The biggest business story of 2017 is the tax reform passed by Congress and signed into law just before Christmas. It may very well be the biggest business story of 2018 as the law goes into effect and we really learn what it does for business and for individuals.
Business is the focus of this story.
As you know the corporate tax rate — starting January 1 of this year — is going to be 21%. The cut drops the rate from 21% and lets companies take full deductions from capital expenses and will lower the tax on repatriating overseas profits.
Though a mixed bag of benefits, PIA National says the reforms are — though they run out in 2025 — fairly good for small business.
“While the bill provides provisions that will result in savings for some pass-through entities, the benefit is limited by an income threshold that will prevent some PIA members from benefitting from the maximum new deduction available to certain pass-throughs. As such, many may opt to reorganize as C corporations, a process that costs money and presents logistical and compliance issues that could be overly burdensome to small businesses. Furthermore, the benefit for pass-throughs, even at its most generous, is not permanent, which leaves small business owners at a disadvantage compared to large corporations. Still, overall this legislation will be a net positive for most PIA members,” the association said in a statement.
Overall though, it’s good news.
“Pass through income — which many insurance agencies work under — will continue to be taxed at individual rates. Some of the smaller agencies will be able to deduct 20% of business income if the annual business income does not go past $157,500 for single filers or $315,000 for those filing jointly,” the PIA statement added.
Meyer Shields of Keefe, Bruyette & Woods (KBW) did an analysis of the reforms for insurers and insurance agencies. He said, “The primary changes are 1) the lower corporate tax rate; 2) the likely near-total discontinuation of intra-company cessions to non-U.S. affiliates; 3) the elimination of tax-friendly intra-company debt, and 4) adjustments to deferred tax assets and liabilities.”
He also said property and casualty insurance pricing will reflect the lower taxes.
“The P&C insurance industry’s longstanding track record of price competitiveness (other than when underwriting and expected returns are obviously inadequate) strongly suggests that the bottom-line benefits of the tax bill will be competed away relatively quickly. The speed with which P&C rates will reflect lower tax rates should vary by line. On the other hand, we expect the brokers to broadly retain the bottom-line benefits of the domestic tax bill, especially since several brokers’ benefits should be offset by the elimination of current tax management strategies,” he wrote.
Jimi Grande of the National Association of Mutual Insurance Companies (NAMIC) said his organization is happy with the changes. “For property/casualty insurers, the legislation would slash the tax rate 14 percentage points and eliminate the corporate alternative minimum tax, while maintaining the current effective rate for municipal bond interest, the deductibility of advertising expenses, and current law regarding carrybacks and carryforwards of net operating losses. Also, critical to NAMIC’s smallest member companies, the bill maintains the investment income election for small property/casualty insurers that helps ensure consumers in underserved rural areas continue to have coverage options.”
He noted the average company tax rate before the reforms was the low 30 percentile so “a 21 percent corporate rate is a huge win for us. Congress deserves high praise for its ability to balance the very real need to keep our corporate tax rate internationally competitive with the need to ensure that they did not create a fundamental mismatch between the federal tax code and our industry’s regulatory and accounting systems. We think they struck this balance nicely.”
The Coalition for American Insurance — which represents Alleghany, Allstate, American Family, American Financial, Berkshire Hathaway, Cincinnati Insurance, CAN, EMC Insurance, Liberty Mutual, The Hartford, Travelers and W.R. Berkley — likes the new law and that it does away with a hated loophole.
“With this agreement, Congress has made good on its promise to create U.S. jobs and to keep American companies competitive in the global marketplace. Importantly, the Tax Cuts and Jobs Act helps to close the tax haven loophole in the current tax code that unfairly rewarded the transfer of profits and jobs overseas. Now, with the inclusion of the Base Erosion and Anti-Abuse Tax (BEAT) to impede the offshoring of profits by foreign companies to tax havens, all insurers operating in the U.S. market will do so on the most level playing field in decades. The BEAT is not discriminatory. Instead, it ensures that all companies doing business in the United States will pay U.S. taxes on that business. This is an important reform that will help maintain a thriving American-based insurance industry and enhance choices for all consumers,” the coalition said in a statement.
A.M. Best also likes the reforms and said, “The insurance industry will see overall benefits from the reduced corporate tax rate as a result of The Tax Cuts and Jobs Act, however partially offsetting the benefits are certain revenue enhancements that will impact life and property/casualty insurers. In particular, a repeal of all net operating loss carrybacks could reduce total adjusted and risk-based capital for life insurers. For life insurers, the repeal of the loss carryback period has the potential to reduce the amount of gross deferred tax assets that can be admitted, thereby reducing capital and surplus. Higher after-tax earnings may offset the surplus declines, but this may take time to emerge. A.M. Best will view companies on a case-by-case basis to determine future surplus expectations as the new law takes effect.”
Moody’s Investors Service added, “While the Tax Cuts and Jobs Act is broadly credit positive for U.S. companies, the sweeping legislation makes many changes to the tax code, some of which will suppress house prices and are credit negative for other sectors, including the U.S. sovereign. Overall, the tax cuts’ stimulative impact on the economy from increased consumption and investment spending from the private sector is likely to be modest. Ultimately, Moody’s estimates that the tax legislation will spur economic growth in the range of one-tenth to two-tenths of one percent of GDP, due mostly to increased household consumption.”
Source links: Insurance Journal, Business Insurance