TAX CUTS & JOBS ACT Provisions of Interest to Insurers

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1 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 F. W H E E L A N D

2 INTRODUCTIONS Tom Wheeland Partner 2

3 OUR GOALS FOR TODAY 1 2 Outline Basic Provisions Applicable to All Corporations Discuss Insurance-Specific Provisions 3 Summarize the Income Tax Accounting Impact of Act 4 Highlight Tax Planning Opportunities 3

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 Reduction in Dividends Received Deduction Income Inclusion Modifications to 162(m) 4

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 and Accelerating Expenses Prepaid Expenses Accrued Bonuses Pension Funding Policyholder Dividends 5

6 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 6

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 % of Excess Refundable in

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, 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 8 $30,000 AMT Credit Carryforward as of 12/31/18

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 and Carryforward Rules Unchanged 9

10 TAX REFORM NOL Comparison Chart OLD LAW Years Carryback Years Carryforward % Offset C-Corporations Non-Life Insurers Life Insurers NEW LAW Years Carryback Years Carryforward % Offset C-Corporations 0 80 Non-Life Insurers Life Insurers 0 80

11 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, 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,

12 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 12

13 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 13

14 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 14

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 15

16 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) 16

17 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 17

18 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 18

19 QUESTIONS? Tom Wheeland Partner Susan Kelley Director Brandy Shy Director Kara Cramer Senior Manager

20 20 Thank You!

21 TH10