Form 1120-L: U.S. Life Insurance Company Income Tax Return

Form 1120-L, the U.S. Life Insurance Company Income Tax Return, is a specialized federal tax form. Its purpose is to report the income, gains, losses, deductions, and credits for entities classified as life insurance companies under the Internal Revenue Code. The form is used to calculate the company’s final income tax liability for a given tax year. This return is distinct from the standard Form 1120, reflecting the unique accounting and reserving principles that govern the life insurance industry.

Who Must File Form 1120-L

The requirement for filing Form 1120-L rests on a company’s classification as a “life insurance company” for federal tax purposes. This designation applies if a domestic insurance company’s life insurance reserves, plus its unearned premiums and unpaid losses on noncancellable policies, comprise more than 50 percent of its total reserves. This quantitative test distinguishes life insurers from property and casualty insurers, who file Form 1120-PC.

Life insurance reserves are amounts computed from recognized mortality or morbidity tables and assumed interest rates. These reserves are set aside to mature or liquidate future claims from life insurance, annuity, and noncancellable accident and health contracts. The calculation of these reserves is a specialized actuarial function.

All domestic life insurance companies meeting this definition must file Form 1120-L, including certain organizations providing “commercial-type insurance” under Internal Revenue Code Section 501. The filing deadline for a calendar-year company is April 15th. An automatic extension can be obtained by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.

Required Information and Key Calculations

Before beginning Form 1120-L, a company must assemble specific financial data. The foundation of the return is the determination of gross income, which includes gross premiums on insurance and annuity contracts, any decreases in certain reserves, and all gross investment income earned during the year.

A key calculation is the change in life insurance reserves, governed by Internal Revenue Code Section 807. This requires the company to calculate the value of its reserves at the beginning and end of the tax year. These reserves include life insurance reserves, unearned premium reserves, and other statutorily defined types. A net decrease in these reserves is treated as income, while a net increase is allowed as a deduction.

Another calculation involves policyholder dividends as defined under Section 808. These are dividends or similar distributions to policyholders. The deduction for these dividends is determined by the increase in reserves for policyholder dividends payable during the year.

Life insurance companies are also entitled to other deductions. These include benefits paid to policyholders, such as death benefits and annuity payments, as well as general business expenses that are ordinary and necessary for their operations.

Completing Specific Schedules

Once all preliminary calculations are complete, the data is transcribed onto the various schedules of Form 1120-L. Each schedule serves a distinct purpose in building up to the final tax liability.

Schedule A, Taxable Income, is the operational core of the return. On this schedule, the company enters its gross premium income, investment income, and the net decrease in reserves as income items. It then lists its deductions, including the net increase in reserves, policyholder dividends, and other claims and benefits paid, to arrive at taxable income before net operating loss deductions.

Schedule B, Other Information, consists of a series of yes-or-no questions that provide the IRS with a compliance overview of the company’s operations. These questions cover topics such as ownership structure, foreign accounts, and whether the company is a member of a controlled group. Schedule E, Unearned Premiums and Unpaid Losses, requires a detailed breakdown of these specific reserve types.

The company’s financial position is reported on Schedule L, Balance Sheets per Books, which requires the balance sheet at the beginning and end of the tax year. A reconciliation of the company’s book income with its taxable income is required on Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return. However, life insurance companies with total assets of $10 million or more must file the more detailed Schedule M-3. Schedule M-2, Analysis of Unappropriated Retained Earnings per Books, tracks changes in retained earnings.

Filing and Post-Filing Procedures

Corporations are required to file Form 1120-L electronically if they file 10 or more returns of any type during the calendar year. Filing is done through the IRS Modernized e-File system. For those not required to file electronically, the mailing address for a paper return depends on the location of the company’s principal business office.

Any tax liability shown on the return must be paid by the original due date, regardless of whether an extension to file has been obtained. Payments can be made through the Electronic Federal Tax Payment System (EFTPS), which is a requirement for most corporate tax payments.

Life insurance companies are also required to pay estimated tax. These payments are made in four installments and are calculated based on the company’s expected income tax for the year. Companies can use Form 1120-W, Estimated Tax for Corporations, as a worksheet to figure their estimated tax, though the worksheet itself is not filed.

If a company discovers an error on a previously filed Form 1120-L, it must file a corrected return using Form 1120-X, Amended U.S. Corporation Income Tax Return. This form allows the company to report the changes and calculate any additional tax due or refund owed.