Difference between revisions of "Odomirok.26-Taxes"

Latest revision as of 21:18, 3 July 2024

Reading: Financial Reporting Through the Lens of a Property/Casualty Actuary - Chapter 26 - Taxation in the U.S.

Author: Kathleen C. Odomirok, FCAS, MAAA, Liam M. McFarlane, FCIA, FCAS, Gareth L. Kennedy, ACAS, MAAA, Justin J. Brenden, FCAS, MAAA, EY

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BA Quick-Summary: Taxation in the U.S. Chapter 26 discusses taxation for insurance companies in the U.S., emphasizing the impact of federal taxes on insurance pricing, company valuation, and capital models. The chapter explains how taxable income is derived from statutory accounts, including the adjustment of loss reserves for discounting, and reviews the calculation of tax basis earned premiums and incurred losses. The discussion also highlights significant changes from the Tax Cuts and Jobs Act of 2017, such as the reduction in the corporate tax rate, updated proration rules, and the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). The chapter concludes with a discussion on discounting loss reserves for taxes and the transitional adjustments required under the new tax law.

Study Tips

The new version of Odomirok from 2019 incorporates the new tax law passed by Congress effective for tax-year 2018. This represents a significant change from the prior version.

This chapter on taxes is one of the easier chapters. There was a big change for 2021.Spring that made one of the difficult calculation problems much simpler. (The old version required you to calculate the tax implication of dividends which was a messy calculation.)

Under the Tax Cut and Jobs Act of 2017 (TCJA) there is a new calculation called the BEAT (Base Erosion and Anti-Abuse Tax) but it's pretty easy. It has to do with U.S. companies that make tax-deductible payments to foreign companies as a way to reduce their U.S. taxes.

Altogether, there were 4 important changes for 2021-Spring due to the TCJA (Tax Cut and Jobs Act of 2017):

decrease in the corporate tax rate
cannot use company-specific data to determine payment patterns for discounting
change how the interest rate is determined
BEAT calculation (Base Erosion and Anti-Abuse Tax) ← this is probably the most testable of the new information

For changes in the discounting procedure, click Discounting Loss Reserves for Taxes and look for the yellow boxes.

Estimated study time: 1 day (not including subsequent review)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

income tax calculation
SAP income calculation, both pre-tax and post-tax
tax basis income, tax rates, discounting loss reserves for tax purposes

Outdated → questions highlighted in orange are at least partially outdated because they refer to AMIT (Alternative Minimum Income Tax).

reference	part (a)	part (b)	part (c)
E (2018.Spring #14)	tax basis income: - calculate ⁵
E (2017.Fall #21)	income tax: - calculate
E (2016.Fall #19)	tax rate: - various income types ³	taxable income: - from SAP income	income tax: - calculate
E (2016.Spring #18)	discounting reserves: - for tax purposes ²	SAP income: - calculate pre-tax value	federal tax: - identify missing info
E (2015.Spring #17)	income tax: - calculate ¹
E (2013.Fall #18)	SAP income: - calculate ⁴	bond/stock allocation: - considerations

¹ There's a little trick in this problem that's glossed over in the examiner's report. See A Few Old Exam Problems at the bottom of this article for an explanation. (Parts of this problem are outdated, specifically the AMTI calculation and the 'dividends received' deduction. The proration provision has also changed from 15% to 25%.)

² Part (a) of this problem is outdated because under the TCJA (Tax Cut and Jobs Act of 2017) it's no longer permissible for a company to use it's own Schedule P data to derive a payment pattern for discounting.

³ This problem is partly outdated because the corporate tax rate changed from 35% to 21%, but you can still do parts (ii), (iii), and (iv) based on the new version of the source text. Part (i) on the 'dividends received' deduction is definitely outdated as this is no longer discussed on the source text.

⁴ Click for an updated solution to 2013-Fall-Q18

⁵ Click for comments regarding discounting in this problem

Full BattleQuiz

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In Plain English!

Tax-Basis Income

Let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the tax-basis income. Don't try to solve it for now - Alice's solution is presented in the next section.

E (2018.Spring #14)

The first question that popped into my mind was:

Question: what is tax-basis income and how is it different from "normal" SAP income

tax-basis income is SAP or statutory income with a few adjustments:

==> EP is adjusted with a revenue-offset

==> losses (or reserves) are discounted

The concept of discounting is already familiar, but let's take a closer look at the revenue-offset term. (If you want, you can glance ahead at the TBEP formula which is given in the next section.)

Question: briefly describe the IRS's revenue offset procedure as it applies to tax-basis income

in SAP, acquisition costs are not deferred so the insurer would incur a loss
the insurer would then be entitled to a future tax refund on this loss
but the IRS wanted to simplify the process: instead of a refund, the IRS reduces UEP liability by 20% for all insurers

(assumes the acquisition cost ratio is 20% for all lines for all insurers)

mini BattleQuiz 1

Calculating the Tax-Basis Income (Version 1)

Note that the formula provided below for TBI (Tax-Basis Income) is based on past exam problems and does not include quantities that were not provided in the exam problems. In particular, the quantity TBI may include terms such as U/W expense and policyholder dividends but these are not generally provided in typical exam problems on calculating TBI. There is a brief forum post mentioning this.

Let

TBI = Tax-Basis Income

TBEP = Tax-Basis EP

InvInc = Investment Income

(Strictly speaking, InvInc refers to the taxable portion of InvInc but for this version of the problem, where it's just the compound interest earned on EP, we assume all of this InvInc is taxable.)

TBIL = Tax-Basis Incurred Loss

then

TBI = TBEP + InvInc – TBIL

where the right-hand-side terms TBEP and TBIL can each be calculated two different ways:

Let

PL = Paid Loss (during year)

IL = Incurred Loss (during year)

L^D = Loss reserves after Discounting

D = Discount amount (= difference between undiscounted and discounted loss reserves)

Then

TBEP = EP + 20% x chg(UEP) = WP – 80% x chg(UEP)

TBIL = PL + chg(L^D) = IL – chg(D)

(shout-out to pb for finding a typo in the 2^nd version of the TBIL formula!)

Side Note:

The formula for TBEP doesn't look like it matches the above description of revenue-offset, but it amounts to the same thing:

==> the TBEP formula increases the statutory EP by 20% of the chg(UEP)

Alice's solution to (2018.Spring #14):

Solution to 2018.Spring #14 ← see this forum post for an alternate way to compute investment income

And here's a practice problem:

1 practice problem like 2018.Spring #14

The quiz has a practice template for this problem. (In the next section, we'll look at a slightly harder version of calculating TBI.)

mini BattleQuiz 2 You must be logged in or this will not work.

Calculating the Tax-Basis Income (Version 2)

We're going to build on the formulas from the previous section. The following exam problem used to be quite hard but because of a change in the Exam 6-US syllabus for 2021.Spring, it's now much easier. The reason it's easier is that the tax implication of dividend income is no longer covered in the Odomirok source text. Take a quick look at the problem the way it was in 2017 but you can ignore the details on dividend income both in the statement of the problem and in the solution.

E (2017.Fall #21)

There were 2 things that made this problem harder:

the calculation of InvInc (Investment Income) required you to know details of how certain bonds are taxed

→ remember that in these problems, InvInc refers only to the taxable portion of investment income

you were asked to calculate IT (Income tax) which is an extra step (the previous problem asked only for TBI, the Tax-Basis Income, not the actual tax)

We'll examine these 2 items below, but first note the basic corporate tax rate of 21%. This percentage is applied directly to TBI (if TBI = $100 then IT = $21) but there are many, many adjustments. Most of these are not discussed in Odomirok.

First, you should know that in this context, the term proration means to increase taxable income by reducing the deduction for losses incurred by a percentage of certain types of income.

Question: describe the tax adjustments to bonds

proration of tax-exempt municipal bonds

==> add 25% of interest income to TBI

==> taxable amounts are then multiplied by the standard corporate tax rate of 21% to obtain the actual tax.

For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. Side note: The solution involves something called RIT (Regular Income Tax) which is the tax obtained by multiplying TBI (Tax-Basis Income) by the standard corporate tax rate of 21%. It is no longer required to calculate AMTI (Alternative Minimum Taxable Income) or AMIT (Alternative Minimum Income Tax)

Alice's solution to (2017.Fall #21):

Solution to 2017.Fall #21 (updated for 2021.Spring)

And here are 2 practice problems.

2 practice problems like 2017.Fall #21 (2021.Spring version)

BEAT or Base Erosion and Anti-Abuse TAX

BEAT is a new tax under the Tax Cuts and Jobs Act of 2017.

Question: what is the purpose of BEAT

BEAT limits the ability of multinational corporations to shift profits from the United States

(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)

Question: how does BEAT work

the corporation calculates its regular tax (as a percentage of taxable income, currently 21%)
the corporation calculates its alternative tax (as a percentage of gross income, currently 10%)
if alternative tax > regular tax then the corporation must pay the difference (BEAT = this difference)

Another way of describing BEAT is that it is a minimum tax add-on. Here's an example to illustrate the concept:

Suppose for the years 2020-2022, a US corporation has $600 million of gross taxable income per year. For tax year 2022, the corporation also pays $400 million in tax-deductible royalties to a foreign affiliate. The corporation’s regular tax liability is ($600 - $400) x 21% = $42 million. Its alternative tax is $600 x 10% = $60 million. The corporation must then pay $60 million to the United States (regular tax of $42 million plus the BEAT of $18 million.)

Not all U.S. corporations are subject to BEAT however. The following conditions must be satisfied for a corporation to be potentially subject to BEAT:

insurer is part of a U.S. group of companies with average gross receipts in the past three years ≥ $500M
insurer makes base erosion payments ≥ 3% of the total deductions taken by the U.S. group on its current tax return.

Again, BEAT is a type of minimum tax that is added to the regular tax liability. Note however that if the foreign company to which tax-deductible payments have been made has elected to be taxed as a U.S. taxpayer then the U.S. corporation or insurer is not subject to BEAT. That seems like a little trick they might throw at you on the exam. So pay attention! (Maybe they'll give you information on 2 companies that made foreign payments but where only 1 of them is subject to BEAT because the other doesn't satisfy the conditions described above.)

Pop Quiz A! :-o

In which of the following situations would the insurer be potentially subject to BEAT:

Situation 1:

average gross receipts in past 3 years is $550 million
insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

Situation 2:

average gross receipts in past 3 years is $400 million
insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

Situation 3:

average gross receipts in past 3 years is $550 million
insurer makes base erosion payments of 2% of the total deductions taken by the U.S. group on its current tax return
base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

Situation 4:

average gross receipts in past 3 years is $550 million
insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
base erosion payments were to a foreign company that is taxed as a U.S. taxpayer

Click for Answer

Below is the example from the text. It's very easy. (And below that are a couple of practice problems.)

Here's the problem...

Odomirok.Ch26 (Excel) BEAT example problem.png

Here's the solution...

Odomirok.Ch26 (Excel) BEAT example solution.png

Here are a couple of really easy practice problems.

2 BEAT problems (taxes)

mini BattleQuiz 3

Discounting Loss Reserves for Taxes

Let's start with a very important distinction regarding discounting:

Question: explain the difference between a company's own estimate of discounted reserves versus the estimate derived for tax purposes

Even though reserves are reported at their nominal value on the balance sheet, every company is primarily interested in the economic impact of their assets & liabilities (versus the purely statutory impact). Obviously the company wants to ensure that its assets are sufficient to support its liabilities, but if you know you have $1,000 of liabilities due in 1 year, you don't need to set aside $1,000 of assets at the beginning of the year. If you think your assets will earn 10%, then you only need to set aside $1,000/1.1 = $909. This is an economic calculation.

But the calculation is different for taxes. The discount rate applied to this $1,000 for tax purposes is calculated according to the procedure below and probably won't be the same as the discount the company used in their economic calculation.

This is the final section from chapter 26 of Odomirok and there is a lot of overlap with Feldblum.Discount. Note however that Feldblum's reading was removed from the syllabus for the 2019.Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. Sometimes readings that are being removed are tested heavily; sometimes not at all. My suggestion is that you get a basic understanding of discounting facts and calculations, but if I were studying for the exam, I would give it a lower priority.

First, let's recall our earlier discussion of discounting as it related to the Fair Value of the Liabilities. That was discussed in Chapter 23 Purchase GAAP. Discounting was component #2 of the Fair Value of the Liabilities. As a reminder, component #1 was future cash flows and component #3 was the risk margin. These components were asked on an exam question in 2017, so make sure you know them.

Anyway, the first paragraph in the discounting section in chapter 26 has another bullet point list you have to memorize:

Question: what 3 components are required to calculate discounted loss reserves (for tax purposes)

undiscounted loss reserves
discount rate for the AY reserves to be discounted (use U.S. Treasury rate)
payment pattern

Actually, that list is pretty obvious. If you simply know how to calculate the discounted reserves, you could come up with those components. We'll cover the calculations below, but there are a few more dull facts you have to know.

2021.Spring: Information regarding the components of discounting has changed.

Question: where do you get these 3 components for discounting (for tax purposes)

undiscounted loss reserves:

- Schedule P, Part 1

- note that Part 1 is net of tabular discount, but gross of nontabular discount (means that any tabular discount must first be eliminated to get the true undiscounted reserves)

discount rate:

- NEW: based on the corporate bond yield curve (determined by the U.S. Treasury for each accident year)

- (no longer valid: 60-month moving average of Federal midterm rates for each AY)

payment pattern:

- use Schedule P, Part 1 from industry data (IRS does the calcs for you. Thanks IRS!)

- (no longer valid: using Schedule P, Part 1 from company data)

Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at (then you can pretty much just skim Feldblum.Discount in about 5 minutes. There is no real content, only a couple of old exam problems you might want to glance at. I didn't remove Feldblum completely because it overlaps so much with the tax chapter from Odomirok.)

Question: why is the payment pattern derived from Schedule P, Part 1 instead of Part 3 (for tax purposes)

Part 3 may be skewed because it doesn't include adjusting/other expenses
Part 3 is not audited (Part 1 is audited)
Part 1 requires no judgment for the IRS method

2021.Spring: Calculating the discount factor using company Schedule P data is no longer covered in the current version of Odomirok and should not be tested.

Ok, we're finally at the fun part where we calculate the discount factor from Schedule P, Part 1 data. On the exam, this calculation is usually part of a bigger problem but the other parts of the problem are covered elsewhere so we'll focus here on the discount factor calculation. Once you have the discount factor, say it's 80.2% or something, you just multiply it by the undiscounted reserves, say that was $1,000, to get the discounted reserves of $802. Anyway, here's an exam problem where you have to calculate the discount factor. Below that, Alice has provided her own solution to the discounting calculation and then a few random practice problems.

E (2016.Spring #18)

Details of discounting calculation from above exam problem:

Solution to 2016.Spring #18 (discount calc only) ← as of 2021.Spring, this calculation should no longer be tested

Random practice problems on calculating the discount factor:

4 discounting practice problems like 2016.Spring #18 ← as of 2021.Spring, this calculation should no longer be tested

mini BattleQuiz 4

A Few Old Exam Problems

Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in:

E (2015.Spring #17)

Part of the solution involves calculating RTI (or TBI).
The standard formula is: TBI = TBEP + InvInc - TBIL
You can calculate InvInc using the methods discussed above, but the trick involves getting the value for TBEP - TBIL
You are not given TBEP. Instead you are given U/W profit. Recall the U/W profit formula from Chapter 8.

U/W profit = EP - IL

so

EP = U/W profit + IL

also: TBEP = EP + 20% x chg(UEP)

and: TBIL = IL - chg(resv disc)

Putting this all together gives:

TBEP - TBIL

= [ U/W profit + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]

= U/W profit + 20% x chg(UEP) + chg(resv disc)

The other piece of RTI is InvInc which is given in the examiner's report as:

==> (taxable InvInc) + (realized gains)

Then the rest of the solution isn't too bad, but the part about AMTI or Alternative Minimum Taxable Income is now outdated, as is the part about the dividends received deduction. (See examiner's report.)

mini BattleQuiz 5 You must be logged in or this will not work.

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POP QUIZ ANSWERS

Pop Quiz A - Answer

Situation 1: potentially subject to BEAT because all conditions are satisfied

Situation 2: not subject to BEAT because average gross receipts over last 3 years < 500M

Situation 3: not subject to BEAT because base erosion payments < 3% of tax-deductible payments to foreign company

Situation 4: not subject to BEAT because foreign company to which tax-deductible payments were made is taxed as a U.S. taxpayer

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Difference between revisions of "Odomirok.26-Taxes"

Latest revision as of 21:18, 3 July 2024

Contents

Study Tips

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In Plain English!

Tax-Basis Income

Calculating the Tax-Basis Income (Version 1)

Calculating the Tax-Basis Income (Version 2)

BEAT or Base Erosion and Anti-Abuse TAX

Discounting Loss Reserves for Taxes

A Few Old Exam Problems

POP QUIZ ANSWERS

Pop Quiz A - Answer

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@@ Line 1: / Line 1: @@
-This chapter on taxation is all potentially outdated because of the new tax law passed by Congress effective for tax-year 2018. If I were on the exam committee, I would not ask any taxation questions until Odomirok has been updated. A new version of Odomirok (dated 2019) is being released for the 2019.Fall exam, and it seems pointless to ask detailed taxation questions from the 2014 version of Odomirok. ''(You should probably still study it though.)'' '''There are tons of formulas'''.
+'''Reading''':  Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 26''' - '''Taxation in the U.S.'''
-&nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
+'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''
+[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
+{| class='wikitable' style='background-color: navajowhite;
+|-
+|| '''BA Quick-Summary''': <span style="color: green;>'''Taxation in the U.S.'''</span>
+* Chapter 26 discusses taxation for insurance companies in the U.S., emphasizing the '''impact of federal taxes on insurance pricing''', company valuation, and capital models. The chapter explains how taxable income is derived from statutory accounts, including the adjustment of loss reserves for discounting, and reviews the calculation of tax basis earned premiums and incurred losses.
+* The discussion also highlights significant changes from the '''Tax Cuts and Jobs Act of 2017''', such as the reduction in the corporate tax rate, updated proration rules, and the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). The chapter concludes with a discussion on discounting loss reserves for taxes and the transitional adjustments required under the new tax law.
+|}
+==Study Tips==
+The new version of Odomirok from 2019 incorporates the new tax law passed by Congress effective for tax-year 2018. This represents a significant change from the prior version.
+This chapter on taxes is one of the easier chapters. There was a big change for 2021.Spring that made one of the difficult calculation problems much simpler. ''(The old version required you to calculate the tax implication of dividends which was a messy calculation.)''
+Under the Tax Cut and Jobs Act of 2017 (TCJA) there is a '''new calculation''' called the BEAT (Base Erosion and Anti-Abuse Tax) but it's pretty easy. It has to do with U.S. companies that make tax-deductible payments to foreign companies as a way to reduce their U.S. taxes.
+{| class='wikitable' style='background-color: yellow;"
+|-
+|| Altogether, there were 4 important changes for '''2021-Spring''' due to the TCJA (Tax Cut and Jobs Act of 2017):
+|}
+* <u>decrease</u> in the corporate tax rate
+* <u>cannot</u> use company-specific data to determine payment patterns for discounting
+* <u>change</u> how the interest rate is determined
+* <u>BEAT</u> calculation (Base Erosion and Anti-Abuse Tax) <span style="color: red;">&nbsp; &larr; ''this is probably the most testable of the new information''</span>
-==Study Tip==
+{| class='wikitable' style='background-color: yellow;"
+|-
+|| For changes in the discounting procedure, click ''[[Odomirok.26-Taxes#Discounting_Loss_Reserves_for_Taxes | Discounting Loss Reserves for Taxes]]'' and look for the yellow boxes.
+|}
-The ''[[Feldblum.Discount]]'' reading covers the same material as the discounting section of chapter 26 of Odomirok. There are only 2 exam problems from Feldblum and you can pretty much answer them using what you'll learn here. In other words, as long as you can do those problems, I don't think you need to spend much time on that particular Feldblum reading. ''It is being removed from the syllabus for the 2019.Fall sitting anyway.''
+'''Estimated study time''': 1 day ''(not including subsequent review)''
 ==BattleTable==
@@ Line 14: / Line 46: @@
 * <span style="color: blue;">'''SAP income'''</span> calculation, both pre-tax and post-tax
 * tax basis income, tax rates, discounting loss reserves for tax purposes
+<span style="background-color: orange; border: 2px solid black; margin 100px; font-size: 16px;">&nbsp;'''Outdated'''&nbsp;</span> &nbsp;&rarr; ''questions highlighted in <u>orange</u> are at least partially outdated because they refer to <u>AMIT</u> (Alternative Minimum Income Tax)''.
 : {| class="wikitable" style="width: 1000px;"
@@ Line 21: / Line 55: @@
 |-
 | [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2018.Spring #14)'''</span>
-|| '''tax basis income''': <br> - calculate
+|| '''tax basis income''': <br> - calculate <span style="color: red;">'''<sup>5</sup>'''</span>
 | style="background-color: lightgrey;" |
 | style="background-color: lightgrey;" |
@@ Line 28: / Line 62: @@
 |-
 | [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2017.Fall #21)'''</span>
-|| <span style="color: green;">'''income tax:'''</span> <br> - calculate
+| style='background-color: orange;' | <span style="color: green;">'''income tax:'''</span> <br> - calculate
 | style="background-color: lightgrey;" |
 | style="background-color: lightgrey;" |
@@ Line 35: / Line 69: @@
 |-
 | [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(19).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2016.Fall #19)'''</span>
-|| '''tax rate''': <br> - various income types
+|| '''tax rate''': <br> - various income types <span style="color: red;">'''<sup>3</sup>'''</span>
 || '''taxable income''': <br> - from SAP income
-|| <span style="color: green;">'''income tax:'''</span> <br> - calculate
+| style='background-color: orange;' | <span style="color: green;">'''income tax:'''</span> <br> - calculate
 | style="background-color: lightgrey;" |
 |-
 | [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2016.Spring #18)'''</span>
-|| '''discounting reserves''': <br> - for tax purposes
+| style='background-color: orange;' | '''discounting reserves''': <br> - for tax purposes <span style="color: red;">'''<sup>2</sup>'''</span>
 || <span style="color: blue;">'''SAP income:'''</span> <br> - calculate pre-tax value
 || '''federal tax''': <br> - identify missing info
@@ Line 49: / Line 83: @@
 |-
 | [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2015.Spring #17)'''</span>
-|| <span style="color: green;">'''income tax:'''</span> <br> - calculate <span style="color: red;">'''<sup>1</sup>'''</span>
+| style='background-color: orange;' | <span style="color: green;">'''income tax:'''</span> <br> - calculate <span style="color: red;">'''<sup>1</sup>'''</span>
 | style="background-color: lightgrey;" |
 | style="background-color: lightgrey;" |
@@ Line 56: / Line 90: @@
 |-
 | [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(18).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2013.Fall #18)'''</span>
-|| <span style="color: blue;">'''SAP income:'''</span> <br> - calculate
+|| <span style="color: blue;">'''SAP income:'''</span> <br> - calculate <span style="color: red;">'''<sup>4</sup>'''</span>
 || '''bond/stock allocation''': <br> - considerations
 | style="background-color: lightgrey;" |
@@ Line 63: / Line 97: @@
 |}
-: <span style="color: red;">'''<sup>1</sup>'''</span> There's a little trick in this problem that's glossed over in the examiner's report. See ''[[Odomirok.26-Taxes#A_Few_Old_Exam_Problems | A Few Old Exam Problems]]'' at the bottom of this article for an explanation.
+: <span style="color: red;">'''<sup>1</sup>'''</span> There's a little trick in this problem that's glossed over in the examiner's report. See ''[[Odomirok.26-Taxes#A_Few_Old_Exam_Problems | A Few Old Exam Problems]]'' at the bottom of this article for an explanation. (Parts of this problem are outdated, specifically the AMTI calculation and the 'dividends received' deduction. The proration provision has also changed from 15% to 25%.)
+: <span style="color: red;">'''<sup>2</sup>'''</span> Part (a) of this problem is outdated because under the TCJA (Tax Cut and Jobs Act of 2017) it's no longer permissible for a company to use it's own Schedule P data to derive a payment pattern for discounting.
+: <span style="color: red;">'''<sup>3</sup>'''</span> This problem is partly outdated because the corporate tax rate changed from 35% to 21%, but you can still do parts (ii), (iii), and (iv) based on the new version of the source text. Part (i) on the 'dividends received' deduction is definitely outdated as this is no longer discussed on the source text.
+: <span style="color: red;">'''<sup>4</sup>'''</span> Click for an ''[https://www.battleacts6us.ca/Excel/2013-Fall-Q18-(updated)_v01.xlsx updated solution to 2013-Fall-Q18]''
+: <span style="color: red;">'''<sup>5</sup>'''</span> Click for ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/581/2018s-14#latest comments regarding discounting in this problem]''
-[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
+[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all<span style="font-size: 20px; background-color: lightgreen; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''Full BattleQuiz]'''</span>
 &nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
@@ Line 73: / Line 112: @@
 ===Tax-Basis Income===
-When I was first writing this article, one of our beta-testers wrote to me asking when I'd be finished the material on taxes because she found it very confusing. I felt her pain. It isn't that Odomirok is badly written, per se, but they make you sift through all kinds of extraneous information to get to what you really need to know. I wish they would just clearly lay out 2 or 3 different types of problems with the formula alongside. Unfortunately they don't do that.
+Let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the <u>tax-basis income</u>. Don't try to solve it for now - Alice's solution is presented in the next section.
-Anyway, let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the <u>tax-basis income</u>. Don't try to solve it for now - Alice's solution is presented in the next section.
 : [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2018.Spring #14)'''</span>
@@ Line 97: / Line 134: @@
 |}
-:* in SAP, acquisition costs <u>not deferred</u> so the insurer would incur a loss
+:* in SAP, acquisition costs are <u>not deferred</u> so the insurer would incur a loss
 :* the insurer would then be entitled to a future tax <u>refund</u> on this loss
 :* <span style="color: red;">'''but the IRS wanted to simplify the process:'''</span> instead of a refund, the IRS <u>reduces</u> UEP liability by 20% for all insurers
 :: ''(assumes the acquisition cost ratio is 20% for all lines for all insurers)''
-[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
+[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 1]'''</span>
-===Calculating the Tax-Basis Income (Easier Version)===
+===Calculating the Tax-Basis Income (Version 1)===
+Note that the formula provided below for TBI (Tax-Basis Income) is based on past exam problems and does not include quantities that were not provided in the exam problems. In particular, the quantity TBI may include terms such as U/W expense and policyholder dividends but these are not generally provided in typical exam problems on calculating TBI. There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/52/2015-spring-17#latest brief forum post]'' mentioning this.
 Let
@@ Line 111: / Line 150: @@
 : '''TBEP''' = Tax-Basis EP
 : '''InvInc''' = Investment Income
+:: ''(Strictly speaking, InvInc refers to the <u>taxable</u> portion of InvInc but for this version of the problem, where it's just the compound interest earned on EP, we assume <u>all</u> of this InvInc is taxable.)''
 : '''TBIL''' = Tax-Basis Incurred Loss
@@ Line 121: / Line 161: @@
 where the right-hand-side terms TBEP and TBIL can each be calculated <u>two different ways</u>:
+Let
+: '''PL''' = Paid Loss ''(during year)''
+: '''IL''' = Incurred Loss ''(during year)''
+: '''L<sup>D</sup>''' = Loss reserves after Discounting
+: '''D''' = Discount amount ''(= difference between undiscounted and discounted loss reserves)''
+Then
 :{| class='wikitable'
@@ Line 129: / Line 178: @@
 :{| class='wikitable'
 |-
-| &nbsp;&nbsp; '''TBIL''' &nbsp;&nbsp; <span style="color: blue;">'''='''</span> &nbsp;&nbsp; PL &nbsp;&nbsp; + &nbsp;&nbsp; chg(L<sup>D</sup>) &nbsp;&nbsp; <span style="color: blue;">'''='''</span>  &nbsp;&nbsp; IL &nbsp;&nbsp; <span style="color: red;">&ndash;</span> &nbsp;&nbsp; chg(reserve discount)
+| &nbsp;&nbsp; '''TBIL''' &nbsp;&nbsp; <span style="color: blue;">'''='''</span> &nbsp;&nbsp; PL &nbsp;&nbsp; + &nbsp;&nbsp; chg(L<sup>D</sup>) &nbsp;&nbsp; <span style="color: blue;">'''='''</span>  &nbsp;&nbsp; IL &nbsp;&nbsp; <span style="color: red;">&ndash;</span> &nbsp;&nbsp; chg(D)
 |}
+: <span style="color: green;">''(shout-out to pb for finding a typo in the 2<sup>nd</sup> version of the TBIL formula!)</span>
 '''Side Note''':
@@ Line 140: / Line 191: @@
 '''Alice's solution to''' <span style="color: red;">'''(2018.Spring #14)'''</span>:
-: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14).pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Solution to 2018.Spring #14'''''</span>]
+: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14).pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Solution to 2018.Spring #14'''''</span>] &nbsp;&larr; ''see [https://www.battleacts6us.ca/vanillaforum6us/discussion/454/2nd-year-inv-inc this forum post] for an alternate way to compute investment income
 And here's a practice problem:
@@ Line 150: / Line 201: @@
 [https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 2]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
-===Calculating the Tax-Basis Income (Harder Version)===
+===Calculating the Tax-Basis Income (Version 2)===
-We're going to build on the formulas from the previous section. The following exam problem is a harder version of the the tax problem. Take a quick look but don't try to solve it yet:
+We're going to build on the formulas from the previous section. The following exam problem used to be quite hard but because of a change in the Exam 6-US syllabus for 2021.Spring, it's now much easier. The reason it's easier is that the tax implication of '''dividend income''' is <u>no longer covered</u> in the Odomirok source text. Take a quick look at the problem the way it was in 2017 but you can ignore the details on dividend income both in the statement of the problem and in the solution.
 : [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2017.Fall #21)'''</span>
@@ Line 158: / Line 209: @@
 There were 2 things that made this problem harder:
-* the calculation of '''InvInc''' required you to know details of how certain bonds and stockholder dividends are taxed
+* the calculation of '''InvInc''' ''(Investment Income)'' required you to know details of how certain bonds are taxed
+: &nbsp;&nbsp; &rarr; remember that in these problems, InvInc refers only to the <u>taxable</u> portion of investment income
 * you were asked to calculate '''IT''' ''(Income tax)'' which is an extra step ''(the previous problem asked only for '''TBI''', the Tax-Basis <u>Income</u>, not the actual tax)''
-We'll examine these 2 items below, but first note the basic corporate tax rate of 35%. This percentage is applied directly to '''TBI''' ''(if TBI = $100 then IT = $35)'' but there are many, many adjustments. Most of these are not discussed in Odomirok.
+We'll examine these 2 items below, but first note the basic corporate tax rate of 21%. This percentage is applied directly to '''TBI''' ''(if TBI = $100 then IT = $21)'' but there are many, many adjustments. Most of these are not discussed in Odomirok.
+First, you should know that in this context, the term <u>proration</u> means to <u>increase</u> taxable income by <u>reducing</u> the deduction for losses incurred by a percentage of certain types of income.
 :{| class='wikitable'
 |-
-| '''Question''': describe the tax adjustments to bonds and stockholder dividends
+| '''Question''': describe the tax adjustments to bonds
 |}
 :* proration of tax-exempt municipal bonds
-:: &nbsp;&nbsp; ==> add 15% of interest income to TBI
+:: &nbsp;&nbsp; ==> add 25% of interest income to TBI
-:* proration of DRDs ''(Dividends-Received-Deductions)'' for stockholder dividends ''(let D = Dividend Income)''
+:: &nbsp;&nbsp; ==> <u>taxable amounts</u> are then multiplied by the standard corporate tax rate of 21% to obtain the <u>actual tax</u>.
-:: &nbsp;&nbsp; ==> depends on the relationship between the corporation <u>paying</u> the dividend & the corporation being <u>taxed</u>
-:: &nbsp;&nbsp; ==> a certain portion ''(either 20% or 30%)'' is fully taxable, then the remainder '(80% or 70%) has 15% of its value taxed
+For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. '''Side note''': The solution involves something called RIT ''(Regular Income Tax)'' which is the tax obtained by multiplying TBI ''(Tax-Basis Income)'' by the standard corporate tax rate of 21%. It is <u>no longer required</u> to calculate AMTI ''(Alternative Minimum Taxable Income)'' or AMIT ''(Alternative Minimum Income Tax)''
+'''Alice's solution to''' <span style="color: red;">'''(2017.Fall #21)'''</span>:
+: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_2021.Spring.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Solution to 2017.Fall #21 (updated for 2021.Spring)'''''</span>]
-:::{|class='wikitable' style='text-align: center;'
+And here are 2 practice problems.
-|-
+: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_practice_01ab_2021.Spring_v2.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''2 practice problems like 2017.Fall #21 (2021.Spring version)'''''</span>]
-! ownership of <u>taxed</u> corporation !! <u>paying</u> corporation is... !! % of D subject to tax !! TBI is adjusted by
-|-
+===BEAT or Base Erosion and Anti-Abuse TAX===
-| > 80%           || controlled   ||  0% || <span style="color: green;">no adjustment</span> ''(dividends are 100% exempt)''
-|-
+BEAT is a <u>new</u> tax under the Tax Cuts and Jobs Act of 2017.
-| 20% &rarr; 80% || affiliated   || 20% || [ 20% + (80% x 15%) ] x D = <span style="color: red;">32% x D</span>
+:{| class='wikitable'
 |-
-| < 20%          || unaffiliated || 30% || [ 30% + (70% x 15%) ] x D = <span style="color: red;">40.5% x D</span>
+|| '''Question''': what is the <u>purpose</u> of BEAT
 |}
-:* '''Example:''' Suppose D = $1,000 ''(D = Dividend Income)''
+:* BEAT <u>limits</u> the ability of multinational corporations to <u>shift profits</u> from the United States
+:: ''(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)''
-::* dividend-paying corporation is '''controlled''':
+:{| class='wikitable'
-::: &nbsp;&nbsp; ==> adjust TBI by $<u>0</u>
+|-
+|| '''Question''': how does BEAT work
+|}
-::* dividend-paying corporation is '''affiliated''':
+:# the corporation calculates its regular tax ''(as a percentage of taxable income, currently 21%)''
-::: &nbsp;&nbsp; ==> adjust TBI by $<u>320</u>
+:# the corporation calculates its alternative tax ''(as a percentage of gross income, currently 10%)''
+:# if alternative tax > regular tax then the corporation must pay the difference ''(BEAT = this difference)''
-::* dividend-paying corporation is '''unaffiliated''':
+Another way of describing BEAT is that it is a minimum tax add-on. Here's an example to illustrate the concept:
-::: &nbsp;&nbsp; ==> adjust TBI by $<u>405</u>
-:: These <u>taxable amounts</u> are then multiplied by the standard corporate tax rate of 35% to obtain the <u>actual tax</u>.
+* ''Suppose for the years 2020-2022, a US corporation has $600 million of gross taxable income per year. For tax year 2022, the corporation also pays $400 million in tax-deductible royalties to a foreign affiliate. The corporation’s regular tax liability is ($600 - $400) x 21% = $42 million. Its alternative tax is $600 x 10% = $60 million. The corporation must then pay $60 million to the United States (regular tax of $42 million plus the BEAT of $18 million.)''
-For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. '''Side note''': The solution involves something called RIT ''(Regular Taxable Income)'' which is the tax obtained by multiplying TBI ''(Tax-Basis Income)'' by the standard corporate tax rate of 35%. But big corporations are crafty and their accountants often use loopholes to reduce the tax owed. For this reason, the IRS has come up with something called AMIT ''(Alternative Minimum Income Tax)''. If AMIT is ''greater'' than RIT, then the company must pay the AMIT amount.
+Not all U.S. corporations are subject to BEAT however. The following conditions must be satisfied for a corporation to be potentially subject to BEAT:
-'''Alice's solution to''' <span style="color: red;">'''(2017.Fall #21)'''</span>:
+* insurer is part of a U.S. group of companies with average gross receipts in the past three years &ge; $500M
+* insurer makes base erosion payments &ge; 3% of the total deductions taken by the U.S. group on its current tax return.
-: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21).pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Solution to 2017.Fall #21'''''</span>]
+Again, BEAT is a type of minimum tax that is <u>added</u> to the regular tax liability. Note however that if the '''foreign company''' to which tax-deductible payments have been made has elected to be '''taxed as a U.S. taxpayer''' then the U.S. corporation or insurer is '''not''' subject to BEAT. That seems like a little trick they might throw at you on the exam. So pay attention! ''(Maybe they'll give you information on 2 companies that made foreign payments but where only 1 of them is subject to BEAT because the other doesn't satisfy the conditions described above.)''
-And here are 3 practice problems. They are <u>all the same</u> <span style="color: red;">'''except'''</span> for the ownership percentages. This illustrates the interplay between the ''ownership percentage'' and the ''AMIT''. See below for a comparison table.
+: {| class="wikitable"
+|-
+| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A! &nbsp;&nbsp; :-o'''
+|}
-: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_practice_01abc.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''3 practice problems like 2017.Fall #21'''''</span>]
+: &nbsp;&nbsp; In which of the following situations would the insurer be potentially subject to BEAT:
-Here's an observation based on these 3 practice problems that could be part of a great exam question. Notice how the overall tax liability drops as the ownership percentage increases. Note also that were it not for the AMIT, this insurer's tax bill would be even lower, <u>much</u> lower. <span style="color: red;">'''That's why the AMIT exists!'''</span> ''(numbers are rounded)''
+:: '''Situation 1''':
+::* average gross receipts in past 3 years is $550 million
+::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
+::* base erosion payments were to a foreign company that <u>is not</u> taxed as a U.S. taxpayer
-::{| class='wikitable' style='text-align: center;'
+:: '''Situation 2''':
+::* average gross receipts in past 3 years is $400 million
+::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
+::* base erosion payments were to a foreign company that <u>is not</u> taxed as a U.S. taxpayer
-|-
+:: '''Situation 3''':
-! ownership percentage !! RIT !! AMIT !! final tax
+::* average gross receipts in past 3 years is $550 million
+::* insurer makes base erosion payments of 2% of the total deductions taken by the U.S. group on its current tax return
+::* base erosion payments were to a foreign company that <u>is not</u> taxed as a U.S. taxpayer
-|-
+:: '''Situation 4''':
-| 10% || <u>2,048</u> || 2,024 || 2,048 <span style="color: red;">&larr; RIT</span>
+::* average gross receipts in past 3 years is $550 million
+::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
+::* base erosion payments were to a foreign company that <u>is</u> taxed as a U.S. taxpayer
-|-
+: &nbsp;&nbsp; <span style="background-color: lightblue; border-radius: 5px;"> ''[[Odomirok.26-Taxes#Pop_Quiz_A_-_Answer |Click for Answer]]''&nbsp;</span>
-| 55% || 1,791 || <u>1,988</u> || 1,988 <span style="color: red;">&larr; AMIT</span>
+Below is the example from the text. It's very easy. ''(And below that are a couple of practice problems.)''
+{| class='wikitable'
 |-
-| 90% || 824 || <u>1,850</u> || 1,850  <span style="color: red;">&larr; AMIT</span>
+|| Here's the problem...
 |}
-Now, here's the first of 2 great exam questions related to this idea:
+: [[File: Odomirok.Ch26_(Excel)_BEAT_example_problem.png]]
-:{| class='wikitable'
+{| class='wikitable'
 |-
-| '''Alice's Great Question #1''': for <span style="color: red;">'''(2017.Fall #21)'''</span>, recalculate the tax given ownership percentages of 10% and 90%, and complete the table below
+|| Here's the solution...
 |}
-The results for 50% ownership were from the original exam problem. I will give a permanent shout-out to the first person to to email the correct answers for 10% and 90%. (email: info@battleacts.ca)
+: [[File: Odomirok.Ch26_(Excel)_BEAT_example_solution.png]]
-::{| class='wikitable' style='text-align: center;'
+Here are a couple of really easy practice problems.
-|-
+: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(text)_BEAT_practice_01_02.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''2 BEAT problems (taxes)'''''</span>]
-! ownership percentage !! RIT !! AMIT !! final tax
-|-
+[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span>
-| 10% ||  ||  ||  <span style="color: red;">&larr; ?</span>
-|-
+===Discounting Loss Reserves for Taxes===
-| 50% || 100.73 || <u>104.99</u> || 104.99 <span style="color: red;">&larr; AMIT</span>
-|-
-| 90% ||  ||  ||   <span style="color: red;">&larr; ?</span>
-|}
-And here's the second great question:
-:{| class='wikitable'
-|-
-| '''Alice's Great Question #2''': discuss the tax implications for the above insurer given different levels of ownership percentages
-|}
-:* the insurer's tax liability is <u>inversely related</u> to the ownership percentage ''(if ownership goes up, tax goes down, although note there are only 3 different ownership levels)''
-:* this inverse relationship may not always be true ''(although it <u>was</u> true for the 2 examples above)''
-If you own the company then it kind of sucks to get stuck with the AMIT, but there is a silver lining.
+Let's start with a very important distinction regarding discounting:
 :{| class='wikitable'
 |-
-| '''Question''': what happens when AMIT ''is greater than'' RIT for a particular year
+| '''Question''': explain the <u>difference</u> between a '''company's''' own estimate of discounted reserves versus the estimate derived for '''tax purposes'''
 |}
-:* the difference ''(AMIT &ndash; RIT)'' can be <u>carried forward</u> indefinitely
+:* Even though reserves are reported at their nominal value on the balance sheet, every company is primarily interested in the '''economic impact''' of their assets & liabilities ''(versus the purely statutory impact)''. Obviously the company wants to ensure that its assets are sufficient to support its liabilities, but if you know you have $1,000 of liabilities due in 1 year, you '''don't''' need to set aside $1,000 of assets at the beginning of the year. If you think your assets will earn 10%, then you only need to set aside $1,000/1.1 = $909. This is an '''economic calculation'''.
-:* this means that if in a subsequent year, AMIT ''is less than'' RIT ''(so that the company pays taxes of  RIT)'' they can <u>reduce their taxes</u> using amounts carried forward from previous years
-:This is a pretty easy concept that comes up in part (c) of:
-:: [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(19).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2016.Fall #19)'''</span>
-: Give it a try. You'll figure it out.
-[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 3]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
-===Discounting Loss Reserves for Taxes===
+:* But the calculation is <u>different</u> for taxes. The discount rate applied to this $1,000 for '''tax purposes''' is calculated according to the procedure below and probably won't be the same as the discount the company used in their '''economic''' calculation.
-This is the final section from chapter 26 of Odomirok and there is a lot of overlap with [[Feldblum.Discounting]]. Note however that Feldblum's reading is being removed from the syllabus for the 2019.Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. Sometimes readings that are being removed are tested heavily; sometimes not at all. My suggestion is that you get a basic understanding of discounting facts and calculations, but if I were studying for the exam, I would give it a lower priority.
+This is the final section from chapter 26 of Odomirok and there is a lot of overlap with ''[[Feldblum.Discount]]''. Note however that Feldblum's reading was removed from the syllabus for the 2019.Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. Sometimes readings that are being removed are tested heavily; sometimes not at all. My suggestion is that you get a basic understanding of discounting facts and calculations, but if I were studying for the exam, I would give it a lower priority.
 First, let's recall our earlier discussion of discounting as it related to the ''Fair Value of the Liabilities''. That was discussed in ''[[Odomirok.22-23-GAAP | Chapter 23 Purchase GAAP]]''. Discounting was component #2 of the ''Fair Value of the Liabilities''. As a reminder, component #1 was ''future cash flows'' and component #3 was the ''risk margin''. These components were asked on an exam question in 2017, so make sure you know them.
-Anyway, the first paragraph in the discounting section in chapter 26 has another dumb bullet point list you have to memorize:
+Anyway, the first paragraph in the discounting section in chapter 26 has another bullet point list you have to <u>memorize</u>:
 :{| class='wikitable'
 |-
-| '''Question''': <u>what</u> 3 components are required to calculate discounted loss reserves
+| '''Question''': <u>what</u> 3 components are required to calculate discounted loss reserves ''(for tax purposes)''
 |}
 :* undiscounted loss reserves
-:* discount rate for that AY reserves to be discounted ''(use U.S. Treasury rate)''
+:* discount rate for the AY reserves to be discounted ''(use U.S. Treasury rate)''
 :* payment pattern
 Actually, that list is pretty obvious. If you simply know how to calculate the discounted reserves, you could come up with those components. We'll cover the calculations below, but there are a few more dull facts you have to know.
+<span id="NewTaxInfo"></span>
+{| class='wikitable' style='background-color: yellow;>
+|-
+|| '''2021.Spring''': Information regarding the components of discounting has <u>changed</u>.
+|}
 :{| class='wikitable'
 |-
-| '''Question''': <u>where</u> do you get these 3 components for discounting
+| '''Question''': <u>where</u> do you get these 3 components for discounting  ''(for tax purposes)''
 |}
@@ Line 312: / Line 363: @@
 :: &nbsp;&nbsp; - note that Part 1 is <u>net</u> of tabular discount, but <u>gross</u> of nontabular discount ''(means that any tabular discount must first be eliminated to get the true undiscounted reserves)''
-:* discount rate:
+:* discount rate: &nbsp;
-:: &nbsp;&nbsp; - computed as a 60-month moving average of Federal midterm rates ''(for each AY)''
+:: &nbsp;&nbsp; - '''NEW''': based on the corporate bond yield curve ''(determined by the U.S. Treasury for each accident year)''
+:: &nbsp;&nbsp; - ''('''no longer valid''': 60-month moving average of Federal midterm rates for each AY)''
+:* payment pattern:
+:: &nbsp;&nbsp; - use Schedule P, Part 1 from '''industry data''' ''(IRS does the calcs for you. Thanks IRS!)''
+:: &nbsp;&nbsp; - ''('''no longer valid:''' using Schedule P, Part 1 from company data)''
-:* payment pattern: CHOICE!
-:: &nbsp;&nbsp; - option 1: use Schedule P, Part 1 from '''industry data''' ''(IRS does the calcs for you. Thanks IRS!)''
-:: &nbsp;&nbsp; - option 2: use Schedule P, Part 1 from '''company data''' ''(there's a 2-year lag so the company's Annual Statement from 2018 would be used for AY 2020)''
-:: &nbsp;&nbsp; - ''(For <u>option 1</u>, you have to keep the pattern for 5 years whereas for <u>option 2</u>, you have to update every year)''
-Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at ''(then you can pretty much just skim [[Feldblum.Discounting]] in about 5 minutes.)''
+Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at ''(then you can pretty much just skim [[Feldblum.Discount]] in about 5 minutes. There is no real content, only a couple of old exam problems you might want to glance at. I didn't remove Feldblum completely because it overlaps so much with the tax chapter from Odomirok.)''
 :{| class='wikitable'
 |-
-| '''Question''': <u>why</u> is the payment pattern derived from Schedule P, Part 1 ''instead of'' Part 3
+| '''Question''': <u>why</u> is the payment pattern derived from Schedule P, Part 1 ''instead of'' Part 3 ''(for tax purposes)''
 |}
@@ Line 330: / Line 382: @@
 :* Part 3 is '''not audited''' ''(Part 1 <u>is</u> audited)''
 :* Part 1 requires '''no judgment''' for the IRS method
+{| class='wikitable' style='background-color: yellow;>
+|-
+|| '''2021.Spring''': Calculating the discount factor using company Schedule P data is <u>no longer covered</u> in the current version of Odomirok and <u>should not be tested</u>.
+|}
 Ok, we're finally at the fun part where we calculate the discount factor from Schedule P, Part 1 data. On the exam, this calculation is usually part of a bigger problem but the other parts of the problem are covered elsewhere so we'll focus here on the discount factor calculation. Once you have the discount factor, say it's 80.2% or something, you just multiply it by the undiscounted reserves, say that was $1,000, to get the discounted reserves of $802. Anyway, here's an exam problem where you have to calculate the discount factor. Below that, Alice has provided her own solution to the discounting calculation and then a few random practice problems.
@@ Line 337: / Line 394: @@
 Details of discounting calculation from above exam problem:
-: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Solution to 2016.Spring #18 (discount calc only)'''''</span>]
+: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''Solution to 2016.Spring #18 (discount calc only)'''''</span>] &nbsp; <span style="color: red;">&larr; ''as of 2021.Spring, this calculation should no longer be tested''</span>
 Random practice problems on calculating the discount factor:
-: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting_practice_01_04.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''4 discounting practice problems like 2016.Spring #18'''''</span>]
+: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting_practice_01_04.pdf <span style="color: white; font-size: 12px; background-color: green; border: solid; border-width: 2px; border-radius: 10px; border-color: green; padding: 1px 3px 1px 3px; margin: 0px;">'''''4 discounting practice problems like 2016.Spring #18'''''</span>] &nbsp; <span style="color: red;">&larr; ''as of 2021.Spring, this calculation should no longer be tested''</span>
-[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 4]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
+[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 4]'''</span>
 ===A Few Old Exam Problems===
-Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in <span style="color: red;">'''(2015.Spring #17)'''</span>:
+Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in:
+: [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf <span style='font-size: 12px; background-color: yellow; border: solid; border-width: 1px; border-radius: 5px; padding: 2px 5px 2px 5px; margin: 5px;'>E</span>] <span style="color: red;">'''(2015.Spring #17)'''</span>
 * Part of the solution involves calculating RTI (or TBI).
@@ Line 354: / Line 413: @@
 * You are <u>not given</u> TBEP. Instead you are given '''U/W profit'''. Recall the U/W profit formula from ''[[Odomirok.8-9-IS#Statutory_Income_.282018.Spring_.2310a.29 | Chapter 8]]''.
-:: U/W profit
+:: U/W profit = EP - IL
-::: = EP - IL
+::: so
-::: = U/W profit + IL
+:: EP = U/W profit + IL
 : '''also''': TBEP = EP + 20% x chg(UEP)
@@ Line 365: / Line 424: @@
 :: TBEP - TBIL
-::: = [ EP + + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]
+::: = [ U/W profit + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]
-::: = EP + 20% x chg(UEP) + chg(resv disc)
+::: = U/W profit + 20% x chg(UEP) + chg(resv disc)
+The other piece of RTI is InvInc which is given in the examiner's report as:
+: '''==>''' (taxable InvInc) + (realized gains)
-You can figure out the rest using the examiner's report.
+Then the rest of the solution isn't too bad, but the part about <u>AMTI</u> or Alternative Minimum Taxable Income is now <u>outdated</u>, as is the part about the <u>dividends received</u> deduction. ''(See examiner's report.)''
 [https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5<span style="font-size: 20px; background-color: aqua; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 10px;">'''mini BattleQuiz 5]'''</span> <span style="color: red;">'''You must be <u>logged in</u> or this will not work.'''</span>
@@ Line 375: / Line 438: @@
 &nbsp;&nbsp;[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes<span style="font-size: 12px; background-color: lightgrey; border: solid; border-width: 1px; border-radius: 10px; padding: 2px 10px 2px 10px; margin: 0px;">'''Forum'''</span>]
+==POP QUIZ ANSWERS==
+===Pop Quiz A - Answer===
+: '''Situation 1''': potentially subject to BEAT because all conditions are satisfied
+: '''Situation 2''': not subject to BEAT because average gross receipts over last 3 years &lt; 500M
+: '''Situation 3''': not subject to BEAT because base erosion payments < 3% of tax-deductible payments to foreign company
+: '''Situation 4''': not subject to BEAT because foreign company to which tax-deductible payments were made <u>is</u> taxed as a U.S. taxpayer
+* <html><a href="javascript:history.go(-1)">Go back</a></html>