The Tax Cuts and Jobs Act's Impact on Insurance Companies
Several tax breaks for businesses are included in the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017. Here are some of the key changes affecting insurance companies.
Life insurance companies
Currently, tax deductible reserves are determined as the greater of (a) the net surrender of the contract or (b) the federally prescribed reserve. Under the TCJA, the federally prescribed reserve is replaced by 92.81 percent of the tax reserve method otherwise applicable. Transition rules apply that require the 2017 tax reserves to be recalculated under the 2018 rules and the difference to be amortized over the next eight years beginning with 2018.
Additionally, the 10-year spread for changes in a company’s basis for determining reserves is repealed. Changes that result in decreases to the reserves are to be spread over four years. There is no spread for those changes that increase the reserves. This makes changes in the basis of computing reserves consistent with IRS procedures for all other corporations making a change in their accounting method.
Deferred acquisition costs (DAC):
The TCJA increases the percentages of net premiums that make up the specified policy acquisition expenses that must be amortized, as follows:
- Annuities – 2.09 percent (formerly 1.75 percent)
- Group life contracts – 2.45 percent (formerly 2.05 percent)
- All other contracts – 2 percent (formerly 7.7 percent)
Additionally, the amortization period is changed from 120 months to 180 months for costs in excess of $5 million. The amortization period for the first $5 million of costs will remain at 60 months.
Dividends received deduction (DRD):
Under the TCJA, the company’s share will be a fixed percentage of 70 percent rather than based on the percentage determined by dividing an insurance company’s share of net investment income by total net investment income. This results in a policyholder’s share of 30 percent.
Net operating losses (NOLs):
The bill repeals the operations loss deductions and removes the prohibition on life insurance companies deducting their net operating losses. In addition, the bill conforms life insurers to the limitations imposed on other corporations by disallowing any NOL carryback. NOLs will be able to be carried forward indefinitely and allowed to offset up to 80 percent of taxable income in the year of utilization.
Small life insurance company deduction:
The bill repeals the small life insurance company deduction for tax years beginning after December 31, 2017.
Policyholder surplus account:
The TCJA imposes a tax of 21 percent on any remaining balance in the account as of December 31, 2017, which is required to be remitted ratably over the next eight years beginning with the 2018 tax year.
Nonlife insurance companies
Under the TJCA, taxpayers will no longer be allowed to use their own historical loss payment patterns to calculate their discount factors but will be required to use the IRS factors. Similar to the treatment for life insurance companies, there are transition rules which will require the 2017 tax reserves to be recalculated under the 2018 rules and the adjustment spread over 2018 and the subsequent seven years. The IRS factors will be determined using the corporate bond yield curve rather than the mid-term applicable Federal rates.
The bill changes the proration percentage for tax-exempt interest and dividends received deduction from 15 percent to 25 percent beginning with the 2018 taxable year. However, the net tax impact of 5.25 percent remains the same.
Net operating losses:
Under the TCJA, property and casualty companies will still be allowed the two-year carryback and 20-year carryforward period for net operating losses, and the ability to offset 100 percent of taxable income in the year of utilization.
Special estimated tax payment:
Under the TCJA, the election that permitted nonlife companies not to discount unpaid losses but instead to make “special estimated tax payments” has been repealed.
Click here to read about other changes from the TCJA impacting business income taxes.