The Tax Cuts and Jobs Act (TCJA), one of the most sweeping tax reforms in recent memory, had unique consequences for the insurance industry. Tax professionals who seek to reach the next stage of their careers at insurance corporations can gain knowledge and understanding of the complex code changes in a 100% Online Master of Science in Taxation program.
Here’s a look at some of the most important implications of the TCJA:
Changes impacting all corporations
Many of the TCJA’s comprehensive reforms impact all types of corporations. The most prominent changes include:
Corporate tax rate
The TCJA reduced the top corporate tax rate from 35% to 21%. Additionally, it removed the graduated corporate tax rate schedule. The lowered rate increased the size of capital stock, and, as a result, gave corporations the ability to increase wages and boost productivity. Economists estimate the TCJA will increase U.S. capital stock by approximately 4.8%.
Alternative minimum tax
Prior to the passing of the TCJA, corporations, like individuals, were subject to an alternative minimum tax (AMT). It was the corporation’s responsibility to calculate its tax burden under the regular corporate income tax or the AMT and pay the higher of the two. The TCJA repealed the AMT, which reduced the amount of work necessary to calculate a company’s tax responsibilities.
Dividends received deduction
The dividends received deduction (DRD) is meant to reduce the potential for corporate profits to be taxed three times: from the corporation that earned the profits, the corporate shareholders, and individual shareholders.
Previously if a company owned less than 20% of another corporation, its DRD was 70%. If a company owned at least 20% but less than 80% of a company, its DRD was 80%. The TCJA reduced these rates to 50% and 65%, respectively.
Net operating losses
The TCJA limited the net operating loss (NOL) deduction to 80% of the corporation’s taxable income. However, this only applies to tax years beginning after Dec. 31, 2017. Therefore, corporations will have to track new NOL deductions separately. Previously, NOL deductions could be carried back two years and carried forward 20 years. Now, they can no longer be carried back, but they can be carried forward indefinitely.
Full expensing of business assets
Property put into service between Sep. 27, 2017, and Dec. 31, 2022, can be fully expensed under the TCJA. Between Jan. 1, 2023, and Dec. 31, 2026, this expense rule will gradually decline until it is eliminated in 2027. Previously, the Internal Revenue Service required all business assets to be capitalized.
Business interest expense deduction limitation
The TCJA set limits for the deduction of net interest expenses for businesses with average annual gross receipts totaling more than $25 million. However, the deduction cannot exceed either the corporation’s interest income for the year or 30% of the business’s adjustable taxable income (ATI). In this case, ATI is calculated as earnings before interest, tax, depreciation, and amortization (EBITDA) prior to Jan. 1, 2022, and as earnings before interest and taxes (EBIT) afterward.
Changes impacting insurance companies
Many of the TCJA’s reforms were targeted at specific insurance industry tax issues, such as:
Net operating loss deductions
In addition to the general NOL deduction changes noted above, the TCJA made special changes to NOL deductions for life insurance (LI) companies. Previously, LI companies could carry NOL deductions back three years and forward 15 years. Now, LI companies are subject to the same regulations as all corporations.
Small life insurance company deduction
Prior to the passing of the TCJA, section 806 allowed small life insurance companies a 60% deduction of the company’s tentative taxable income, so long as it did not exceed $3 million. The TCJA removed this deduction, which means small life insurance companies likely saw an increase in their tax burden in 2018.
Life insurance company tax reserve computation
Previously, the calculation of tax reserves of life insurance companies was complicated. LI companies had to take into account either the net surrender value of a contract or 92.81% of the reserve for the contract. Under the TCJA, the calculation is simplified as a percentage of statutory reserves.
Dividends received deduction for life insurance companies
As noted above, the TCJA reduced DRD rates for most corporations, but LI companies are treated differently. The new regulation fixes the company’s share at 70% and the policyholder’s share at 30%. This will simplify the calculation of the deduction, as only the company’s share is allowable.
Discounting rules for policy and claims insurance companies
Under the TCJA, policy and claims (P&C) companies are required to use a discounting rate based on the corporate bond yield curve issued by the U.S. Treasury to discount unpaid losses. Likewise, P&C companies are no longer able to utilize the election which previously allowed them to use company-specific loss payment patterns to determine their loss reserves. Now, P&C companies must use payment patterns issued by the IRS. This move will likely result in lower deductible tax reserves.
Proxy deferred acquisition costs
The TCJA made the following changes to capitalization rates applicable to insurance contracts:
- Annuity contracts: Increased from 1.75% to 2.09%.
- Group life insurance contracts: Increased from 2.05% to 2.45%
- Individual life insurance, group, and individual health insurance: Increased from 7.7% to 9.20%.
Additionally, the amortization period for capitalized amounts increased from 10 years to 15 years.
Reporting requirements for specific transactions and contacts
The TCJA introduced new reporting requirements for life settlement transactions and reportable death benefits. Essentially, life insurance companies will likely need to comply with additional reporting rules, but those rules will be simpler, thanks to changes to the transfer for value rules, in which a portion of death benefits may be subject to taxation.
In the fully online Master’s in Taxation program from the D’Amore-McKim School of Business at Northeastern University, you can take a deep dive into these and many other important tax issues unique to the insurance industry. The knowledge you gain will help you to develop the skills and expertise to address future changes in tax policy throughout your career.