Tax season is fast approaching, and if you’re a business that conducts transactions overseas, that is involved in mergers and acquisitions, or that deals in renewable energy, real estate investment trust (REIT) risk, you may want to consider tax liability insurance. Tax liability insurance, also known as “tax insurance” or “tax opinion liability insurance,” is a product that protects the insured when they hold a tax position that is in conflict with what the IRS calculates. This coverage can be purchased through A and H Insurance with our partner carriers.
Tax liability insurance is not a general protection, but instead focuses on very specific transactions that may leave the insured compromised, where tax positions are known but amounts undetermined. The pricing on a policy usually ranges between 3% and 6% of the policy limit purchased. The insured will retain a degree of risk based on the underwriter’s assessment of the likelihood of successful settlement should the IRS challenge a company’s tax position. The higher the likelihood of settlement, the more likely the underwriter will reduce risk retention. A policy term typically runs for six years, although an additional seventh year can usually be purchased.
Companies who deal in mergers and acquisitions or who conduct international transactions are some of the main clients for tax liability insurance, but there are other reasons to protect your company. Some issues that may benefit from tax liability insurance include:
- In a merger and acquisition, the historic tax positions of a target company
- Foreign tax credits
- Preservation of net operating losses post transaction
- Where distributions may be deemed a “disguised sale”
If you have purchased Tax Liability Insurance and are challenged on your tax position, your policy will instigate a claim when you are notified by the IRS of the challenge. The policy will compensate the insured in cases of a challenge to a covered tax position, typically including additional taxes, interest, claim expenses, and penalties.
Recent changes to the tax code that will take effect in 2022 may make it even more important to assess your tax situation and consider whether tax liability insurance might be right for you. Consider these tax code alterations:
- “Net investment income, under the new law, would include certain deemed foreign income items such as Subpart F inclusions, GILTI, Qualified Electing Fund inclusions, and Mark to Market income, when they are includable as income for regular tax purposes.”
- Small business stock exclusions for purchases held for five years that had held the potential for 75% and 100% exclusion provisions will see those eliminated, as well as alternative minimum tax options, for taxpayers with adjusted gross income equal to or exceeding $400,000.
- “Net investment income, under the new law, would include certain deemed foreign income items such as Subpart F inclusions, GILTI, Qualified Electing Fund inclusions, and Mark to Market income, when they are includable as income for regular tax purposes.”
- “The expanded scope of NIIT will particularly impact owners of limited partnerships or S-corporations (pass-through entities) who “materially participate” in the business and who were not previously subject to the 3.8% NIIT, or to self-employment tax beyond deemed “reasonable compensation” as an employee.”
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Ivan Young is a writer from Happy Writers, Co. in partnership with Checkworks business and personal checks.
