TAX CUTS & JOBS ACT Provisions of Interest to Insurers P R E - - PowerPoint PPT Presentation

▶
tax cuts jobs act
SMART_READER_LITE
LIVE PREVIEW

TAX CUTS & JOBS ACT Provisions of Interest to Insurers P R E - - PowerPoint PPT Presentation

Mar 29, 2023 780 likes •999 views

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

slide-1
SLIDE 1

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

TAX CUTS & JOBS ACT

Provisions of Interest to Insurers

slide-2
SLIDE 2

2

INTRODUCTIONS

Tom Wheeland Partner BKD CPAs & Advisors Brandy Shy Director BKD CPAs & Advisors Leon Langlitz, FSA, MAAA Senior Vice President & Principal Lewis & Ellis Inc.

slide-3
SLIDE 3

3

OUR GOALS FOR TODAY

1

Outline Basic Provisions Applicable to All Corporations Discuss Insurance-Specific Provisions Summarize the Income Tax Accounting Impact of Act Highlight Tax Planning Opportunities

2 3 4

slide-4
SLIDE 4

4

GENERAL CORPORATE PROVISIONS

Some good news for corporations

The View From 30,000 Feet

Reduction in Federal Corporate Income Tax Rate to 21% Repeal of Alternative Minimum Tax (AMT) Offset of Regular Tax with AMT Credits Net Operating Losses (NOLs)

  • 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)

slide-5
SLIDE 5

5

CORPORATE TAX RATE

One federal tax rate for all C corporations

Federal Tax Rate Reduced to Flat 21%

Former Top Tax Rate of 35% was Highest in the Industrialized World 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
slide-6
SLIDE 6

6

AMT REPEAL

This trap for the unwary particularly affected P&C & small life insurers

Goodbye AMT in 2018!

Considered a Prepaid Tax by Most Companies Corporations Allowed a Credit for AMT – 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

slide-7
SLIDE 7

7

AMT CREDITS

Easier to use credits from pre-law periods, including a refund mechanism

Utilization of Existing AMT Credits

Use AMT Credits to Offset Regular Tax Excess Credits are Refundable (over an established period)

  • 50% of Excess Refundable in

2018 – 2020

  • 100% of Excess Refundable in

2021

slide-8
SLIDE 8

8

AMT CREDITS

Easier to use credits from pre-law periods, including a refund mechanism

AMT Credit Example

$100,000 AMT Credit Carryforward as of 12/31/17 Calculation: $40,000 2018 Regular Tax ($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

slide-9
SLIDE 9

9

NET OPERATING LOSSES

The Lord Giveth, the Lord Taketh Away …

Net Operating Losses (NOLs)

Conforms Life Operations Loss Deduction (OLD) Rules to NOLs No Carryback of NOLs 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

slide-10
SLIDE 10

TAX REFORM

NOL Comparison Chart OLD LAW

Years Carryback Years Carryforward % Offset

C-Corporations 2 20 100 Non-Life Insurers 2 20 100 Life Insurers 3 15 100

NEW LAW

Years Carryback Years Carryforward % Offset

C-Corporations

∞

80 Non-Life Insurers 2 20 100 Life Insurers

∞

80

slide-11
SLIDE 11

11

LIBERALIZING FIXED ASSET EXPENSING

Bonus depreciation & §179

Good News …

Bonus Depreciation Increased to 100% for Assets Placed in Service After September 27, 2017 & Before January 1, 2023 §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

slide-12
SLIDE 12

12

YEAR OF INCLUSION

More guidance is needed to determine effect on market discount deferral

Other Items of Note

Year of Inclusion

  • Income Inclusion – No Later than

Inclusion for Financial Reporting Purposes

  • Some Exceptions
  • 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
slide-13
SLIDE 13

13

BUSINESS INTEREST

Is insurance company interest income considered trade or business interest?

Other Items of Note

Limitation on Business Interest Expense

  • Limits Net Business Interest

Expense

  • 30% of Adjusted Taxable Income
  • Excess Carried Forward

Meals & Entertainment

  • All Meals Subject to 50%

Disallowance

  • No Deduction for Entertainment

Expenses

slide-14
SLIDE 14

14

NON-LIFE COMPANIES Focused on reserves & proration

Non-Life Insurance Company Provisions

Loss Reserves

  • Changes in Interest Rate & Payment

Pattern – Reduce Tax Loss Reserves

  • 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

slide-15
SLIDE 15

15

LIFE COMPANIES

Feel the burn … Life Insurance Company Provisions

§807(f) Changes Subject to §481 Rules

  • 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

slide-16
SLIDE 16

16

LIFE COMPANIES

… but it could have been worse Life Insurance Company Provisions Life Reserves Capped at Greater of Net Surrender Value or 92.81% of NAIC Prescribed Reserves (8-Year Phase-In) 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)

slide-17
SLIDE 17

17

GAAP & SAP

Reduction in Current Federal Taxes with Short-Term Effect of DTA Reduction

Income Tax Accounting Impact

Reduction in DTAs

  • Increase 2017 GAAP Effective Tax

Rate (ETR) in P&L Regardless of Source

  • Increase 2017 SAP ETR in Surplus

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

slide-18
SLIDE 18

18

CHANGE IS HERE!

Though most changes are effective in 2018, there are strategies you can implement in 2017 to help maximize the benefits of tax reform

Planning Opportunities

Look for Opportunities to Accelerate Deductions & Defer Income

  • Prepaid Expenses
  • Pension Funding
  • Compensation Accruals
  • Bonus Depreciation
  • Policyholder Dividends

Analyze Portfolio for Effect of Proration & Company Share Changes

slide-19
SLIDE 19

19

QUESTIONS?

Tom Wheeland BKD Partner 314.802.0213 twheeland@bkd.com Susan Kelley BKD Director 513.562.5510 skelley@bkd.com Brandy Shy BKD Director 314.236.5181 bshy@bkd.com Kara Cramer BKD Senior Manager 816.489.4329 kcramer@bkd.com Leon Langlitz Lewis & Ellis Senior Vice President & Principal 913.491.3388 llanglitz@lewisellis.com

slide-20
SLIDE 20

Thank You!

20

slide-21
SLIDE 21

TH10