Tax Planning Opportunities & Reserving Changes for Insurance Companies

Tax Planning Opportunities and Reserving Changes for Insurance Companies

September 30, 2026

Article Summary

• The tax benefits available under certain OBBBA and NAIC updates can affect cash flow, capital investment decisions, and year-end tax planning.

• Insurance companies that develop software for internal use may qualify for R&D tax credits, while other insurers may benefit from purchasing transferable energy-related tax credits.

• The OBBBA expanded potential deductions for insurance companies through changes to the business interest expense limitation, permanent 100% bonus depreciation, and the treatment of domestic research and experimental expenditures.

• VM-22 introduces a principle-based reserving framework for non-variable annuities that may change statutory reserves, tax reserves, and deferred tax balances for affected life insurers.
  

More than a year after the last major federal tax bill was signed into law, taxpayers are still dealing with changes from the One Big Beautiful Bill Act (OBBBA) as they try to understand how their business is impacted. These changes present opportunities for insurance companies to plan and consider new investments. In this article we will explore the ongoing effects of updates to such provisions as the business interest expense limitation, bonus depreciation, research & development expenses and credits, as well as the NAIC’s new principle-based reserving framework.

Planning Considerations Under the OBBBA

The One Big Beautiful Bill Act (OBBBA) changed the calculation of Adjusted Taxable Income (ATI) when computing the limitation on business interest expense. Prior to the enactment of the OBBBA, ATI for purposes of the §163(j) limitation was earnings before interest and taxes (EBIT). For tax years beginning after December 31, 2024, taxpayers can also add back depreciation and amortization. For taxpayers whose deduction for business interest expense is limited, this can increase the deduction if the taxpayer has significant depreciation and/or amortization expense. Taxpayers who have average annual gross receipts over the 3 years prior to 2026 of more than $32 million (indexed for inflation) may be limited in how much business interest expense is deductible in the current tax year. For corporate taxpayers, even investment interest expense is considered business interest expense and is subject to the limitation. Thus, it is important for insurance companies to be aware that they may not be able to deduct all their interest expense in the current year.

The OBBBA also changed bonus depreciation, making 100% bonus depreciation permanent. Previously, bonus depreciation was being phased out by 20% each year. Restoring the 100% deduction of certain capitalized expenditures and making it permanent is a taxpayer-friendly adjustment that can provide opportunities for planning when making capital investments.

A couple of other exciting changes from the OBBBA relate to research and development. The TCJA created an unpopular burden on taxpayers by requiring the capitalization and amortization of all §174 expenses, which includes any research and experimental expenditures. The OBBBA kept the capitalization requirement for foreign expenses but made it possible for taxpayers to once again deduct domestic R&D expenses. For tax years beginning after December 31, 2024, taxpayers had the option to expense any remaining unamortized domestic amounts in the current year or over two years, or they could amend prior year returns to claim the deductions. This change provided some relief for taxpayers who had to capitalize significant R&D investments in years before 2025. Some taxpayers were left with restricted cash availability after large expenses while still bearing a significant tax bill due to the inability to immediately deduct those expenses. The OBBBA helped unwind some of that economic discrepancy.

Related to research and development, insurance companies that develop software for internal use should also be aware of the potential R&D tax credits that may be available to them. Insurance companies can create a strategic advantage through software tailored for their processes, while at the same time taking advantage of tax credits. Not all R&D expenses fall under the umbrella of credit-eligible expenses, but certain tax specialists can perform studies to let insurers know how they might qualify for these credits.

Insurance companies that do not generate their own credits may still have an opportunity to take advantage of certain energy-related tax credits. Taxpayers who cannot utilize such credits due to factors such as large net operating losses or tax-exempt status can sell them to other taxpayers. The seller will typically offer them at a discount, and the ownership of the credit will transfer to the buyer. The use of the credit may also be available for carryover to a prior or future tax year. If insurance companies are interested in purchasing a tax credit, it would be prudent to work with a specialized consultant who can assist with stepping through all the right hoops.

Principle-Based Reserving for Non-Variable Annuities

The IRS isn’t the only regulatory body making updates that affect insurance companies. The NAIC also recently issued Valuation Manual 22 (VM-22) introducing a principle-based reserving framework for non-variable annuities. This began to be phased in at the beginning of 2026. Life insurance companies that sell non-variable annuity products will see a change in the calculation of their statutory reserves. If a taxpayer’s statutory reserves are higher under the new framework, the tax reserves will also be higher because statutory reserves are the starting point for tax reserves. The resulting deferred tax asset (DTA) will also increase. The opposite will be true for a taxpayer whose statutory reserves are lower under VM-22. It will be important to understand the impact VM-22 will have on your statutory and tax reserves.

The OBBBA and VM-22 present insurance companies with both new opportunities and added complexity. Changes to the business interest expense limitation, bonus depreciation, domestic research expenditures, transferable tax credits, and annuity reserving could materially affect taxable income, cash flow, statutory surplus, and deferred taxes. Insurance companies should work closely with their tax, accounting, and actuarial professionals to evaluate how these developments apply to their specific circumstances and to identify planning opportunities before year-end. Proactive analysis now can help insurers avoid surprises, strengthen tax and capital planning, and make informed decisions about future investments.

Frequently Asked Questions

How can insurance companies determine whether they may benefit from the changes made by the OBBBA?

Insurance companies should evaluate the impact of the OBBBA across several areas, including business interest expense, capital expenditures, research and development activities, and available tax credits. Companies with significant depreciation and amortization, substantial technology investments, or large capital projects may see meaningful tax benefits under the revised rules. Performing a year-end tax modeling exercise can help management understand the effect on taxable income, cash flow, and capital planning.

What should life insurers do to prepare for VM-22?

Life insurers that issue non-variable annuity products should work closely with their actuarial, accounting, and tax teams to understand how VM-22 will affect statutory reserves and related tax calculations. Changes in statutory reserves may also affect tax reserves and deferred tax balances. Early analysis can help management anticipate financial statement impacts, evaluate capital implications, and avoid unexpected tax or reporting consequences as the new reserving framework is implemented.