August 14, 2019
Loss Discount Factors 2.0
The Internal Revenue Service (“IRS”) has released the final revised loss discounting factors just in time for the final countdown toward the extended tax return filing deadlines.
Revenue Procedure 2019-30 offers the most in-depth guidance on the loss discounting method change that taxpayers have seen to date. Herein, the Commissioner has waived the filing requirement for Form 3115, as long as affected taxpayers comply with certain standard requirements. Further, taxpayers are advised that the adjustment to salvage and subrogation (“S&S”) will be recognized entirely in 2018 to the extent such adjustment is favorable. This is in contrast with previous public understanding that suggested amortization would be over an 8-year period. Rather, favorable adjustments to S&S are recognized in the year of change, while unfavorable adjustments are recognized over a 4-year period corresponding with the general accounting method change rules applicable to 481(a) adjustments. The adjustment to loss reserves continues to be captured over an 8-year period.
This most recent guidance also confirms that any taxpayer who might have used the proposed discount factors that were released in January for their reserves in the first TCJA year will have a supplemental adjustment based on the revised factors for the second TCJA year. This supplemental adjustment can be recognized over one year or seven years. Again, this only applies to the TCJA adjustment for loss reserves, and not for S&S.
Revenue Procedure 2019-31 completes the guidance with the full discount factor tables to be used for tax years 2017, 2018 and 2019. For these factors, the revised annual interest rate for 2018 is 2.94% compounded semiannually and the annual interest rate for 2019 is 3.09%.
The option to use the proposed factors or the revised factors is still available, but the revised factors must be used for taxable years ending on or after June 17, 2019. It is recommended that you consult your tax advisor about the implications of these Revenue Procedures, which may affect your 2019 estimates as well as your tax returns. If you have questions about this article, please contact the Johnson Lambert team.