The Internal Revenue Services has developed a system that could help U.S. life insurers comply with part of the Tax Cuts and Jobs Act of 2017 (TCJA).
The new system, described in IRS Revenue Procedure 2019-34, is supposed to give life insurers a quick way to change accounting methods that conflict with the new TCJA policy acquisition cost tax rules.
The TCJA changed the tax rules for life insurers’ reserves, and for how life insurers handle “policy acquisition expenses.”
“Policy acquisition expenses” include many types of costs related to selling and onboarding a new life insurance policy or annuity contract, including the payment of sales commissions to agents, brokers and distributors.
Normally, the IRS requires companies to use the same accounting methods every year, to reduce the risk that companies will try to cut their tax bills by changing their accounting methods.
Now, however, life insurers need to be able to change their accounting methods quickly to comply with the TCJA changes, IRS officials say in the new revenue procedure.
In January, the IRS published one revenue procedure, Revenue Procedure 2019-10, to help life insurers with the effects of the TCJA on reserve accounting.
The new revenue procedure applies to life insurer efforts to comply with the TCJA policy acquisition expense rules, and some life insurer efforts to comply with the new reserve tax rules.
Officials describe a number of standardized time frames and other rules life insurers need to follow if they want to use the automatic approval process for the accounting method changes. If a life insurer follows the rules, and includes a specified adjustment figure in its federal income tax return, it need not get any permission for the accounting change from the IRS.
The new revenue procedure applies for an insurance company’s first taxable year beginning after Dec. 31, 2017.
A transition rule applies the rule to life insurers that have already requested permission to change their accounting procedures through the ordinary process. A life insurer that wants to switch to using automatic process has to notify the IRS that it’s using the automatic approval process.
Dan Phillips of the IRS Office of Associate Chief Counsel is the revenue procedure contact person.
IRS Revenue Procedure 2019-34 is available here.
— Read Boosting the Value of IRA Planning Strategies After the Tax Cut Law, on ThinkAdvisor.