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What tax rate should a small life insurance company use when it records its deferred tax assets and liabilities for GAAP (ASC 740 / FAS 109)? 

Enacted vs. effective rate. GAAP generally requires that a small life insurance company compute its deferred taxes no different than any other company.  GAAP generally requires that a company should measure its deferred tax assets and liabilities at the enacted tax rate (generally 34% or 35%).  However, small life companies can have an effective rate as low as 13.6% due to the small life insurance company deduction.  Therefore, should a small life insurance company record its deferreds at the enacted rate or its effective rate?

Need for a valuation allowance. Deferred tax assets or liabilities should be measured using the enacted tax rate.  A small life insurance company who is eligible for the small life insurance company deduction should consider the effect that the deduction will have on the amount of future taxable income that is expected to be available when assessing the realizablility of its deferred tax assets.  Based on this analysis the company may need to then determine the need for a valuation allowance.

Realizable amount. A small life insurance company should record its deferred tax assets and liabilities at the enacted rate.  If the company has a net deferred tax asset balance after it has netted it deferred tax assets and liabilities, the company should then determine if it needs to record a valuation allowance to net the deferred tax asset balance to a realizable amount that may be different from the enacted rate.

Small life insurance company defined. A small life insurance company is a life insurance company that has less than $500 million in assets and has taxable income of less than $15 million.  Both the asset and income of the company must be determined at a controlled group level.  For the asset test, the controlled group includes all companies of the group (both insurance and non-insurance companies).  For the income test, the taxable income only includes life insurance companies of the controlled group.

Small life insurance company deduction. The small life insurance company deduction is equal to 60% of the first $3 million of taxable income.  The rate is phased out on taxable income between $3 million and $15 million.  The maximum small life insurance company deduction is $1.8 million.

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