In April 2017, the Trump administration outlined core principles of its tax reform proposal. Tax reform has been identified as a priority for the president, but there is much uncertainty on whether the administration and Congress will be able to get any type of tax reform legislation passed in the near future. Despite this timing uncertainty, a tax reform package including a tax rate reduction for many Americans and restructuring of business taxes is likely what the president and Congress will try to accomplish before midterm elections in November 2018.
The business tax reform proposal includes a reduction in the corporate tax rate to 15 percent from 35 percent. If the corporate tax rate is reduced, there are some key considerations for insurance companies with respect to deferred tax assets and the impact on surplus. First, the beginning-of-year gross deferred tax assets will have to be revalued for financial statement purposes at the new tax rate on the effective date of enactment. This creates an immediate effect on the gross deferred tax asset, as the value will decline by the 20 percent rate change. The impact of the rate change runs through the effective tax rate, potentially creating large variances in a company’s rate from year to year.
Once the reduced adjusted gross deferred tax asset is calculated, insurance companies will also have to consider the changes in the admissibility calculation under Statement of Statutory Accounting Principles No. 101 in paragraphs 11.a., 11.b. and 11.c.
Ultimately, it is likely that insurance companies in a net deferred tax asset position may need to reduce their deferred tax asset resulting from the 20 percent rate decrease as well as potentially through changes in the admissibility calculation. Tax reform may create a long-term benefit for insurance companies, but a one-time negative surplus hit in the year of tax reform. Alternatively, a company in a net deferred tax liability position may be able to realize a favorable surplus adjustment as the future tax liability originally recorded may now be taxed at the lower tax rate.
Prior to enactment, deferring income or accelerating deductions where appropriate will allow for a company to take advantage of a future tax rate reduction. As the value of deferred tax assets decreases, companies may want to revisit the admissibility calculation if they currently have non-admitted deferred tax assets. This could involve capital and surplus planning to ensure the exDTA Authorized Control Level Risk-Based Capital percentage is appropriate to allow for a three-year projection of taxable income. Companies may also want to revisit reversal patterns of deferred tax assets to confirm that all reversals within the three-year period (assuming certain thresholds are met) are being adequately captured and utilized in the admissibility calculation.
For more information on this topic, or to learn how Baker Tilly insurance industry tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.