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Sec. 848. Capitalization Of Certain Policy Acquisition Expenses

I.R.C. § 848(a) General Rule
In the case of an insurance company—
I.R.C. § 848(a)(1)
specified policy acquisition expenses for any taxable year shall be capitalized, and
I.R.C. § 848(a)(2)
such expenses shall be allowed as a deduction ratably over the 180-month period beginning with the first month in the second half of such taxable year.
I.R.C. § 848(b) 5-Year Amortization For First $5,000,000 Of Specified Policy Acquisition Expenses
I.R.C. § 848(b)(1) In General
Paragraph (2) of subsection (a) shall be applied with respect to so much of the specified policy acquisition expenses of an insurance company for any taxable year as does not exceed $5,000,000 by substituting ”60-month” for “180-month”.
I.R.C. § 848(b)(2) Phase-Out
If the specified policy acquisition expenses of an insurance company exceed $10,000,000 for any taxable year, the $5,000,000 amount under paragraph (1) shall be reduced (but not below zero) by the amount of such excess.
I.R.C. § 848(b)(3) Special Rule For Members Of Controlled Group
In the case of any controlled group—
I.R.C. § 848(b)(3)(A)
all insurance companies which are members of such group shall be treated as 1 company for purposes of this subsection, and
I.R.C. § 848(b)(3)(B)
the amount to which paragraph (1) applies shall be allocated among such companies in such manner as the Secretary may prescribe.
For purposes of the preceding sentence, the term “controlled group” means any controlled group of corporations as defined in section 1563(a); except that subsections (a)(4) and (b)(2)(D) of section 1563 shall not apply, and subsection (b)(2)(C) of section 1563 shall not apply to the extent it excludes a foreign corporation to which section 842 applies.
I.R.C. § 848(b)(4) Exception For Acquisition Expenses Attributable To Certain Reinsurance Contracts
Paragraph (1) shall not apply to any specified policy acquisition expenses for any taxable year which are attributable to premiums or other consideration under any reinsurance contract.
I.R.C. § 848(c) Specified Policy Acquisition Expenses
For purposes of this section—
I.R.C. § 848(c)(1) In General
The term “specified policy acquisition expenses” means, with respect to any taxable year, so much of the general deductions for such taxable year as does not exceed the sum of—
I.R.C. § 848(c)(1)(A)
2.09 percent of the net premiums for such taxable year on specified insurance contracts which are annuity contracts,
I.R.C. § 848(c)(1)(B)
2.45 percent of the net premiums for such taxable year on specified insurance contracts which are group life insurance contracts, and
I.R.C. § 848(c)(1)(C)
9.2 percent of the net premiums for such taxable year on specified insurance contracts not described in subparagraph (A) or (B).
I.R.C. § 848(c)(2) General Deductions
The term “general deductions” means the deductions provided in part VI of subchapter B (sec. 161 and following, relating to itemized deductions) and in part I of subchapter D (sec. 401 and following, relating to pension, profit sharing, stock bonus plans, etc.).
I.R.C. § 848(d) Net Premiums
For purposes of this section—
I.R.C. § 848(d)(1) In General
The term “net premiums” means, with respect to any category of specified insurance contracts set forth in subsection (c)(1), the excess (if any) of—
I.R.C. § 848(d)(1)(A)
the gross amount of premiums and other consideration on such contracts, over
I.R.C. § 848(d)(1)(B)
return premiums on such contracts and premiums and other consideration incurred for reinsurance of such contracts.
The rules of section 803(b) shall apply for purposes of the preceding sentence.
I.R.C. § 848(d)(2) Amounts Determined On Accrual Basis
In the case of an insurance company subject to tax under part II of this subchapter, all computations entering into determinations of net premiums for any taxable year shall be made in the manner required under section 811(a) for life insurance companies.
I.R.C. § 848(d)(3) Treatment Of Certain Policyholder Dividends And Similar Amounts
Net premiums shall be determined without regard to section 808(e) and without regard to other similar amounts treated as paid to, and returned by, the policyholder.
I.R.C. § 848(d)(4) Special Rules For Reinsurance
I.R.C. § 848(d)(4)(A)
Premiums and other consideration incurred for reinsurance shall be taken into account under paragraph (1)(B) only to the extent such premiums and other consideration are includible in the gross income of an insurance company taxable under this subchapter or are subject to tax under this chapter by reason of subpart F of part III of subchapter N.
I.R.C. § 848(d)(4)(B)
The Secretary shall prescribe such regulations as may be necessary to ensure that premiums and other consideration with respect to reinsurance are treated consistently by the ceding company and the reinsurer.
I.R.C. § 848(e) Classification Of Contracts
For purposes of this section—
I.R.C. § 848(e)(1) Specified Insurance Contract
I.R.C. § 848(e)(1)(A) In General
Except as otherwise provided in this paragraph, the term “specified insurance contract” means any life insurance, annuity, or noncancellable accident and health insurance contract (or any combination thereof).
I.R.C. § 848(e)(1)(B) Exceptions
The term “specified insurance contract” shall not include—
I.R.C. § 848(e)(1)(B)(i)
any pension plan contract (as defined in section 818(a)),
I.R.C. § 848(e)(1)(B)(ii)
any flight insurance or similar contract,
I.R.C. § 848(e)(1)(B)(iii)
any qualified foreign contract (as defined in section 807(e)(3) without regard to paragraph (5) of this subsection),
I.R.C. § 848(e)(1)(B)(iv)
any contract which is an Archer MSA (as defined in section 220(d)), and
I.R.C. § 848(e)(1)(B)(v)
any contract which is a health savings account (as defined in section 223(d)).
I.R.C. § 848(e)(2) Group Life Insurance Contract
The term “group life insurance contract” means any life insurance contract—
I.R.C. § 848(e)(2)(A)
which covers a group of individuals defined by reference to employment relationship, membership in an organization, or similar factor,
I.R.C. § 848(e)(2)(B)
the premiums for which are determined on a group basis, and
I.R.C. § 848(e)(2)(C)
the proceeds of which are payable to (or for the benefit of) persons other than the employer of the insured, an organization to which the insured belongs, or other similar person.
I.R.C. § 848(e)(3) Treatment Of Annuity Contracts Combined With Noncancellable Accident And Health Insurance
Any annuity contract combined with noncancellable accident and health insurance shall be treated as a noncancellable accident and health insurance contract and not as an annuity contract.
I.R.C. § 848(e)(4) Treatment Of Guaranteed Renewable Contracts
The rules of section 816(e) shall apply for purposes of this section.
I.R.C. § 848(e)(5) Treatment Of Reinsurance Contract
A contract which re insures another contract shall be treated in the same manner as the reinsured contract.
I.R.C. § 848(e)(6) Treatment Of Certain Qualified Long-Term Care Insurance Contract Arrangements
An annuity or life insurance contract which includes a qualified long-term care insurance contract as a part of or a rider on such annuity or life insurance contract shall be treated as a specified insurance contract not described in subparagraph (A) or (B) of subsection (c)(1).
I.R.C. § 848(f) Special Rule Where Negative Net Premiums
I.R.C. § 848(f)(1) In General
If for any taxable year there is a negative capitalization amount with respect to any category of specified insurance contracts set forth in subsection (c)(1)—
I.R.C. § 848(f)(1)(A)
the amount otherwise required to be capitalized under this section for such taxable year with respect to any other category of specified insurance contracts shall be reduced (but not below zero) by such negative capitalization amount, and
I.R.C. § 848(f)(1)(B)
such negative capitalization amount (to the extent not taken into account under subparagraph (A)) --
I.R.C. § 848(f)(1)(B)(i)
shall reduce (but not below zero) the unamortized balance (as of the beginning of such taxable year) of the amounts previously capitalized under subsection (a) (beginning with the amount capitalized for the most recent taxable year), and
I.R.C. § 848(f)(1)(B)(ii)
to the extent taken into account as such a reduction, shall be allowed as a deduction for such taxable year.
I.R.C. § 848(f)(2) Negative Capitalization Amount
For purposes of paragraph (1), the term “negative capitalization amount” means, with respect to any category of specified insurance contracts, the percentage (applicable under subsection (c)(1) to such category) of the amount (if any) by which—
I.R.C. § 848(f)(2)(A)
the amount determined under subparagraph (B) of subsection (d)(1) with respect to such category, exceeds
I.R.C. § 848(f)(2)(B)
the amount determined under subparagraph (A) of subsection (d)(1) with respect to such category.
I.R.C. § 848(g) Treatment Of Certain Ceding Commissions
Nothing in any provision of law (other than this section or section 197) shall require the capitalization of any ceding commission incurred on or after September 30, 1990, under any contract which reinsures a specified insurance contract.
I.R.C. § 848(h) Secretarial Authority To Adjust Capitalization Amounts
I.R.C. § 848(h)(1) In General
Except as provided in paragraph (2), the Secretary may provide that a type of insurance contract will be treated as a separate category for purposes of this section (and prescribe a percentage applicable to such category) if the Secretary determines that the deferral of acquisition expenses for such type of contract which would otherwise result under this section is substantially greater than the deferral of acquisition expenses which would have resulted if actual acquisition expenses (including indirect expenses) and the actual useful life for such type of contract had been used.
I.R.C. § 848(h)(2) Adjustment To Other Contracts
If the Secretary exercises his authority with respect to any type of contract under paragraph (1), the Secretary shall adjust the percentage which would otherwise have applied under subsection (c)(1) to the category which includes such type of contract so that the exercise of such authority does not result in a decrease in the amount of revenue received under this chapter by reason of this section for any fiscal year.
(Added by Pub. L. 101-508, title XI, Sec. 11301(a), Nov. 5, 1990, 104 Stat. 1388-445; amended by Pub. L. 103-66, title XIII, Sec. 13261(d), Aug. 10, 1993, 107 Stat. 312; Pub. L. 104-191, title III, Sec. 301(h), Aug. 21, 1996, 110 Stat. 1936; Pub. L. 106-554, Sec. 202, Dec. 21, 2000, 114 Stat. 2763; Pub. L. 108-173, title XII, Sec. 1201(h), Dec. 8, 2003, 117 Stat. 2066; Pub. L. 109-280, title VIII, Sec. 844(e), Aug. 17, 2006, 120 Stat. 780; Pub. L. 113-295, Div. A, title II, Sec. 221(a)(70), Dec. 19, 2014, 128 Stat. 4010; Pub. L. 115-97, title I, Secs. 12001(b)(8)(C), 13517(b)(4), 13519, Dec. 22, 2017, 131 Stat. 2054.)
BACKGROUND NOTES
AMENDMENTS
2017 - Subsec. (a)(2). Pub. L. 115-97, Sec. 13519(a)(1) amended par. (2) by substituting “180-month” for “120-month”.
Subsec. (b)(1). Pub. L. 115-97, Sec. 13519(b), amended par. (1) by substituting “180-month” for “120-month”
Subsec. (c)(1). Pub. L. 115-97, Sec. 13519(a)(2)-(4), amended par. (1) by substituting “2.09 percent” for “1.75 percent”, “2.45 percent” for “2.05 percent”, and “9.2 percent” for “7.7 percent”. Note that Pub. L. 115-97, Sec. 13519(a) instructed that the amendments be made to Sec. 848(c)(1), (2) and (3) instead of Sec. 848(c)(1)(A), (B), and (C).
Subsec. (e)(1)(B)(iii). Pub. L. 115-97, Sec. 13517(b)(4), amended clause (iii) by substituting “807(e)(3)” for “807(e)(4)”.
Subsec. (i). Pub. L. 115-97, Sec. 12001(b)(8)(C), struck subsec. (i). Before being struck, it read as follows:
“(i) Treatment Of Qualified Foreign Contracts Under Adjusted Current Earnings Preference.— For purposes of determining adjusted current earnings under section 56(g), acquisition expenses with respect to contracts described in clause (iii) of subsection (e)(1)(B) shall be capitalized and amortized in accordance with the treatment generally required under generally accepted accounting principles as if this subsection applied to such contracts for all taxable years.”
2014 - Subsec. (j). Pub. L. 113-295, Div. A, Sec. 221(a)(70), struck subsec. (j). Before being struck, it read as follows:
“(j) Transitional Rule.__In the case of any taxable year which includes September 30, 1990, the amount taken into account as the net premiums (or negative capitalization amount) with respect to any category of specified insurance contracts shall be the amount which bears the same ratio to the amount which (but for this subsection) would be so taken into account as the number of days in such taxable year on or after September 30, 1990, bears to the total number of days in such taxable year.”
2006 - Subsec. (e)(6). Pub. L. 109-280, Sec. 844(e), added par. (6).
2003--Subsec. (e)(1)(B)(iii)-(v). Pub. L. 108-173, Sec. 1201(h), amended subpar. (B) by striking “and” at the end of clause (iii), by substituting “, and” for the period at the end of clause (iv), and by adding clause (v).
2000--Subsec. (e)(1)(B)(iv). Pub. L. 106-554, Sec. 202, substituted “an Archer MSA” for “a medical savings account” in clause (iv).
1996--Subsec. (e)(1)(B). Pub. L. 104-191, Sec. 301(h), struck “and” at the end of clause (ii), substituted “, and” for “." at the end of clause (iii), and added clause (iv).
1993—Subsec. (g). Pub. L. 103-66, Sec. 13261(d), amended subsec. (g) by substituting “this section or section 197” for “this section”.
EFFECTIVE DATE OF 2017 AMENDMENTS
Amendment by Pub. L. 115-97, Sec. 12001(b)(8)(C), effective for taxable years beginning after December 31, 2017.
Amendment by Pub. L. 115-97, Sec. 13517(b)(4), effective for taxable years beginning after December 31, 2017. Sec. 13517(c)(2)-(3) of Pub. L. 115-97 provided the following transition rule and relief:
“(2) TRANSITION RULE.—For the first taxable year beginning after December 31, 2017, the reserve with respect to any contract (as determined under section 807(d) of the Internal Revenue Code of 1986) at the end of the preceding taxable year shall be determined as if the amendments made by this section had applied to such reserve in such preceding taxable year.
“(3) TRANSITION RELIEF.—
“(A) IN GENERAL.—If—
“(i) the reserve determined under section 807(d) of the Internal Revenue Code of 1986 (determined after application of paragraph (2)) with respect to any con- tract as of the close of the year preceding the first taxable year beginning after December 31, 2017, differs from
“(ii) the reserve which would have been determined with respect to such contract as of the close of such taxable year under such section determined without regard to paragraph (2),
“then the difference between the amount of the reserve described in clause (i) and the amount of the reserve described in clause (ii) shall be taken into account under the method provided in subparagraph (B).
“(B) METHOD.—The method provided in this subparagraph is as follows:
“(i) If the amount determined under subparagraph (A)(i) exceeds the amount determined under subparagraph (A)(ii), 1/8 of such excess shall be taken into account, for each of the 8 succeeding taxable years, as a deduction under section 805(a)(2) or 832(c)(4) of such Code, as applicable.
“(ii) If the amount determined under subparagraph (A)(ii) exceeds the amount determined under subparagraph (A)(i), 1/8 of such excess shall be included in gross income, for each of the 8 succeeding taxable years, under section 803(a)(2) or 832(b)(1)(C) of such Code, as applicable.”
Amendments by Pub. L. 115-97, Sec. 13519, effective for net premiums for taxable years beginning after December 31, 2017. Sec. 13519(c)(2) of Pub. L. 115-97 provided the following transition rule:
“(2) TRANSITION RULE.—Specified policy acquisition expenses first required to be capitalized in a taxable year beginning before January 1, 2018, will continue to be allowed as a deduction ratably over the 120-month period beginning with the first month in the second half of such taxable year.”
EFFECTIVE DATE OF 2014 AMENDMENT
Amendment by Pub. L. 113-295, Div. A, Sec. 221(a)(70), effective on the date of the enactment of this Act [Enacted: Dec. 19, 2014].
EFFECTIVE DATE OF 2006 AMENDMENT
Amendment by Pub. L. 109-280, Sec. 844(e), effective for specified policy acquisition expenses determined for taxable years beginning after December 31, 2009.
EFFECTIVE DATE OF 2003 AMENDMENTS
Amendments by Pub. L. 108-173 effective for taxable years beginning after December 31, 2003.
EFFECTIVE DATE OF 2000 AMENDMENTS
Amendment by Pub. L. 106-554 effective December 21, 2000.
EFFECTIVE DATE OF 1996 AMENDMENT
Amendment by Pub. L. 104-191 effective with respect to taxable years beginning after Dec. 31, 1996.
EFFECTIVE DATE OF 1993 AMENDMENT
Amendment by Pub. L. 103-66, Sec. 13261(d), effective with respect to property acquired after the date of enactment of this Act [Enacted: Aug. 10, 1993]. Section 13261(g)(2)-(3) of Pub. L. 103-66 provided:
“(2) ELECTION TO HAVE AMENDMENTS APPLY TO PROPERTY ACQUIRED AFTER JULY 25, 1991. --
“(A) IN GENERAL.—-If an election under this paragraph applies to the taxpayer --
“(i) the amendments made by this section shall apply to property acquired by the taxpayer after July 25, 1991,
“(ii) subsection (c)(1)(A) of section 197 of the Internal Revenue Code of 1986 (as added by this section) (and so much of subsection (f)(9)(A) of such section 197 as precedes clause (i) thereof) shall be applied with respect to the taxpayer by treating July 25, 1991, as the date of the enactment of such section, and
“(iii) in applying subsection (f)(9) of such section, with respect to any property acquired by the taxpayer on or before the date of the enactment of this Act, only holding or use on July 25, 1991, shall be taken into account.
“(B) ELECTION.--An election under this paragraph shall be made at such time and in such manner as the Secretary of the Treasury or his delegate may prescribe. Such an election by any taxpayer, once made --
“(i) may be revoked only with the consent of the Secretary, and
“(ii) shall apply to the taxpayer making such election and any other taxpayer under common control with the taxpayer (within the meaning of subparagraphs (A) and (B) of section 41(f)(1) of such Code) at any time after August 2, 1993, and on or before the date on which such election is made.
“(3) ELECTIVE BINDING CONTRACT EXCEPTION.--
“(A) IN GENERAL.--The amendments made by this section shall not apply to any acquisition of property by the taxpayer if --
“(i) such acquisition is pursuant to a written binding contract in effect on the date of the enactment of this Act and at all times thereafter before such acquisition,
“(ii) an election under paragraph (2) does not apply to the taxpayer, and
“(iii) the taxpayer makes an election under this paragraph with respect to such contract.
“(B) ELECTION.--An election under this paragraph shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall prescribe. Such an election, once made --
“(i) may be revoked only with the consent of the Secretary, and
“(ii) shall apply to all property acquired pursuant to the contract with respect to which such election was made.”
EFFECTIVE DATE
Section 11301(d)(1) of Pub. L. 101-508 provided that: ‘The amendments made by subsections (a) and (c) (enacting this section) shall apply to taxable years ending on or after September 30, 1990. Any capitalization required by reason of such amendments shall not be treated as a change in method of accounting for purposes of the Internal Revenue Code of 1986.’