Income Taxes
Income tax expense (benefit) consisted of the following for the periods indicated:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Current tax expense (benefit): | | | | | |
Federal | $ | 344 |
| | $ | 67 |
| | $ | (69 | ) |
Total current tax expense (benefit) | 344 |
| | 67 |
| | (69 | ) |
Deferred tax expense (benefit): | | | | | |
Federal | (12 | ) | | 49 |
| | 15 |
|
Total deferred tax expense (benefit) | (12 | ) | | 49 |
| | 15 |
|
Total income tax expense (benefit) | $ | 332 |
| | $ | 116 |
| | $ | (54 | ) |
Income taxes were different from the amount computed by applying the federal income tax rate to Income (loss) before income taxes for the following reasons for the periods indicated:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Income (loss) before income taxes | $ | 432 |
| | $ | 135 |
| | $ | (79 | ) |
Tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
Income tax expense (benefit) at federal statutory rate | 151 |
| | 47 |
| | (28 | ) |
Tax effect of: | | | | | |
Dividends received deduction | (50 | ) | | (68 | ) | | (76 | ) |
Valuation allowance | 268 |
| | 136 |
| | 48 |
|
Audit settlements | — |
| | (2 | ) | | — |
|
Tax credits | 5 |
| | 2 |
| | 2 |
|
Non-deductible expense (benefit) | 1 |
| | 1 |
| | — |
|
Effect of Tax Reform | (43 | ) | * | — |
| | — |
|
Income tax expense (benefit) | $ | 332 |
| | $ | 116 |
| | $ | (54 | ) |
Effective tax rate | 76.9 | % | | 85.7 | % | | 68.2 | % |
* Effect of Tax Reform includes a tax benefit of $400 related to change in valuation allowance.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Reform"). Tax Reform makes broad changes to U.S. federal tax law, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing the computations of the dividends received deduction, tax reserves, and deferred acquisition costs; (3) changing how alternative minimum tax credits can be realized; and (4) eliminating the net operating loss (“NOL”) carryback and limiting the NOL carryforward deduction to 80% of taxable income for losses arising in taxable years beginning after December 31, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of Tax Reform for the reporting period of enactment. SAB 118 allows the Company to provide a provisional estimate of the impacts of Tax Reform during a measurement period similar to the measurement period used when accounting for business combinations. Adjustments to provisional estimates and additional impacts from Tax Reform must be recorded as they are identified during the measurement period as provided for in SAB 118.
In reliance on SAB 118, the Company provisionally remeasured its deferred tax assets and liabilities based on the 21% tax rate at which they are expected to reverse in the future. The Company continues to analyze the effects of Tax Reform and will record adjustments and additional impacts from Tax Reform as they are identified during the measurement period as provided for in SAB 118.
Temporary Differences
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of the dates indicated, are presented below.
|
| | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 |
Deferred tax assets | | | |
Insurance reserves | $ | 466 |
| | $ | 768 |
|
Investments | 596 |
| | 818 |
|
Compensation and benefits | 13 |
| | 23 |
|
Other assets | 11 |
| | 22 |
|
Total gross assets before valuation allowance | 1,086 |
| | 1,631 |
|
Less: Valuation allowance | 601 |
| | 734 |
|
Assets, net of valuation allowance | 485 |
| | 897 |
|
| | | |
Deferred tax liabilities | | | |
Deferred policy acquisition costs | (324 | ) | | (663 | ) |
Net unrealized investment (gains) losses | (240 | ) | | (245 | ) |
Total gross liabilities | (564 | ) | | (908 | ) |
Net deferred income tax asset (liability) | $ | (79 | ) | | $ | (11 | ) |
Valuation allowances are provided when it is considered more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2017 and 2016, the Company had total valuation allowances of $601 and $734, respectively. As of December 31, 2017 and 2016, $787 and $920, respectively, of these valuation allowances were allocated to continuing operations, and $(186) as of the end of each period was allocated to Other comprehensive income (loss) related to realized and unrealized capital losses.
For the years ended December 31, 2017, 2016 and 2015, the changes in the valuation allowance were $(133), $136 and $48, respectively, all of which were allocated to continuing operations.
Tax Sharing Agreement
The Company had a payable from Voya Financial, Inc. of $145 as of December 31, 2017, and a receivable from Voya Financial Inc. of $4 as of December 31, 2016 for federal income taxes under the intercompany tax sharing agreement.
The results of the Company's operations are included in the consolidated tax return of Voya Financial, Inc. Generally, the Company's financial statements recognize the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods pursuant to the provisions of Income Taxes (ASC Topic 740) as if the Company were a separate taxpayer rather than a member of Voya Financial, Inc.'s consolidated income tax return group with the exception of any net operating loss carryforwards and capital loss carryforwards, which are recorded pursuant to the tax sharing agreement. If the Company instead were to follow a separate taxpayer approach without any exceptions, there would be no impact to income tax expense (benefit) for the periods indicated above. Also, any current tax benefit related to the Company's tax attributes realized by virtue of its inclusion in the consolidated tax return of Voya Financial, Inc. would have been recorded directly to equity rather than income. Under the tax sharing agreement, Voya Financial, Inc. will pay the Company for the tax benefits of ordinary and capital losses only in the event that the consolidated tax group actually uses the tax benefit of losses generated.
Unrecognized Tax Benefits
Reconciliations of the change in the unrecognized income tax benefits for the periods indicated are as follows:
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| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Balance at beginning of period | $ | 2 |
| | $ | 5 |
| | $ | 5 |
|
Additions for tax positions related to prior years | — |
| | — |
| | — |
|
Reductions for tax positions related to prior years | — |
| | (2 | ) | | — |
|
Reductions for settlements with taxing authorities | — |
| | (1 | ) | | — |
|
Balance at end of period | $ | 2 |
| | $ | 2 |
| | $ | 5 |
|
The Company had $2 of unrecognized tax benefits as of December 31, 2017 and 2016, and $5 of unrecognized tax benefits as of December 31, 2015, which would affect the Company's effective tax rate if recognized.
Interest and Penalties
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in current income taxes and income tax expense on the Balance Sheets and Statement of Operations, respectively. The Company had no accrued interest as of December 31, 2017 and 2016.
Tax Regulatory Matters
Voya Financial, Inc. (including the Company) is currently under audit by the IRS, and it is expected that the examination of tax year 2016 will be finalized within the next twelve months. Voya Financial, Inc. (including the Company) and the IRS have agreed to participate in the Compliance Assurance Process for the tax years 2016 through 2018.