What Is a Statutory Income Tax Provision?

What Is a Statutory Income Tax Provision?

May 2, 2024

Insurance companies report their financial statements on a statutory basis. A small but important item of the financial statements is the income tax provision. Statutory accounting has specific guidance for calculating and reporting the tax provision. The tax provision reflects a company’s anticipated tax expense or benefit and its future asset or liability based on its current financial statements and tax laws.

HOW IS AN INCOME TAX PROVISION CALCULATED?

The income tax provision involves calculating the insurance company's taxable income and applying the applicable tax rate to determine the amount of taxes owed to the government. However, it's important to note that the provision is not the actual amount of taxes paid; rather, it represents an estimate of the tax expense that will eventually be settled with tax authorities.

WHY IS AN INCOME TAX PROVISION NECESSARY?

An income tax provision is necessary and essential for ensuring financial transparency, compliance with accounting standards and tax laws, managing tax risks, and maintaining stakeholder trust.

THE TECHNICAL SIDE OF A TAX PROVISION

From a high level, the tax provision gives you a picture of your tax position at the end of the year.  On the technical side, the annual statement has Footnote #9 that is required, and the tax provision makes up that footnote. Your accountant preparing the tax provision would provide a workpaper that has the content for that footnote. This would also include a journal entry to make to adjust certain tax accounts and all the worksheets that show how your accountant got there.

The income tax provision is two-fold: your current income tax expense (your expected tax for the year-end based on your taxable income and any other adjustments that run through current tax expense), and deferred taxes. Regarding deferred taxes, the provision includes a detailed list of the company’s deferred tax assets (DTAs) and deferred tax liabilities (DTLs). Then it summarizes that up into one net number. The net number gets reported on the annual statement on either page 2 (if a net DTA) or page 3 (if a net DTL). The change in this deferred tax asset or liability makes up your deferred tax expense on the income statement.

If we step back, deferred taxes arise from temporary book-tax differences. A temporary book-tax difference that is favorable creates a future tax benefit, meaning in the future you will either have a tax deduction or there will be income on the books that is not taxable. This creates a DTA. A temporary book-tax difference that is unfavorable creates a future tax liability because in the future you either must include an item in taxable income that is not on the books or there is a book expense you cannot take for taxes. Depreciation is always a good example – usually for taxes you get to depreciate a fixed asset more quickly than for financial purposes. If you depreciate 100% of a new asset in Year 1 for taxes, but it is depreciated over 5 years on your books, there will be an expense on your books for Years 2-5 that cannot be deducted for taxes (because the full amount was deducted in Year 1). This would create a DTL.

CONCLUSION

The tax provision helps you see your current taxes and helps you see what’s coming and how to plan for it. It can help you know what strategies to use to ensure that you can utilize your deferred tax assets or help you prepare for your deferred tax liabilities.

The experienced tax professionals at Larson & Company are happy to assist you with your tax provision, tax return, or any additional questions you may have.  Please contact us for further guidance.