tax cuts & jobs act · general corporate provisions some good news for corporations the view...
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P R E S E N T E D B Y: T H O M A S F. W H E E L A N D
TAX CUTS & JOBS ACTProvisions of Interest to Insurers
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INTRODUCTIONSTom Wheeland
Partner
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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
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GENERAL CORPORATE PROVISIONS
Some good news for corporations
The View From 30,000 FeetReduction 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
Reduction in Dividends Received Deduction
Income Inclusion
Modifications to §162(m)
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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 and Accelerating Expenses
• Prepaid Expenses
• Accrued Bonuses
• Pension Funding
• Policyholder Dividends
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AMT REPEAL
This trap for the unwary particularly impacted P&C and 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
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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
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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
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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 and Carryforward Rules Unchanged
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 0 ∞ 80
Non-Life Insurers 2 20 100
Life Insurers 0 ∞ 80
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LIBERALIZING FIXED ASSET EXPENSING
Bonus depreciation and §179
Good News….
Bonus Depreciation Increased to 100% for Assets Placed in Service After September 27, 2017 and 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
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YEAR OF INCLUSION
More guidance is needed to determine impact 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 and 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
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BUSINESS INTEREST
Is insurance company interest income considered trade or business interest?
Other Items of Note (cont’d)
Limitation on Business Interest Expense
• Limits Net Business Interest Expense
• 30% of Adjusted Taxable Income
• Excess Carried Forward
Dividends Received Deduction
• <20% Owned – 50% (vs. 70%)
• ≥20% 65% (vs. 80%)
Meals & Entertainment
• All Meals Subject to 50% Disallowance
• No Deduction for Entertainment Expenses
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NON-LIFE COMPANIES
Focused on reserves and proration
Non-Life Insurance Company Provisions
Loss Reserves
• Changes in Interest Rate and 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 and Tax-Exempt Bonds
Retention of NOL Rules
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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
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LIFE COMPANIES
…but it could have been worse
Life Insurance Company Provisions (cont’d)
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)
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GAAP & SAP
Reduction in Current Federal Taxes with Short-Term Impact 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 and DAC) Increase Deductible Temporary Differences – Reversal Patterns are Key
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CHANGE IS HERE!
Though most changes are effective in 2018, there are strategies you can implement in 2017 to maximize the benefits of tax reform
Planning Opportunities
Look for Opportunities to Accelerate Deductions and Defer Income
• Prepaid Expenses
• Pension Funding
• Compensation Accruals
• Bonus Depreciation
• Policyholder Dividends
Analyze Portfolio for Impact of Proration and Company Share Changes
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QUESTIONS?Tom Wheeland
Partner
314.802.0213
Susan Kelley
Director
513.562.5510
Brandy Shy
Director
314.236.5181
Kara Cramer
Senior Manager
816.489.4329
Thank You!
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TH10