12 Days of SSAP: Bye-bye Small Life Insurance Deduction

As the holidays approach, JLK Rosenberger is taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance company in 2019 and beyond.

Bye-bye Small Life Insurance Deduction

As we enter the new year with a new tax act, we are driven to tell you more insurance tax facts.  As the TCJA came in with a bang, many old insurance rules have changed.  So, here’s one that’s been long-standing for life insurance companies that will cause small insurers some obvious strife.

As background, the small life insurance company deduction was established via the Tax Reform Act of 1984 (1984 TRA).  At that time, the purpose of the rule was to ease what was considered negative tax distortions created by other provisions within the 1984 TRA.  These distortions created competitive disadvantages for small life insurers.  Congress modified the existing law for small life insurance companies to provide a deduction for 60 percent of taxable income up to $1.8 million annually, with a phase-out mechanism between $3 million and $15 million in taxable income.  To be considered a “small life insurance company,” an insurance entity was required to have total assets valued at less than $500 million (including controlled group assets).

Fast forward to December 2017.  The Tax Cuts and Jobs Act repeals the small life insurance company deduction(§806) in its entirety effective with tax years beginning after December 31, 2017.  Clearly, this is not a welcome change within the small life insurance community, many of whom will very possibly experience increased tax burdens.  Though this does not necessarily change the application of the SSAP accounting, it will most certainly impact your statutory tax provision calculations.