Overview:
Late December 19th, the House voted to approve the Tax Cuts and Jobs Act (“TCJA”), sending it to the President’s desk for signature. As a result, there are a number of provisions that will have a significant impact on the insurance industry and their taxes. Most of these provisions will take effect beginning in 2018.
All Corporations:
Some of the notable changes that have affected all corporations, including insurance companies, are as follows:
- Corporate income tax rate reduced from 35% to 21%. There is no graduated brackets so all income is taxed at the 21% rate.
- Net operating losses (“NOLs”): Under TCJA, NOLs for all corporations (excluding P&C insurers) are no longer allowed to be carried back to prior years and will be carried forward indefinitely. The NOL is limited to 80% of taxable income. This limitation and indefinite carryover is only applicable to tax years beginning after December 31, 2017.
- Alternative Minimum Tax was repealed and has the following transition.
- 2018-2020: 50% offset to the extent the AMT credit exceeds regular tax reduced by certain tax credits.
- 2021: 100% offset to the extent the AMT credit exceeds regular tax reduced by certain tax credits.
- 2022: full offset.
- Dividend received deduction (“DRD”) for domestic corporations less than 20% owned is reduced from 70% to 50%. DRD for domestic corporations 20% or more owned is reduced from 80% to 65%.
Life Insurers:
Life insurers will see multiple changes due to the new tax law in small life insurance company deduction, reserves, policy acquisition costs, proration, and net operating losses.
- Small life insurance company deduction (“SLICD”): The provision allowing the SLICD was repealed.
- Reserves: The TCJA adjusted the calculation of life tax reserves. In general, tax-deductible life reserves are equal to the greater of the contract’s net surrender value (if any) or 92.81% of the statutory reserves. Reserves for variable contracts is the greater of the contract’s net surrender value (if any) or the separate account reserve amount under IRC section 817 plus 92.81% of the excess of the amount determined using the NAIC reserve method. The difference between the reserve figure for the prior year and the reserve for such contracts as if the provision applied is taken into account equally over an 8 year period. This change to the tax-deductible life reserves calculation will most likely result in a decrease in the deduction on the tax return.
- Deferred acquisition costs (“DAC”): The TCJA has adjusted the percentages for each line of business to: 2.09% for annuity contracts, 2.45% for group life insurance contracts, and 9.20% for all other specified insurance contracts. These capitalized amounts will be amortized over 180 months (15 years). These changes only apply to net premiums received in 2018 and after. No re-computation is needed for unamortized DAC balances. Proration: Under the current law, the DRD for life insurers is based on the company’s share of dividends received. Under TCJA, that is replaced with a fixed 70% for the company’s share and 30% for the policyholder’s share.
- Adjustments to life reserves: Under the current law, any adjustments to life reserves are recognized ratably over a 10 year period. The TCJA adjusted this to 4 years to conform with other changes in accounting methods. No adjustment is needed for IRC section 807(f) changes that are already being recognized using the 10 year period.
- Policyholders surplus account: Under the new law, IRC section 815 was repealed. Life insurers who carry a balance in their policyholders surplus account will be required to pay a tax on that balance over an 8 year period. Ordinary life insurance losses are not allowed to offset the policyholders surplus account balance subject to tax.
P&C Insurers:
Similar to life insurers, P&C insurers will see significant changes as a result of the new law.
- Reserves: A new discount rate for unpaid losses will be based on a 60-month corporate bond yield curve. Longer loss payment patterns will also be used in the calculation. The difference between the reserve figure for the prior year and the reserve for such contracts as if the provision applied is taken into account equally over an 8 year period.
- Proration of interest and DRD: Due to the rate decrease for corporations, the proration for tax-exempt interest and DRD was changed from 15% to 25%, reducing the deductible losses, in order to preserve the effective tax rate.
- Net operating losses: The NOL for P&C insurers was not changed from current law. They are allowed to carryback 2 years and forward 20 years. They are also not subject to the 80% limitation.
- Special estimated tax payments: IRC section 847 was repealed. Certain “special estimated tax payments” paid in lieu of discounting unpaid losses for certain nonlife insurers will no longer be allowed.
For more information on how the Tax Cuts and Jobs Act will affect insurance companies, contact Greg Denning.
Information was compiled from the Joint Explanatory Statement on the Committee of Conference of the Tax Cuts and Jobs Act.