Senate Tax Reform Bill has Passed. Next Step: Reconciliation
On Saturday morning, the Senate passed its version of the tax reform bill and moved the process to reconciliation with the House. The bill narrowly passed with 51 votes in favor of the bill and 49 votes against it, but it has now officially progressed to the next stage of ratification.
The Senate bill maintains the lower corporate tax rates passed by the House, although it delays implementation by one year. Delay or not, there will still be an immediate impact on a company’s deferred tax position. Deferred taxes are recorded at the effective tax rate at which taxpayers believe the items will reverse in the future. When the future holds differing expected tax rates, and assuming tax reform is agreed to before financial statements are issued, taxpayers will need to schedule out the expected reversals and record the result on their December 31, 2017 financials. This could create a negative impact on surplus for companies in a net DTA position.
Under Senate reform, the Alternative Minimum Tax would remain applicable for corporations. Unlike the complete repeal outlined in the House plan, the Senate plan only increases individual exemptions and does not change anything for corporations.
The majority of the tax provisions specifically affecting insurance companies are maintained in the amended and approved version. The changes in the treatment of net operating losses for life and non-life insurance companies are the same as originally proposed and match the House bill. The Senate bill also retains provisions for changing loss reserve discounting and increasing proration (for more details, please see our previous article on this topic.)
Most of the differences between the House and Senate bills are focused on individual taxation, but corporations should pay attention to issues such as AMT, the timing of the tax rate reduction, and the taxation of foreign-sourced income as reconciliation efforts begin. Although it is likely that insurance companies already know what to expect with the current proposed insurance taxation changes, they must continue monitoring for any impactful compromises as negotiations are finalized. It is difficult to know how long the reconciliation process will take and what further changes may be necessary. However, President Trump is committed to signing legislation before the end of the year. Stay tuned!