Tax Reform for Insurers: Open Questions Remain

By Greg J. Buteyn, CPA; Albert J. DiGiacomo, CPA; and Daniel J. Kusaila, CPA 
Tax Reform for Insurers: Open Questions Remain

More than a year since the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), the impact of this sweeping tax overhaul is becoming clearer. Yet many specific questions remain unanswered. 

As the rollout of guidance continues, insurers need to continue to closely monitor IRS guidance for the foreseeable future, as much of the guidance issued to date has yet to be finalized.

Tax Reform – the Big Picture

The headline features of the TCJA – such as the rate cuts and restructuring of corporate income tax rates, the repeal of the corporate alternative minimum tax (AMT), and changes to the net operating loss (NOL) carryback and carryforward rules – have been widely documented over the past year. At the same time, however, the specific effects of other changes are still somewhat unclear, as businesses await final clarification of new rules.

A bit of ambiguity is no surprise, of course, given the size and complexity of the TCJA. In fact, in the aftermath of massive and sweeping legislation, it is quite common for Congress to pass a technical corrections bill that makes minor language adjustments and clarifies ambiguities. Unfortunately, considering the current state of partisan discord, passage of a law clarifying the TCJA might be unlikely for the near future.

Despite the absence of such a law, taxpayers still have other sources of guidance. Prominent among these is the General Explanation of Public Law 115-97, commonly referred to as the “Blue Book.” The Blue Book was issued in December 2018 by the Joint Committee on Taxation (JCT), which is composed of legislators from the tax-writing committees from both houses of Congress, in consultation with the U.S. Department of the Treasury’s Office of Tax Policy.

Although some industry observers have found the Blue Book to be less valuable than they had hoped, it does serve as one source of guidance for both taxpayers and the IRS. Other sources include IRS notices, revised revenue procedures, and rewritten Treasury regulations. Some of the most significant of these are listed in Exhibits 1 and 2.
exhibit 1
exhibit 2

General Tax Provisions

Despite the ongoing rollout of guidance, several unanswered questions remain about how the IRS will interpret some of the TCJA provisions. For insurers, some of the most consequential remaining issues include:
  • NOL issues for mixed organizations. Because property and casualty (P&C) insurers now are covered by different NOL carryback and carryforward rules than life insurers and other corporations, consolidated returns with P&C and other types of corporations face significant complications upon consolidation. All concerned are hoping for more specific guidance from the IRS soon, but as of now such companies must, at a minimum, maintain detailed tracking schedules to apply the NOL rules appropriately for each subsidiary.
  • Discounting. Proposed Regulation 103163-18, issued in November 2018, would eliminate the composite method of discounting loss reserves and eliminate the need to separately discount salvage and subrogation, which could significantly simplify the calculation of loss reserves for P&C companies. A month later, Revenue Procedure 2019-06 provided updated discount factors for reserves reported as of Dec. 31, 2017, along with factors to be used for the 2018 tax year. The IRS held a hearing in late December 2018 regarding the method for establishing the new discount factors set forth in the proposed regulation. At the hearing, the Treasury heard industry suggestions regarding using a single interest factor as opposed to differing factors along with the use of a 60-month period when generating such factors. As a result, the revenue procedure left open the possibility of revised discount factors being issued later, along with a transition mechanism to capture any necessary adjustments that might be needed once all regulations are finalized.
  • Meals and entertainment. Costs incurred for entertaining customers no longer are deductible, but IRS guidance and the Blue Book appeared to differ on the deductibility of employee meal expenses that are incurred as part of an entertainment event. Companies can rely on the IRS guidance (Notice 2018-76) for now, provided that such meal expenses are stated separately, but should monitor IRS guidance closely for possible changes.
  • Business interest. The TCJA’s new limitations on the deductibility of net interest expense are relatively straightforward on the surface, but potential complications arise from certain provisions under Section 382 of the U.S. Tax Code that allow certain disallowed business interest expenses to be carried forward in situations involving an ownership change in the company. Companies involved in corporate acquisition or merger scenarios should take care that the carryforward of disallowed business expense is considered appropriately.
  • Income recognition. There originally was some concern that taxpayers might not be able to defer bond market discount accretion that was accrued as income for financial statement purposes. IRS Notice 2018-80 alleviated that concern, specifying that taxpayers may continue to defer such income under Section 1271 of the U.S. Tax Code. An update to Section 451 disallows the deferral of revenue past the date by which the financial statements recognize the item of income. Brokers, managing general agents, and management companies should review the changes made to Section 451 to ensure the changes will not affect their timing of revenue recognition. Any such disruption could generate the need to apply for a change of accounting method with the IRS.

International Tax Questions

In addition to questions that affect all businesses, several TCJA provisions are of concern to companies with international operations. Some of the most prominent international tax questions include:
  • U.S. shareholder definition. The TCJA changed the basic definition of when a U.S. person is classified as a U.S. shareholder in a controlled foreign corporation and therefore eligible to defer taxes on income derived from entity. Previously, U.S. shareholders that held less than 10 percent of the voting power in a foreign corporation potentially were able to defer current U.S. tax through shifting value to nonvoting shareholders. The new law expands the U.S. shareholder definition to include shareholders who have more than 10 percent of the value of the corporation, regardless of their voting power. This change is causing many companies to reevaluate their existing structures, which often were established specifically to enable certain shareholders to defer paying U.S. tax.
  • BEAT. The new 10% BEAT, which is similar in some ways to an AMT, is a cause of considerable concern for a number of insurers. Proposed regulations provide that return premium payments made to foreign affiliates will not be subject to the BEAT, but reinsurance premiums to foreign affiliates will be. The industry is contesting this part of the proposed regulations, as the regulations seem to suggest that claims payments made to a foreign affiliate might not be subject to the BEAT. The industry is anxiously waiting to learn if the final regulations will indeed alleviate this burden. In addition, no guidance has been issued on payments by a domestic reinsurance company to a foreign-related insurance company. Industry executives have been providing comments on the proposed regulations, especially in the netting rules area, but there is no indication yet about when final regulations will be issued. Insurers will need to continue monitoring this area closely.
  • Passive foreign investment company (PFIC). During the past year, many insurance companies that previously were deferring offshore income by writing low-frequency, high-severity coverages or warranty-type coverages have found themselves to be considered PFICs, based on changes to the insurance exception under the PFIC rules. The industry is awaiting further guidance to clarify the new rules in this area.
  • Section 953(d) election. In response to tax reform – and in light of the lower U.S. income tax rate and the potential interplay with the new BEAT and PFIC rules as well as consideration of the prior existing benefits of such election – many companies are reevaluating whether they should make a 953(d) election for their foreign insurance company. This analysis requires tax modeling along with consideration of the commercial business issues that might be involved.

Accounting Issues

In addition to its immediate tax consequences, the TCJA also has an impact on companies’ financial statements. Some of the most significant accounting and financial reporting issues include:
  • Transition to new rules. Staff Accounting Bulletin (SAB) SAB No. 118 was issued in early 2018 – and soon after was adopted by the Financial Accounting Standards Board (FASB) and National Association of Insurance Commissioners (NAIC) – to address situations when a registrant did not have the necessary information available, prepared, or analyzed in reasonable detail to complete the required income tax accounting. SAB 118 also provided up to a one-year measurement period for completion. Dec. 21, 2018, marked the end of that measurement period for the TCJA implications and, accordingly, GAAP and statutory filers must have the impacts of the TCJA quantified in the financial reporting period that includes that date. This requirement created and continues to add strain on the financial reporting process as tax departments continue to navigate the impact of the TCJA on their financial results.
  • AMT credits. The FASB’s decision to allow companies to reclassify their AMT credits as current tax receivables (rather than deferred tax assets) alleviated some financial reporting concerns. Similarly, the NAIC’s Interpretation 18-03 (INT 18-03) provided for consistent treatment for statutory purposes, potentially alleviating admissibility concerns of AMT credit tax assets. While this treatment was viewed as a favorable development for GAAP and statutory filers, affected entities should make sure they are complying with the new disclosure requirement set out in INT 18-03.
  • Revalued discount factors. The recomputed 2017 discount factors announced by the IRS in Revenue Procedure 2019-06 have the effect of restating a company’s tax-loss reserves. That adjustment to restate tax basis in loss reserves is taxable over an eight-year period beginning with 2018 and leaves deferred taxes on the balance sheet to account for the remainder of the transition adjustment.
  • NAIC interpretations. In addition to GAAP compliance as defined by the FASB, the NAIC also is addressing the effects of the new tax law. INT 18-03 focuses on three main issues affecting NAIC statutory filers. These include enhanced disclosure requirements related to the repatriation transition tax, disclosures related to reclassification of AMT credits as a current receivable, and statutory accounting requirements related to the new GILTI. Statutory filers should review the INT closely to ensure their disclosures are compliant.

Looking beyond such specific interpretations, the NAIC also is preparing to publish more far-reaching guidance including revisions to its Statement of Statutory Accounting Principles (SSAP) No. 101 – its primary guidance document related to income tax issues. The most immediate changes will be revisions to the question and answer guidance within SSAP 101, since many of the examples its uses are no longer accurate due to changes in tax rates, NOL carryforward rules, and other provisions. 

As the various revisions to the tax code, U.S. GAAP, and statutory accounting requirements continue to unfold, insurers will need to remain vigilant, and are encouraged to submit industry comments to the relevant organizations. Although the impact of tax reform is indeed far-reaching, there still are opportunities to help shape the ultimate outcome of this complex undertaking.


This article first appeared in IASA’s April 2019 eInterpreter newsletter. Learn more at


Contact us

Greg Buteyn
Gregory J. Buteyn
Daniel Kusaila
Daniel J. Kusaila
Partner, Tax