The Florida District Court of Appeal recently ruled that an insurance company was not entitled to exclude the portion of tax-exempt interest from state and local bonds that was used to reduce losses incurred in the calculation of taxable income for purposes of the Florida corporate income tax.
In State Farm Mutual Automobile Insurance Company v. Department of Revenue,1 the decision hinged on the interpretation of “excluded from taxable income” as cited in Florida statutes Section 220.13(1)(a)2. The language used in the calculation of “adjusted federal income” is the starting point for taxable income of an insurance company other than a life insurance company. Florida corporate income tax calculation, like many state tax calculations, begins with some version of federal taxable income.
Under Florida statutes, non-life insurance companies subject to tax under Internal Revenue Code (IRC) Section 831(a) are required to adjust federal income with additions and subtractions as defined in Florida statute Section 220.13 to arrive at “adjusted federal income,” for purposes of Florida corporate income tax. One of the additions delineated is the “amount of interest which is excluded from taxable income under section 103(a) of the Internal Revenue Code or any other federal law.”
Under IRC Section 831, non-life insurance companies are subject to tax on their gross income less allowed deductions. One such deduction allowed is the interest earned from state and local bonds that are tax exempt under IRC Section 103. To further complicate the calculation, non-life insurance companies include the gross amount of income earned as investment income (i.e., interest, dividends, and rent) as well as underwriting income [i.e., income earned as premiums minus “losses incurred and expenses incurred” pursuant to Section 220.13(1)(a)2].
State Farm argued that it had already deducted 15% of the exempt bond interest in calculating federal “losses incurred” and, therefore, should not be required to add back that amount as exempt income. The Department of Revenue, however, determined that “excluded” as used in Section 220.13 included amounts that were either expressly not included in gross income in the beginning calculation of taxable income or amounts that were subtracted from gross income as a specifically identified deduction. The Court agreed with the Department’s interpretation, upholding the lower court’s decision.
This decision follows the conclusion reached in a 1998 Illinois Office of Administrative Hearings decision—ABC Company v. The Department of Revenue of the State of Illinois.2 In this decision, the state determined that the 15% reduction to the losses incurred deduction is expressly limited to the computation of underwriting income. The tax-exempt interest and the dividend deduction, therefore, are used only as a means to measure the allowable losses incurred deduction, resulting in a requirement of 100% interest addback.
Please contact our Ryan tax professionals for more information on how this case impacts your business.
1 Florida District Court of Appeal, 1st District, No. 1D2021-2793 (January 17, 2024).
2 No. IT 98-2, Illinois Department of Revenue, Office of Administrative Hearings (May 1, 1998).
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