1. Federal Income Tax Update
Central Illinois Chapter Meeting
April 25, 2019
Bloomington, IL
Thomas F. Wheeland
BKD, LLP – St. Louis

2. 1 2 3 Impact of TCJA – A Recap Our goals for today What We Have Seen
What We Don’t Know

3. GENERAL CORPORATE PROVISIONS
TCJA Provisions
Reduction in Federal Corporate Income Tax Rate to 21%
Repeal of Alternative Minimum Tax (AMT)
AMT Credit Utilization and Refund
Net Operating Losses (NOLs)
Unlimited Carryforward
No Carrybacks
Limited to 80% of Regular Taxable Income
P&C Company NOL Rules Unchanged
Capital Loss Rules Unchanged
GENERAL CORPORATE PROVISIONS

4. 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
100% of Excess Refundable in 2021
Classification to Income Taxes Recoverable vs. DTA now disclosed in Annual Statement Tax Footnote
Amt credits

5. AMT Credit Example Amt credits
$100,000 AMT Credit Carryforward as of 12/31/17
Calculation:
$40, Regular Tax
( 40,000) AMT Credit Offset Against Regular Tax
$ Subtotal
($30,000) 50% of Remaining AMT Credit Allowed as a Refundable Credit - Refund Shown on 2018 Tax Return
$30,000 AMT Credit Carryforward as of 12/31/18
Amt credits

6. AMT Credit Example Amt credits
$100,000 AMT Credit Carryforward as of 12/31/17
Calculation:
$ Regular Tax
( ) AMT Credit Offset Against Regular Tax
$ Subtotal
($50,000) 50% of Remaining AMT Credit Allowed as a Refundable Credit - Refund Shown on 2018 Tax Return
$0 Regular Tax in 2019 and 2020 would yield refunds of $25,000 & $12,500, respectively, with $12,500 balance refunded in 2021
Amt credits

7. 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 NOLs
P&C NOLs Unchanged
2 Year Carryback
20 Year Carryforward
100% Offset of Regular Taxable Income
Capital Loss Carryback and Carryforward Rules Unchanged
Net operating losses

8. Nol comparison chart ∞ OLD LAW Pre and Post TCJA NEW LAW
Years
Carryback
Years Carryforward
% Offset
C-Corporations 2 20
100
Non-Life Insurers
Life Insurers 3 15
NEW LAW
Years
Carryback
Years Carryforward
% Offset
C-Corporations ∞ 80
Non-Life Insurers 2 20
100
Life Insurers

9. GENERAL CORPORATE PROVISIONS
TCJA Provisions
100% Bonus Depreciation & Expanded §179 Expensing
Limitation on Deductibility of Business Interest
Income Inclusion Rule
Reduction in Dividends Received Deduction
Meals & Entertainment Limitations
Qualified Transportation Fringe Limitations
Step One Disallowance for Reserved Employee Spots
Step Two Primary Use of Remaining Spots
Step Three Allowance for Reserved Non-Employee Spots
Step Four Remaining Use and Allocable Expenses
GENERAL CORPORATE PROVISIONS

10. Accelerated Tax Depreciation
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
Fixed asset expensing

11. Parking Example SEE IRS Notice 2018-99
Facts: Taxpayer has 500 total parking spots used by visitors and employees, 50 of which are reserved for management. During normal business hours, 400 employees park in the non-reserved spots. Also, there are 10 reserved spots (included in the 500) for visitors. Expenses for the parking lot total $10,000.
Step One – The reserved management spots result in $1,000 [$10,000 * 50/500] of non-deductible expenses (or $1,000 of UBTI)
Step Two – The primary use of the remainder (400/450) is not for use of the general public (>50%)
Step Three – The visitor spots (10/450) result in roughly 2% of the expenses ($200) NOT subject to disallowance
Step Four – Taxpayer reasonably determines that $7,822 of the remaining $8,800 is subject to disallowance (400/450)
SEE IRS Notice

12. Non-Deductible Expenses
Meals & Entertainment
No Deduction for Entertainment Expenses
Notice clarifies deductibility of certain business meals
All Meals Subject to 50% Disallowance
Ordinary & necessary
Not lavish or extravagant
Taxpayer or employee present
Provided to current or prospective clients
If during an entertainment activity, food and beverage cost must be separately billed or stated
Update on certain non- deductible expenses

13. Additional tCJA Provisions
Other Items of Note
Year of Inclusion
Income Inclusion - No Later than Inclusion for Financial Reporting Purposes
Some Exceptions
Per Notice , market discount is excluded
Questionable Application to 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
Additional tCJA Provisions

14. Additional tCJA Provisions
Other Items of Note
Limitation on Business Interest Expense
Limits net business interest expense
30% of adjusted taxable income
Excess carried forward
Insurance company interest income is included in “business interest income” for purposes of IRC §163(j) per Notice
Additional tCJA Provisions

15. Non-life company PROVISIONS
TCJA Provisions
Loss Reserves
Changes in Interest Rate and Payment Pattern – Generally Reduced 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 at 5.25%
Narrows the Spread Between Taxable and Tax-Exempt Bonds
Retention of NOL Rules (2 Back/20 Forward)
Non-life company PROVISIONS

16. life company PROVISIONS
TCJA 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
life company PROVISIONS

17. life company PROVISIONS
TCJA Provisions
Life Reserves Capped at Greater of Net Surrender Value or % of NAIC Prescribed Reserves (8 Year Phase-In)
70% Company Share/30% Policyholder Share (6.3% ETR on Tax Exempt Interest)
Inclusion of Policyholder Surplus Account Balance in Income over 8 Years
NOL/OLD Conformity
Elimination of Small Life Insurance Company Deduction (SLICD)
life company PROVISIONS

18. Additional tCJA Provisions
DRD Summary
Dividends Received Deduction
<20% Owned – 50% (vs. 70%)
P&C DRD (Net of Proration)
Old Law % ETR
New Law % ETR
Life Company (Net of P/H Share)
Old Law Varied
New Law 13.65% ETR
C Corporations
Old Law 10.5% ETR
New Law 10.5% ETR
≥20% Owned – 65% (vs. 80%)
Additional tCJA Provisions

19. Investments: Effective tax rate trends

20. Income Tax Accounting Impact
Impacts to the 2017 & 2018 Tax Provisions
Reduction in DTAs
Increase 2017 GAAP Effective Tax Rate (ETR) in P&L Regardless of Source
Increase 2017 SAP ETR in Surplus
2018 impact of return-to-provision adjustment (as well as carrybacks to pre-TCJA years)
Increases in Current Taxes (Caused by Reserves and DAC) Increase Deductible Temporary Differences – Reversal Patterns are Key
GAAP & SAP
Reduction in Current Federal Taxes with Short-Term Impact of DTA Reduction

21. Income Tax Accounting Impact
Elimination of NOL Carryback for Ordinary DTAs of Life Companies
Removes a Source of Income for GAAP
Makes SSAP 101, ¶11.a., Effectively Moot
Make ¶11.b. difficult to apply
Year 2 and 3 reversals that create NOLs cannot be carried back to years 1 and 2
Year 1 and 2 reversals that create NOLs are subject to 80% limitation when carried forward to years 2 and 3
Adds complexity to ¶11.c.
GAAP & SAP
Complexity Created by Change in NOL Rules

22. Income Tax Accounting Impact
Assume ABC Insurance Company has $1,000,000 of pre-tax book income and $(100,000) of favorable permanent differences
“Book Taxable Income” [taxable income without regard to temporary differences] is $900,000
At 21%, that generates $189,000 of tax and an effective tax rate (ETR) of 18.9%
ETR increases to 19.25% if pre-tax income is $1.2 million
ETR decreases to % if pre-tax income is $0.8 million
P&C companies with historic level tax-exempt investments are reporting ETRs in the 16%-18% rage
Life and health companies are more in the 19%-21% range (IMR skews impact for life companies)
GAAP & SAP
Effective Tax Rate Observations

23. Tax function key controls
The Big Five
Reconciliation of Current Taxes Receivable/Payable
Components of Deferred Tax Inventory
Return-to-Provision Adjustment (RTP)
Effective Tax Rate (ETR) Reconciliation
Uncertain Tax Position (UTP) and Valuation Allowance (VA) Support
Tax function key controls

24. What We Have Seen… Bkd observation s
Items like Meals & Entertainment and Qualified Parking should be tempered by materiality
P&C companies are not running from tax-exempt investments and Life companies do not appear to be running towards them…perhaps it is a light stroll
On P&C side, reserve re-set was close to a push in provision calculations
Look for opportunities to carryback ordinary and/or capital losses to 2017 and prior years
Bkd observation s

25. What We Don’t Know… BKD OBSERVATIONS Net Operating Losses
Assume C Corporation and P&C Company each have $1,000 of taxable income in carryback period
P&C company has tax loss of $(1,000)
Should result in full utilization
$210 tax refund
P&C company has tax loss of $(1,200)
The “entire amount” language of §172(b)(2) comes into play
Suggests $252 refund
BKD OBSERVATIONS
Net Operating Losses
Unanswered questions in mixed group scenarios

26. What We Don’t Know… BKD OBSERVATIONS Net Operating Losses
P&C company has tax loss of $(2,000)
The “entire amount” language of §172(b)(2) comes into play
Coupled with §172(e) for pre-TCJA years
Suggests $420 refund for pre-TCJA years and $378 (80% limitation for C corporation) for post-TCJA years
BKD OBSERVATIONS
Net Operating Losses
Unanswered questions in mixed group scenarios

27. What We Don’t Know… BKD OBSERVATIONS Alternative Minimum Tax
How will refundable AMT credit work in a §382 fact pattern?
Will P&C companies with NOLs in 2018 and/or 2019 be required to calculate an AMT NOL?
If a P&C insurer has an NOL in 2018 or 2019, and creates an AMT liability in the carryback period, how is the resulting credit refunded?
BKD OBSERVATIONS
Alternative Minimum Tax

32. Any Questions?
Thomas F. Wheeland 3