By Carrie Small, Partner, Baker Tilly Virchow Krause, LLP
Overview of Insurance Provisions in Final Tax Reform Bill
On December 15, 2017, a House and Senate conference committee reached an agreement on a final version of tax reform legislation, the Tax Cuts and Jobs Act (TCJA), which contains several key provisions that would significantly impact the property and casualty (P&C) insurance industry. House members voted on the bill on December 19th, passing it with a 227-203 vote. The Senate quickly followed early on December 20th with a 51-48 vote. Prior to the Senate vote, Democrats raised objections to certain items in the legislation that violated the Byrd Rule, a requirement that all measures relate to federal revenue and spending. The legislation will now go back to the House for a re-vote before advancing to the President. It is expected that President Trump will sign the bill into law by the end of the year, but the signing could be delayed until 2018 due to a congressional provision that could trigger spending cuts if signed in 2017.
Generally, the conference agreement ultimately landed at a 21 percent corporate tax rate effective for taxable years beginning after December 31, 2017. This is a slight modification from the 20 percent corporate tax rate that was included in both the House bill and Senate amendment (although the Senate amendment delayed the effective date to taxable years beginning after December 31, 2018). The corporate alternative minimum tax (AMT) would also be repealed with special provisions to refund applicable AMT credit carryforwards. Additionally, dividends received deduction amounts would be changed from 70 percent to 50 percent, and from 80 percent to 65 percent for dividends received from a 20-percent owned corporation.
The major P&C insurance provisions that would generally be effective for tax years beginning after 2017 are as follows:
Modification of Net Operating Loss Deduction
Generally, the net operating loss (NOL) deduction would be limited to 80 percent of taxable income determined without regard to the deduction. Net operating losses could be carried forward indefinitely, but carryback potential would be limited to a two-year carryback in the case of certain losses incurred in the trade or business of farming.
NOLs of a P&C insurance company would remain at a two-year carryback and a 20-year carryforward. The 80 percent limitation as described above would not be applicable to P&C insurance companies. This would have the effect of putting P&C insurance companies and all other corporations (including life insurance companies) on different loss carryback and carryforward schedules. This could create additional complexities for consolidated tax returns that include both P&C insurance companies and other types of corporations, as well as a need for increased tracking and scheduling of NOLs.
Modification of Proration Rules for Property and Casualty Insurance Companies
The 15 percent reduction in the reserve deduction for P&C insurance companies would be increased to 25 percent. This would keep the reduction in the reserve deduction consistent with current law by adjusting the rate proportionately to the decrease in the corporate tax rate. Should there be any future changes in the top corporate rate, the proration percentage would be automatically adjusted so that the product of the proration percentage and the top corporate tax rate always equals five and a quarter percent.
Modification of Discounting Rules for Property and Casualty Insurance Companies
Under this provision, P&C insurance companies would use the corporate bond yield curve (as specified by the U.S. Department of the Treasury) to discount the amount of unpaid losses rather than mid-term applicable federal rates. In addition, the special rule that extends the loss payment pattern period for long-tail lines of business remains (but with the five-year limitation on the extended period increased to 14 years). The provision would also repeal the election to use company-specific, rather than industry-wide, historical loss payment patterns.
A transitional rule would apply for the first taxable year beginning in 2018, which would spread adjustments relating to pre-effective date losses and expenses over such taxable year and the seven succeeding taxable years.
Repeal of Special Estimated Tax Payments
This provision would repeal the elective deduction and related special estimated tax payment rules under section 847. Under current law, insurance companies may elect to claim a deduction equal to the difference between the amount of reserves computed on a discounted basis and the amount computed on an undiscounted basis. Companies that make this election are required to make a special estimated tax payment equal to the tax benefit attributable to the deduction.
Impact on Accounting for Income Taxes
Tax reform would also have to be considered for accounting for income taxes under Accounting Standards Codification 740 (ASC 740) and Statement of Statutory Accounting Principles No. 101 (SSAP 101). If enacted by the end of 2017, all P&C insurance companies would be required to revalue their existing inventory of deferred tax assets (liabilities) at the 21 percent rate. The change in rate would run through the statutory change in capital and surplus as income (net deferred tax liability position) or expense (net deferred tax asset position). The change in rate would also have to be considered as part of the admissibility calculations under paragraph 11 of SSAP 101. For example, when looking at calculations of future taxable income and future reversals, the newly enacted tax rate would have to be utilized.
If signed into law before the end of the year, the Tax Cuts and Jobs Act would require additional consideration by all P&C insurance companies as they work through the year-end financial reporting process. It would be expected that the change in tax rate would be applied to each company’s deferred tax assets (liabilities) and future provisions of the tax bill would be appropriately analyzed for the specific impacts to the company.
To learn more or to connect with our insurance tax specialists, visit www.bakertilly.com. This article was featured in the PAMIC 360.
Carrie Small, partner, joined the firm in 2010 and leads our insurance tax practice. Carrie has 15 years of experience providing tax compliance and tax consulting services, including research and tax planning, to both privately held and public companies.