IRS Issues Proposed Regulations on the Highly Anticipated 2017 and 2018 Loss Discounting Factors
After a year of anticipation, the Internal Revenue Service (“IRS”) has finally issued proposed regulations on the unpaid loss and salvage and subrogation discount factors that insurance companies need in order to properly account for changes to code section 846 as enacted by the Tax Cuts and Jobs Act. The IRS issued Rev. Proc. 2019-06 on December 19, 2018, which contains the new proposed factors for both 2017 and 2018. Pursuant to code section 846(c) and the proposed regulations, the Secretary has determined that the annual interest rate for 2018 is 3.12%, compounded semiannually.
Insurance companies must also account for changes in the Tax Cuts and Jobs Act to code section 846 retroactively to the 2017 tax year, where the difference will be brought into taxable income over 8 years beginning with tax years ending after December 31, 2017. Rev. Proc. 2019-06 also contains the proposed revised factors for unpaid loss and salvage and subrogation existing at December 31, 2017 for accident years 2017 and prior, which now applies to all taxpayers due to the elimination of the ability for a company to use loss reserve discount factors based off of its own company experience patterns.
The release of Rev. Proc. 2019-06 before year-end is helpful and provides a methodology for taxpayers to use for year-end tax provisions. However, the proposed regulations generated several comment letters and may require the IRS to revise these calculations. To the extent necessary, after the proposed regulations are published as final regulations, Treasury and the IRS intend to publish for each property and casualty line of business revised unpaid loss discount factors for the 2018 accident year for use in tax years ending on or after the date the final regulation are published. Therefore, taxpayers need to keep this in mind when applying the revenue procedure.
Below you can download the tables that summarize the new factors as prescribed for the 2017 tax year based on new calculations under tax reform and for the 2018 tax year.
If you have any questions about this contact our team.