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 form used to report a company’s annual income, gains, losses, deductions, and credits. It is used to calculate the company’s total income tax liability for the year. This return is designed to accommodate the unique accounting and reserving principles of the life insurance industry. The form provides the structure to translate operational and investment results into a final tax figure, ensuring compliance with federal tax laws.

Determining Who Must File Form 1120-L

Filing Form 1120-L is required for any domestic company that qualifies as a life insurance company for federal income tax purposes. This determination hinges on the “more than 50 percent” reserve test. A company meets this test if its life insurance reserves, plus any unearned premiums and unpaid losses on noncancelable or guaranteed renewable policies, comprise more than half of its total reserves. This ensures that only companies predominantly engaged in this business use the specialized return.

For this test, “total reserves” includes life insurance reserves, unearned premiums, and unpaid losses on most types of insurance contracts. “Life insurance reserves,” a subset of total reserves, are the amounts set aside to mature or liquidate future unaccrued claims arising from life insurance and annuity contracts.

Certain foreign corporations that would meet these qualifications if they were U.S. entities must also file Form 1120-L. This can apply even if the company has no other U.S. business. Mutual savings banks with a life insurance department file Form 1120-L for that part of their business, attaching it as a schedule to their main corporate return, Form 1120.

Information for Completing the Return

Successfully completing Form 1120-L requires gathering extensive financial data that reflects the unique operations of a life insurance company. The process involves specific calculations and adherence to tax accounting rules for the insurance industry.

Income Sources

The initial step involves aggregating all sources of income. For a life insurance company, this primarily includes gross premiums collected on policies, adjusted for items like return premiums and reinsurance. Another significant income component is investment income from stocks, bonds, real estate, and other assets.

Life Insurance Reserves

A central part of the return is the calculation related to life insurance reserves, detailed on Schedule A. These reserves are liabilities representing the estimated amount needed to pay future benefits. For tax purposes, the change in these reserves from the beginning to the end of the year results in either a deduction or an income item. Companies must calculate these reserve amounts using prescribed tax rules, which may differ from statutory accounting rules.

Policyholder Dividends Deduction

Life insurance companies, particularly mutual companies, may pay dividends to their policyholders. These payments can be deducted when calculating taxable income. The company must track the total amount of dividends paid or accrued to policyholders during the tax year. This includes amounts paid in cash or used by the policyholder to pay premiums, purchase additional insurance, or left to accumulate interest.

Operations Loss Deduction

A life insurance company can have an operations loss when its deductions for a given year exceed its gross income. These are governed by the general net operating loss (NOL) rules applicable to most corporations. For losses arising in tax years after 2017, these losses can be carried forward indefinitely to future tax years. However, the deduction for these loss carryforwards in any single year is limited to 80% of the company’s taxable income for that year.

Important Schedules

Beyond the main form, several schedules capture financial details. Schedule L requires a full balance sheet showing the company’s assets, liabilities, and equity per its books at the beginning and end of the tax year. This information must be reconciled with the company’s taxable income.

Schedule M-1 or Schedule M-3 is used for this reconciliation. Schedule M-1 reconciles book income with taxable income. Larger corporations, those with total assets of $10 million or more, must file the more detailed Schedule M-3.

Tax Computation and Payments

After determining taxable income, the 21 percent flat corporate income tax rate is applied to the company’s taxable income figure. This result is the company’s gross tax liability before any adjustments.

This initial tax amount can be reduced by any available tax credits. Life insurance companies may be eligible for general business credits or other specific credits. For example, a company might claim credits for federal taxes paid on certain fuels, calculated on Form 4136, Credit for Federal Tax Paid on Fuels.

A significant aspect of tax management is the requirement to pay estimated tax. Corporations expecting to owe tax must make quarterly payments based on their estimated taxable income. These payments are due on the 15th day of the fourth, sixth, ninth, and twelfth months of the tax year.

Failure to pay enough tax through these quarterly installments can result in an underpayment penalty. The required annual payment is the lesser of 100% of the tax shown on the current year’s return or 100% of the tax on the prior year’s return. Companies can use an annualized income installment method, and payments are made through the Electronic Federal Tax Payment System (EFTPS).

Submission Procedures for Form 1120-L

For a calendar-year company, the return is due by the 15th day of the fourth month following the close of the tax year, which is April 15 for companies whose tax year ends on December 31.

A company can obtain an automatic six-month extension to file by submitting Form 7004 by the original due date of the return. This is an extension of time to file, not an extension of time to pay. Any tax liability must still be estimated and paid by the original deadline to avoid penalties.

The IRS mandates electronic filing for most corporations. Corporations that file 10 or more returns of any type annually are required to e-file Form 1120-L. When filing electronically, the company does not attach its comprehensive annual statement but must be prepared to provide it to the IRS upon request.

For smaller companies that are not required to file electronically and choose to submit a paper return, the form must be mailed to a specific IRS service center. The correct mailing address depends on the location of the company’s principal business office. The company should retain a complete copy of the return and all supporting documents.