ASC 740-10-25-30 discusses the concept of basis differences that do not result in a tax effect when the related assets or liabilities are recovered or settled. Events or transactions that do not have tax consequences when a basis difference reverses do not give rise to temporary differences. These situations are typically referred to as “permanent differences.” Below are some common examples of permanent differences in the US federal income tax jurisdiction:
  • Interest income on tax-exempt securities
  • Fines and penalties paid to governments for violation of the law
  • Non-deductible portion of business meals and entertainment expenses
  • Premiums paid (and subsequent proceeds) on life insurance policies for key management employees when held until death of the insured
  • Compensation to covered employees in excess of $1 million annually (see TX 17.8)
  • Foreign-derived intangible income (FDII)
  • Non tax-deductible goodwill amortization or impairment (see TX 10)
  • Dividends-received deduction based on income from businesses in which a reporting entity has ownership
  • Base erosion and anti-abuse tax (BEAT)

3.4.1 Excess cash surrender value of life insurance

The excess of the cash surrender value of a life insurance policy (the book basis) held by an employer over the premiums paid (the tax basis) is a basis difference. When a reporting entity owns a life insurance policy, management typically intends to maintain the policy until the death of the insured, in which case the proceeds of the policy would not be taxable. According to ASC 740-10-25-30, the excess of the book basis over the tax basis “is a temporary difference if the cash surrender value is expected to be recovered by surrendering the policy but is not a temporary difference if the asset is expected to be recovered without tax consequence upon the death of the insured.”
Implicit in this guidance is the notion of an employer’s control over the decision to surrender or hold the policy until the death of the employee. If an employer does not expect to keep an insurance policy in force until the death of the insured, it must record a deferred tax liability for the excess book-over-tax basis because the basis difference in this circumstance will be taxable when it reverses. If a reporting entity previously believed it would keep a policy in force until the insured’s death but no longer believes that it will do so, then it must recognize a deferred tax liability on the basis difference even if it expects to keep the policy in force for a number of years. A reporting entity’s ability to control the decision about holding a policy until the death of the insured may be affected by the existence of any employee cancellation option.
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