Industry Insights

How the Proposed Federal Budget Affects Insurance Companies

March 2015
Author:  Kris Smalley

Kris Smalley

Director

Tax

Manufacturing & Distribution

1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City
816.221.6300

On February 2, 2015, President Obama released his federal budget proposal for fiscal year 2016. The budget proposal—which Treasury estimates could reduce the budget deficit by approximately $1.8 trillion—includes a number of proposed tax code reforms. If adopted, they would be effective for taxable years beginning after December 31, 2015. Here’s a summary of proposals specific to the insurance industry.

Net Operating Loss Conformity

In general, a business may carry back a net operating loss (NOL) up to two years preceding the year of loss and carry forward an NOL up to 20 years following the loss year. However, life insurance companies have a carryback period of three years and a carryforward period of 15 years. The budget proposal would change the rules for life insurance companies by allowing a carryback period of two years and a carryforward period of 20 years.

Expanded Information Reporting

For each contract with a cash value that’s partially or wholly invested in a private separate account for any portion of the taxable year and that represents at least 10 percent of the account’s value, the budget proposal would require life insurance companies to report new information to the IRS. This information includes the policyholder’s taxpayer identification number, policy number, amount of accumulated untaxed income, total contract account value and portion of that value invested in one or more private separate accounts.

Proration

Life insurance companies currently are required to prorate the benefits of tax-exempt income and dividends received through deduction, specifying the “company share” and “policyholder share.” The budget proposal would modify the existing proration method and replace it with a simpler method wherein the company share and policyholder share are computed based on a ratio of mean reserves to mean assets.

Derivatives

The budget proposal would require all derivative contracts to be marked to market no later than the last business day of the taxpayer’s taxable year. The resulting gain or loss would be treated as ordinary and attributable to a trade or business for purposes of Section 172(d)(4). The mark-to-market rules would not apply to a hedging transaction if it’s identified as a business hedge for financial accounting purposes and hedges price changes on ordinary property or obligations. 

Expanded Interest Expense Disallowance for Corporate-Owned Life Insurance

Under current law, the portion of a taxpayer’s otherwise deductible interest expense that’s allocable to inside build-up under life insurance and annuity contracts is disallowed. An exception applies to contracts insuring the lives of officers, directors and employees. The proposal would repeal this exception, except for 20 percent owners of a business that’s the owner or beneficiary of the contracts.

To learn more about how these proposed changes could affect your company, contact your BKD advisor.

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