Private Firm Responses to Accounting for Income Tax Uncertainty: Evidence from Loss Accruals by U.S. Insurance Firms
55 Pages Posted: 6 Jun 2019 Last revised: 2 Apr 2020
Date Written: March 31, 2020
Relatively little prior evidence exists on the potential impact of increased guidance on income tax accounting uncertainty on tax planning by private firms. We provide the first evidence that private insurers decrease the use of loss accruals in tax planning in response to the adoption of the Statement of Statutory Accounting Principles (SSAP) 101, which mandates the recognition and measurement of tax contingencies for insurance companies. Using a difference-in-differences design, we find that relative to those of public insurers, loss provisions for private insurers after SSAP 101 adoption decrease by an estimated 0.2–0.29 percent of total assets, implying a forfeited tax benefit of $0.58–$0.85 million per firm per year. We also find that the deterrence effects are concentrated in the first two years of the adoption of the new rule, consistent with the unwinding of prior overprovisioned loss reserves when tax planning costs increase. Additionally, private insurers exhibit increased earnings persistence, suggesting that financial reporting quality improves when incentives to distort earnings for tax purposes are constrained. Overall, our study offers important insight into how accounting for income tax uncertainty affects private insurers’ tax planning and accounting choices.
Keywords: Loss Provisions, Corporate Taxation, Insurance Companies, SSAP 101
JEL Classification: G22, H25, H26, M41
Suggested Citation: Suggested Citation