United States

Tax reform: Deferred tax assets from a statutory perspective

INSIGHT ARTICLE  | 

When the corporate income tax rate dropped to 21 percent last month when the Tax Cuts and Jobs Act (TCJA) was signed into law, many public companies announced significant reductions in their deferred tax assets (DTA). The change runs through income under GAAP, but through surplus under statutory accounting. Since the legislation was enacted in 2017, the 2017 financial statements will record the impact of this change. See the following link for background discussion: Financial statement implications of the TCJA.

Most insurance companies hold a net DTA under statutory accounting. The drop in the corporate tax rate will generally result in a drop in surplus. When you overlay SSAP 101, the calculation may result in some unexpected results.

The carryback issue

Under SSAP 101, the admitted portion of the deferred tax asset is the sum of three components (paragraphs 11.a, 11.b, and 11.c.). The first component is equal to the amount of the taxes that can be recovered if the reversing differences (from 2018-2020) were “carried back” to prior years. For life insurance companies, the carryback period was three years prior to enactment. In this situation, the temporary differences reversing in each of the three years (2018-2020) would be recoverable to the extent of the tax paid in those years. Since life insurance companies cannot carryback losses arising in taxable years ending after December 31, 2017, presumably, paragraph 11.a. (the first component) should no longer apply. Note that property and casualty companies will continue to have a two-year carryback with a 20-year carryforward.

Paragraph 4.3 of SSAP No. 101 Q&A

Under paragraphs 11.a. and 12.b., a reporting entity can admit adjusted gross DTAs to the extent that it would be able to recover federal income taxes paid in the carryback period, by treating existing temporary differences that reverse during a timeframe corresponding with Internal Revenue Code tax loss carryback provisions, not to exceed three years as ordinary or capital losses that originated in each such subsequent year. The reversing temporary differences are specific to each year in which they reverse, and in turn, to the specific year(s) to which they can be carried back corresponding with tax loss carryback provisions. Reversing temporary differences for unrealized losses and nonadmitted assets are treated as capital or ordinary losses depending on their character for tax purposes. The entity is not required to project an actual net operating loss in future periods. This first component of admission is available to all entities, regardless of whether they meet any of the threshold limitations in paragraph 11.b. for reversals expected to be realized against future taxable income

Surplus limitation on admitted DTA

Suppose a company has a gross DTA of $3.5 million, passage of the TCJA causes that DTA to drop to $2.1 million. That $1.4 million drop would generally reduce 2017 surplus. However, if the admitted DTA was limited due to the application of the surplus limitation under paragraph 11.b., there may be no reduction in the admitted DTA (just a reduction in the gross DTA).

DTA for AMT credit carryforward

The TCJA repealed the corporate AMT and allowed the credit to be refundable such that all AMT paid should be recovered by the end of 2021. The calculation of the admitted amount will need to take the refundability of the credit into account. The admitted DTA associated with AMT credit carryforwards will likely increase.

Life insurance companies that had paid AMT due to the ‘small life insurance company deduction’ were typically in a permanent AMT position and as a result would often carry a valuation allowance against the AMT credit carryover. Those valuation allowances should be reviewed and generally may be removed since the credit will be refundable.  

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