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October 3, 2019 Tabatha Broussard Jon LeBlanc Kathryn Pittman. Tax Reform Update: What We Learned. Overview. Brief Overview of Tax Reform Provisions Impacting Non-Life Insurance Companies Provisions Impacting Life Insurance Companies Other Business Changes
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October 3, 2019 Tabatha Broussard Jon LeBlanc Kathryn Pittman Tax Reform Update: What We Learned
Overview Brief Overview of Tax Reform Provisions Impacting Non-Life Insurance Companies Provisions Impacting Life Insurance Companies Other Business Changes • How did TCJA impact 2018 filing season? • C-Corporations • General Business Changes • What does the future hold for taxes?
TCJA Changes 21% tax rate Net Operating Losses: Retain pre-TCJA rules, including carryback Reserve Discounting: I.R.S. issued further guidance • Revenue Procedure 2019-06: Setting unpaid discount loss and salvage discount factors for 2018 • Revenue Procedure 2019-30: Procedures for change in accounting methods related to reserve discounting • Revenue Procedure 2019-31: Revised discount factors for 2018 Proration Rate
TCJA Changes 21% tax rate Net Operating Losses: Requires use of TCJA changes, repealing carryback but allowing indefinite carryforward • Reserve Discounting: Life reserves discount is the greater of the net surrender value or 92.81% of reserve • Proration • Small Life Insurance Company Deduction: Eliminated • Corporate AMT: Repealed
TCJA Changes Distributions from Pre-1984 Surplus Accounts: Deferral Repealed Reserve Computation: Repeals 10-year recognition period for change in reserve computation method • Capitalization of Policy Acquisition Expenses: Increased amortization period and modified capitalization rates
Effect on Corporations Changes graduated rates to a flat 21% tax rate for corporations Effective on 1/1/2018
Corporate Tax Rates Pre-2018, double taxation rate on owners of C corporations was 50.47% Pre-2018, top rate on Schedule C/S corporation/partnership income was 39.6%. TCJA, double taxation rate on C corporation is down to 39.8% (21% corporate rate; 23.8% dividend tax) Pre-2018, tax advantage of flow-through treatment was close to 11%. Post-2018, tax advantage of flow-through was reduced to .2%.
Accounting Methods-Small Business Exceptions Uniform $25M gross receipt threshold for small business exceptions to various accounting method items • Cash basis accounting for a C corporation • 263A • Accounting for Inventories • Application of 163(j) (Business Interest Limitation) • Completed Contract accounting method Must not be a “tax shelter” to qualify as a “small business” $25M test is based on average gross receipts for the previous 3 years This used to be $5M.
Tax Shelter – Am I a Tax Shelter Any enterprise for which interests in the enterprise have been offered for sale in an offering required to be registered with any federal or state agency with the authority to regulate the offering of securities (excluding C corporations); Any syndicate (as defined in IRC 1256(e)(3)(B);OR Any tax shelterdefined in IRC 6662(d)(2)(C)(ii).
Syndicate Limited Liability Companies, Limited Partnerships and S Corporations More than 35% of the entity’s losses during the tax year are allocable to “limited partners” or “limited entrepreneurs” “Limited entrepreneur” is any person: • who has an interest in an enterprise other than a limited partner AND • who does not actively participate in the management of the enterprise. Appears to only apply in the year the entity has a loss Can you be a syndicate one year and not the next year?
163(j)/Business Interest Expense Limits deduction for “business interest” to the sum of business interest income PLUS 30% of adjusted taxable income of the taxpayer for the taxable year plus floor plan financing interest “Adjusted taxable income” means the taxable income of a taxpayer computed without regard to: • Items of income, gain, deduction or loss which is not allocable to a trade or business; • Business interest or business interest income; • Net operating losses; and; • Depreciation, amortization or depletion (tax years beginning before January 1, 2022). Small Business Exception (discussed above).
Book/Tax Conformity 451(b) Accrual Method Taxpayer • If taxpayer has an applicable financial statement (audited financial statements or filings with SEC or other non-tax federal regulatory requirements), the taxpayer must recognize income no earlier than the year: • Recognized for financial accounting purposes OR • Right to the income is fixed and determinable • Only impacts recognition not realization of income
Realization v. Recognition 451(b) Accrual Method Taxpayer • JCT Blue Book – two examples: • Example 1 • Taxpayer enters into a 3 year contract to provide consulting services. Taxpayer will receive payment as services are provided and will be entitled to a $4,500 bonus at the end. • Financial accounting may require the taxpayer to treat $1,500 per year as income. • JCT Book says that income was not “realized” by Taxpayer until year 3 when the material conditions of the contract are met and the Taxpayer has a definitive right to receive the payment.
Realization v. Recognition 451(b) Accrual Method Taxpayer • JCT Blue Book – two examples: • Example 2 • Taxpayer enters into a contract to construct a building for $100,000. • Taxpayer will bill $50,000 in year 1 and $50,000 in year 2. • Based on activity, revenue for financial accounting purposes is booked $60,000 in year 1 and $40,000 in year 2. • Blue Book states that Taxpayer is required to book income in the same year as financial accounting purposes. • Blue Book determined that $10,000 of year 2 income was “fixed” in year 1.
Business Expensing/Bonus Depreciation Allows for 100% expensing of qualified property placed in service after September 27, 2017 and before January 1, 2023 Extended through 2026, with 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. Repeal requirement that original use of qualified property begin with the taxpayer, allowing property to qualify if it is the taxpayer’s first use Not available for real property trade or businesses or farming businesses that opt to not apply interest limitation or businesses using floor plan financing indebtedness Property acquired before September 28, but placed in service after September 27 would be subject to old law. Rev. Proc. 2019-33 • Provides for late relief for making bonus election or revoking bonus election
Business Deductions NO MORE ENTERTAINMENT EXPENSES!!!!!!!!!!!!!
