TAX CUTS & JOBS ACT Provisions of Interest to Insurers P R E S E N T E D B Y: T H O M A S W H E E L A N D , B R A N D Y S H Y & L E O N L A N G L I T Z
INTRODUCTIONS Tom Wheeland Partner BKD CPAs & Advisors Brandy Shy Director BKD CPAs & Advisors Leon Langlitz, FSA, MAAA Senior Vice President & Principal Lewis & Ellis Inc. 2
1 Outline Basic Provisions Applicable to All Corporations OUR GOALS FOR TODAY 2 Discuss Insurance-Specific Provisions 3 Summarize the Income Tax Accounting Impact of Act 4 Highlight Tax Planning Opportunities 3
The View From 30,000 Feet Reduction in Federal Corporate Income Tax Rate to 21% GENERAL Repeal of Alternative Minimum Tax (AMT) CORPORATE PROVISIONS Offset of Regular Tax with AMT Credits Net Operating Losses (NOLs) Some good news for corporations • Unlimited Carryforward • No Carrybacks • Limited to 80% of Regular Taxable Income • P&C Company NOL Rules Unchanged 100% Bonus Depreciation & Expanded §179 Expensing Limitation on Deductibility of Business Interest Income Inclusion Modifications to §162(m) 4
Federal Tax Rate Reduced to Flat 21% CORPORATE TAX RATE Former Top Tax Rate of 35% was Highest in One federal tax rate the Industrialized World for all C corporations Trump Proposed a 15% Tax Rate Initial Drafts of Bill Included 20% Rate Represents a 40% Reduction in Top Rate Applies to Tax Years Beginning After 12/31/17 Consider Deferring Income & Accelerating Expenses • Prepaid Expenses • Accrued Bonuses • Pension Funding • Policyholder Dividends 5
Goodbye AMT in 2018! AMT REPEAL Considered a Prepaid Tax by Most This trap for the Companies unwary particularly affected P&C & small Corporations Allowed a Credit for AMT – life insurers Used to Offset Regular Tax to Extent it Exceeded Tentative AMT in Future Years Small Life Insurers – Many Paid AMT with Limited Ability to Claim Credit (See Slide on SLICD) A Benefit for P&C Companies in Poor Underwriting Years Makes Certain Investment Decisions Less Complex 6
Utilization of Existing AMT Credits AMT CREDITS Easier to use credits from pre-law periods, Use AMT Credits to Offset Regular Tax including a refund Excess Credits are Refundable ( over an mechanism established period ) • 50% of Excess Refundable in 2018 – 2020 • 100% of Excess Refundable in 2021 7
AMT Credit Example AMT CREDITS $100,000 AMT Credit Carryforward as of Easier to use credits 12/31/17 from pre-law periods, Calculation: including a refund $40,000 2018 Regular Tax mechanism ($40,000) AMT Credit Offset Against Regular Tax $0 Subtotal ($30,000) 50% of Remaining AMT Credit Allowed as a Refundable Credit ($30,000) Refund Shown on 2018 Tax Return $30,000 AMT Credit Carryforward as of 12/31/18 8
Net Operating Losses (NOLs) NET OPERATING LOSSES Conforms Life Operations Loss Deduction (OLD) Rules to NOLs The Lord Giveth, the No Carryback of NOLs Lord Taketh Away … Indefinite Carryforward Annual Limitation of 80% of Regular Taxable Income for Post-2017 NOLs P&C NOLs Unchanged • 2-Year Carryback • 20-Year Carryforward • 100% Offset of Regular Taxable Income Capital Loss Carryback & Carryforward Rules Unchanged 9
TAX REFORM NOL Comparison Chart OLD LAW Years Years % Offset Carryback Carryforward C-Corporations 2 20 100 Non-Life Insurers 2 20 100 Life Insurers 3 15 100 NEW LAW Years Years % Offset Carryback Carryforward ∞ C-Corporations 0 80 Non-Life Insurers 2 20 100 ∞ Life Insurers 0 80
Good News … LIBERALIZING FIXED ASSET Bonus Depreciation Increased to 100% EXPENSING for Assets Placed in Service After September 27, 2017 & Before Bonus depreciation & January 1, 2023 §179 §179 Expensing • Expanded to $1 million (from $500K) with Phase-Out Beginning at $2.5 million (from $2 million) • Property Placed in Service After December 31, 2017 11
Other Items of Note YEAR OF INCLUSION Year of Inclusion • Income Inclusion – No Later than More guidance is Inclusion for Financial Reporting needed to determine Purposes effect on market • Some Exceptions discount deferral • Questionable Application to Market Discount & Accrued Dividends §174 Amortization of Research & Experimentation Expenses • 5-Year Amortization Period • For Expenses Incurred After 12/31/21 • No Change to R&E Credit 12
Other Items of Note BUSINESS INTEREST Limitation on Business Interest Expense Is insurance company • Limits Net Business Interest interest income Expense considered trade or • 30% of Adjusted Taxable Income business interest? • Excess Carried Forward Meals & Entertainment • All Meals Subject to 50% Disallowance • No Deduction for Entertainment Expenses 13
Non-Life Insurance Company Provisions NON-LIFE COMPANIES Loss Reserves Focused on • Changes in Interest Rate & Payment reserves & Pattern – Reduce Tax Loss Reserves proration • No Company Election • Repeal of §847 Proration Percentage Increased from 15% to 25% • Keeps the After-Tax Yield of Tax-Exempt Bonds Constant • Narrows the Spread Between Taxable & Tax-Exempt Bonds Retention of NOL Rules 14
Life Insurance Company Provisions LIFE COMPANIES §807(f) Changes Subject to §481 Rules Feel the burn … • 4-Year Spread for Reserve Decreases • 1-Year Spread for Reserve Increases DAC Capitalization • 2.09% for Annuities (formerly 1.75%) • 2.45% for Group Life (formerly 2.05%) • 9.2% for Other Contracts (formerly 7.7%) DAC Amortization • Retains 60-Month Amortization • Increases 120-Month Amortization Period to 180 Months 15
Life Insurance Company Provisions LIFE COMPANIES Life Reserves Capped at Greater of Net Surrender Value or 92.81% of NAIC … but it could have Prescribed Reserves (8-Year Phase-In) been worse 70% Company Share/30% Policyholder Share Inclusion of Policyholder Surplus Account Balance in Income over 8 Years NOL/OLD Conformity Elimination of Small Life Insurance Company Deduction (SLICD) 16
Income Tax Accounting Impact GAAP & SAP Reduction in DTAs Reduction in Current • Increase 2017 GAAP Effective Tax Rate (ETR) in P&L Regardless of Federal Taxes with Source Short-Term Effect of • Increase 2017 SAP ETR in Surplus DTA Reduction Elimination of NOL Carryback for Ordinary DTAs of Life Companies • Removes a Source of Income for GAAP • Makes SSAP 101, ¶11.a., Effectively Moot Increases in Current Taxes (Caused by Reserves & DAC) Increase Deductible Temporary Differences – Reversal Patterns are Key 17
Planning Opportunities CHANGE IS HERE! Look for Opportunities to Accelerate Deductions & Defer Income Though most changes are effective in 2018, • Prepaid Expenses there are strategies • Pension Funding you can implement in • Compensation Accruals 2017 to help maximize • Bonus Depreciation the benefits of tax reform • Policyholder Dividends Analyze Portfolio for Effect of Proration & Company Share Changes 18
QUESTIONS? Tom Wheeland Brandy Shy BKD BKD Partner Director 314.802.0213 314.236.5181 twheeland@bkd.com bshy@bkd.com Leon Langlitz Lewis & Ellis Senior Vice President & Principal 913.491.3388 llanglitz@lewisellis.com Susan Kelley Kara Cramer BKD BKD Director Senior Manager 513.562.5510 816.489.4329 skelley@bkd.com kcramer@bkd.com 19
Thank You! 20
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