry back ordinary losses.15 Capital losses for both non-life and life insurance companies can be carried back three years.16
To the extent a P&C insurance company can admit a majority of its adjusted gross DTAs under SSAP No. 101 paragraph 11.a., the CAMT may not significantly impact admitted DTAs in the near term. A P&C insurance company's admitted DTAs under paragraph 11.a. may become limited in future years, however, when the hypothetical loss carryback period includes tax years in which the CAMT is in effect. The CAMT does not provide for the carryback of financial statement NOLs, which will likely reduce the cash tax benefit of carrying back non-life NOLs under IRC Section 172(b)(1)(C).
SSAP No. 101 paragraph 11.b.
The requirements of SSAP No. 101 paragraphs 11.b.i. and 11.b.ii. are based on Realization Threshold Limitation Tables, which serve as "guardrails" in determining the amount of DTAs admissible under paragraph 11.b. The first guardrail limits admissibility to those DTAs expected to be realized within "the applicable period" provided in the Realization Threshold Limitation Tables (i.e., no more than three years following the balance sheet date). The second guardrail limits DTAs that could be admitted under paragraph 11.b.i. to the amount determined under paragraph 11.b.ii. (i.e., no more than 15% of adjusted current-period statutory capital and surplus for certain risk-based capital reporting entities). The phrase "expected to be realized" requires a reporting entity to perform a "with and without" calculation to project the amount of cash tax savings a reporting entity expects to realize from reversing deductible temporary differences within the applicable period. To properly complete the "with and without" calculation, reporting entities must be able to project future taxable income positions within the applicable period.
The CAMT may materially affect an insurer's ability to admit adjusted gross DTAs under paragraph 11.b. of SSAP No. 101. Before the "Tax Cuts and Jobs Act" (TCJA)17 repealed the former alternative minimum tax applicable to corporations, it was clear in the SSAP No. 101 Q&A that AMT must be factored into this computation. However, insurance companies that were expected to be in an AMT position in the future could still admit much, if not all, of their reversing DTAs. This is because the pre-TCJA corporate AMT used regular taxable income as the starting point. If a reporting entity realized additional deductions for regular taxable income, these would most likely also reduce taxable income computed for AMT purposes, resulting in a tax savings (albeit at a lower rate). Under the new CAMT, however, this may not be the case. Because the base, or starting point, for the new CAMT is book income rather than taxable income, reversing DTAs that reduce regular taxable income will likely have no effect on book income (other than DTAs for certain items like pension and depreciation, for which AFSI conforms to the regular tax computation). If a reporting entity is projecting to be in a CAMT position in the "without" portion of the computation, it will not receive any benefit from its reversing DTAs in the "with" portion. See the following examples (for simplicity we have only illustrated one year of the calculation):
In this example, the company is expecting to realize $400,000 of tax savings from its reversing temporary differences. Because the company expected to be in an AMT position, this represents 20% of the value of the $2 million of reversing temporary differences it expects for the year. The company also generated an additional $300,000 AMT credit carryforward as a result of the reversing temporary difference, which, if utilized within the full three-year period (assuming the SSAP No. 101 paragraph 11.b.i. guardrail is three years), could also be admitted, allowing the company to admit as much as $700,000 of admitted DTA related to the reversing temporary difference, or the full 35% tax benefit of its $2 million of reversing temporary differences.
In this example, the $2 million of reversing temporary differences reduces the regular tax liability but does not affect the CAMT calculation. The company pays the same tax in both the "with" and "without" computations, receiving no current year benefit from its reversing temporary differences. As with the pre-TCJA AMT, the company could presumably admit additional DTAs if it can use the $420,000 MTC within the three-year applicable period (assuming the SSAP No. 101 paragraph 11.b.i. guardrail is three years). If the company expects, however, to be a CAMT payer for each of the next three years, this will preclude it from admitting any DTAs under paragraph 11.b. of SSAP No. 101.
SSAP No. 101 paragraph 11.c.
SSAP No. 101 paragraph 11.c. allows for adjusted gross DTAs not meeting earlier admission criteria to be admitted to the extent they offset existing gross deferred tax liabilities (DTLs). Reporting entities must consider the character (i.e., ordinary versus capital) of their DTAs and DTLs such that offsetting would be permitted in the tax return under existing enacted federal income tax laws and regulations. For those reporting entities with significant DTLs or in an overall net DTL position, the CAMT may have a limited impact, if any, on admitted DTAs.
Other thoughts and considerations
Tax-sharing agreements (TSA)
Under Treas. Reg. Section 1.1502-77(a), a consolidated group's parent corporation acts as the group's agent in all federal income tax matters. Accordingly, the parent corporation will be responsible for remitting any CAMT due to Treasury. Companies will need to evaluate their TSA in order to determine how to allocate the CAMT among members of the group. Perhaps some companies will consider having the parent bear the entire burden of CAMT. Companies choosing that option will need to consider how the parent can pay a large CAMT liability without collecting cash from its subsidiaries.
Alternatively, the TSA could be amended to allocate the CAMT liability among the consolidated group members based on a determination of how much each member contributed to the group's CAMT liability. This type of amendment requires a member to reimburse another member, and to be reimbursed for the use of CAMT tax attributes. It may also be able to apply the existing allocation and reimbursement methods used by the TSA, subject to some adjustments, to take into account the unique aspects of the CAMT and its related tax attributes.
FAS 109 paragraph 40 requires the current and deferred tax expense for an income tax return group that files a consolidated income tax return to be allocated among the members of that group when those members issue separate financial statements but does not establish a mandatory method of allocation.18 The allocation method adopted must be systematic, rational, and consistent with the broad principles of FAS 109. One such method would be to allocate current and deferred tax expense as if each member were a separate taxpayer. Under this method, FAS 109 paragraph 40 notes that the sum of the amounts allocated to individual members of the income tax return group may not equal the consolidated amount. Other methods of allocation may be acceptable so long as methods are consistent with the broad principles of FAS 109. For example, use of an allocation method based on the terms of a TSA whereby a profitable parent corporation (from a consolidated standpoint) agrees to pay a subsidiary for the tax effects of the subsidiary's separate losses would be an acceptable approach, even though the subsidiary might not be able to record a benefit for its losses based on a separate-return calculation.
In general, the accounting for income taxes under SSAP No. 101 is performed on a separate-reporting-entity basis. As previously noted, however, there can be acceptable modifications to the separate-entity approach (i.e., when the reporting entity is paid currently for the use of losses in a consolidated tax return). The tax allocation method selected for statutory financial reporting purposes can also differ from a company's TSA, which is a legal document. When differences arise between the method of allocation for financial statement purposes and the TSA, those differences are accounted for as dividends or capital contributions.
Many insurance companies may be part of an aggregate group that is an "applicable corporation" for CAMT purposes in consolidation but would not be an "applicable corporation" on a separate-reporting-entity basis. Applying the SSAP No. 101 concept of separate-entity reporting for purposes of the tax allocation in the statutory-basis financial statements, we believe it would be appropriate for a reporting entity that would not be an "applicable corporation" on a separate-entity basis to perform its current and deferred tax computations under SSAP No. 101 as if it were not an "applicable corporation" and thus, not subject to the CAMT, regardless of the status of its consolidated group and the terms of the company's TSA. Any future tax payment from the reporting entity to its common parent related to the CAMT, as prescribed by the TSA, would be accounted for directly through surplus as a dividend. Accordingly, to the extent allowed by the TSA, the reporting entity may be allocated a portion of the MTC equal to the CAMT paid by the reporting entity to its parent corporation. The allocated MTC would not be considered a DTA subject to valuation allowance considerations or the admissibility criteria of SSAP No. 101. In contrast, the benefit of this MTC would be realized in the future through a surplus entry (e.g., a deemed capital contribution from the parent), in the form of a lower tax payment from the reporting entity when the MTC is utilized in the consolidated tax return.
The CAMT does not provide for any transition relief for DTAs that exist on December 31, 2022. As those DTAs reverse after the CAMT effective date, regular taxable income will be reduced, potentially causing a company to incur tax under the CAMT. This risk can be reduced to the extent DTAs can be accelerated and monetized in 2022.
Insurance companies may need to carefully consider how the CAMT impacts their tax-planning environment. For many companies, the CAMT will result in a timing difference and, ignoring the time value of money, will not impact the tax benefits associated with permanent book/tax differences such as the dividends-received deduction, tax-exempt interest, and other items. For example, since BEAT liabilities are added to the regular tax liability in computing CAMT, an insurance company may feel incentivized to increase payments subject to BEAT under the notion that it is not detrimental as the company would be paying the CAMT otherwise. Similarly, a company may find it meaningful to reconsider its investment strategies and opt for higher yielding taxable bonds rather than incur a CAMT liability. In many cases, these planning strategies may adversely impact a company's overall tax posture and increase its effective tax rate for financial reporting purposes. The permanent nature of the BEAT and tax-preferred investment assets, in contrast to the temporary (in most cases) nature of the CAMT, should be of paramount concern as insurance companies are considering their options.
Under SSAP No. 101 paragraph 14 and SSAP No. 101 Q&A 13, many insurance companies use tax-planning strategies to accelerate the reversal patterns of DTAs in an effort to preserve their admissibility. To the extent an insurance company is an "applicable corporation," these tax-planning strategies may provide little incremental benefit as a result of the CAMT. Depending on the fact pattern, an insurance company may want to consider tax-planning strategies that increase regular taxable income without affecting the reversal patterns of DTAs. For example, a tax-planning strategy to change the nature of income from tax-exempt to taxable income may help preserve DTA admissibility. Insurance companies should begin to model the effect of the CAMT on their admitted DTAs and perhaps reconsider the effectiveness of their tax-planning strategies used in the admissibility tests. To the extent insurance companies modify or introduce new tax-planning strategies, care should be taken to make certain the tax-planning strategies are consistent with assumptions inherent in statutory or other accounting basis financial statements under SSAP No. 101 Q&A 13.11.
Those insurance companies that are an "applicable corporation" with NOL carryforwards going into the 2023 tax year are at greater risk of paying tax under the CAMT. The risk is particularly acute if there are tax NOLs but no financial statement NOLs.
Reporting considerations — third quarter 2022
On October 24, 2022, SAPWG adopted INT 22-02: Third Quarter 2022 Reporting of the Inflation Reduction Act — Corporate Alternative Minimum Tax (INT 22-02). In INT 22-02, SAPWG reached a consensus that a reasonable estimate for the calculations impacted by the CAMT is not determinable for reporting in the third quarter 2022 statutory-basis financial statements. Because reasonable estimates were not determinable, reporting entities did not record the impacts of the CAMT in their quarterly statement but were required to make disclosures regarding the CAMT and the Act as set forth in paragraph 13 of INT 22-02.
Reporting considerations — year-end 2022 and first quarter 2023
On December 13, 2022, SAPWG reached a consensus to extend the applicability of INT 22-02 to year-end 2022 and first quarter 2023 statutory-basis financial statements, with an additional disclosure requirement on a reporting entity's status as an applicable corporation.
The revised version of INT 22-02 provides an exception such that updated estimates or other calculations that are affected by the Act and determined subsequent to the filing date of the relevant financial statements (i.e., annual or quarterly statement blank) would not be recognized as Type I subsequent events. In other words, INT 22-02 intends to prevent a reporting entity from having to amend its audited statutory-basis financial statements for material Type I subsequent events as a result of updated information/estimates received after the filing date of the year-end 2022 statutory-basis financial statements reflecting the accounting for the enactment of the Act.
The extension of INT 22-02 provides a welcome, if only temporary, relief to the insurance industry, as it gives companies and SAPWG additional time to understand the Act and the impacts of its various rules on the tax provisions of SSAP No. 101.
The CAMT may significantly affect an insurer's DTA admissibility calculation, materially affecting its reported statutory surplus. Accounting for the CAMT will be challenging, with many questions likely remaining unanswered well into 2023. New issues and questions will undoubtedly continue to arise. We believe it would be helpful for SAPWG to develop statutory accounting guidance that insurers can apply consistently in determining the admissibility of their DTAs, potentially including updates to the SSAP No. 101 Q&A to address the new CAMT. Without such guidance, inconsistency will likely exist across the industry in terms of how insurers consider the CAMT for purposes of their DTA admissibility calculation.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor
1 Joint Committee on Taxation (JCT) revenue estimate of the Act released August 9 can be found at https://www.jct.gov/publications/2022/jcx-18-22/.
2 Unless otherwise noted, all Code and "section" references are to the Internal Revenue Code of 1986, as amended, and all "Treas. Reg." references, are to the Treasury regulations promulgated thereunder.
3 For an overview of the information in Notice 2023-7, see Breaking Tax News 2022-9011.
4 Section 5 of Notice 2023-7 provides a safe harbor for determining whether a corporation meets the Average Annual AFSI Qualification Test for a corporation's first tax year beginning after December 31, 2022. The safe harbor substitutes $500 million for $1 billion and computes AFSI without regard to many of the adjustments to AFSI in IRC Section 56A(c) and (d), and after taking into account AFS Consolidation Entries, except those that eliminate transactions between persons not treated as a single employer under IRC Section 52(a) or (b).
5 IRC Section 59(k)(1)(D).
6 Generally, a colloquy is a formal scripted conversation between members of Congress that can become part of the congressional record. Colloquies can be used for various purposes, including to draw attention to, or clarify the intent of, a particular issue or provision in a bill. The impact of colloquies on federal agencies, including Treasury, and their power to make policy decisions is not always clear.
7 Congressional Record Vol. 168, No. 133, S4166. The Congressional Record can be found at: https://www.congress.gov/117/crec/2022/08/06/168/133/CREC-2022-08-06.pdf
8 ASU 2016-01.
9 IRC Section 56A(c)(2)(C).
10 IRC Section 56A(c)(2)(D).
11 SSAP No. 101 — Exhibit A, Implementation Question and Answers, referred to herein as "SSAP No. 101 Q&A."
12 The corresponding ASC 740 Subsections to FAS 109 paragraph 27 are ASC 740-10-25-47 and 740-10-35-4.
13 The corresponding ASC 740 Subsection to FAS 109 paragraph 19 is ASC 740-10-30-10.
14 IRC Section 172(b)(1)(C).
15 IRC Section 810 was repealed. NOLs for life insurance companies are determined under IRC Section 172.
16 IRC Section 1212.
17 An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. Public Law No. 115-97.
18 The corresponding ASC 740 Subsection to FAS 109 paragraph 40 is ASC 740-10-30-27.