Why Insurance Companies Need Specialized Tax Expertise

Insurance companies face tax requirements that differ significantly from those of traditional corporations. From industry-specific calculations and elections to changing filing requirements, these complexities make it important to work with a tax professional who understands the insurance tax environment.

For insurance companies, there are many special tax needs found regularly, with several tax laws that apply to insurance companies that do not apply to regular corporations. That’s the reason why it’s necessary to have a competent tax preparer, who is familiar with the specific tax differences that arise for insurance companies. These differences can include discounting unpaid losses, what constitutes tax basis life reserves, and tax treatment of policy acquisition expenses.

With the enactment of the Tax Cuts and Jobs Act, preparers must also understand the differences in net operating loss rules as they apply to life and nonlife companies. Additional complexities arise when an affiliated mixed group of corporations, such as life and nonlife companies, require an understanding of eligible and ineligible life insurance companies that can join a consolidation. This complexity requires special attention for charitable contributions, capital losses, and net operating losses.

Insurance-Specific Tax Elections

There are several tax elections that apply specifically to insurance companies, further making the case for obtaining a knowledgeable tax preparer.

When preparing tax documents for insurance clients, an election must be made under Section 243(b)(3) to treat a dividend from a life insurance company to a member of an affiliated group as a qualified dividend for purposes of the 100% dividends received deduction.

Second, a Section 953(d) election can be made by a controlled foreign corporation (CFC) to be treated as a domestic corporation. Skilled tax professionals understand the alternative US tax regimes (particularly Section 951A global intangible low-taxed income (GILTI) and Section 952 Subpart F income, and sometimes foreign tax regimes) and can help evaluate whether or not a CFC should make the Section 953(d) election.

Lastly, a Section 831(b) election offers a tax savings opportunity for certain small insurance companies wherein the entity is taxed only on their taxable investment income. This election is often utilized by, but not limited to, captive insurance companies.

Electronic Filing Requirements Are Evolving

Insurance companies also need to prepare for changes in how their federal income tax returns are filed. As part of broader modernization efforts, the IRS is expanding electronic filing capabilities for insurance company returns.

E-filing has previously been unavailable for insurance companies unless they were a part of a consolidated return with a C-corporation parent filing Form 1120. There will be software and transmittal challenges in this transition. Forms 1120-L and 1120-PC will now fall under e-filing mandates, though this mandate was waived for 2025 tax returns. No penalty for not electronically filing Forms 1120-REIT, 1120-RIC, 1120-L, and 1120-PC for 2025 | Internal Revenue Service With the expansion into e-filing, digital transformation, and AI-driven analytics, these returns might be more susceptible to IRS scrutiny.

Tax Planning Beyond the Return

It’s important to note that insurance company tax needs are not limited to income tax returns and election preparation. A tax advisor can also offer tax advice and planning for business transactions, including how to best structure buy/sell agreements or the tax impact of reinsurance transactions. Additionally, insurance company tax advisors should be knowledgeable and able to advise regarding the following:

• Quarterly estimated tax payment needs.
• The insurance business cycle, and able to prepare calculations based on annualized income rules to help better manage the cash flow needed for tax payments.
• State and foreign tax rules for insurance companies that may apply to your company, depending on the jurisdiction.

Tax and statutory accounting methods often merge when preparing current and deferred income tax accruals, valuation allowances, and nonadmitted deferred tax assets. Tax consulting services can help your company navigate many of these complexities by including the preparation of income tax accruals and Note 9 disclosures regarding income taxes, assisting entities in complying with requirements set by the National Association of Insurance Commissioners (NAIC).

Even if your company doesn’t fall under the regulation of the NAIC, understanding the insurance tax regime is essential. Insurance arrangements such as workers’ compensation funds and self-insured funds face many of the same issues as life, health, and property & casualty companies. Insurance taxation continues to evolve, making specialized knowledge increasingly important for accurate filings, effective planning, and compliance with changing requirements. Contact your CRI advisor to discuss your insurance company's tax and accounting needs.