The Tax Cuts and Jobs Act (TCJA) made the following changes to the discounting rules for non-life insurance companies for taxable years beginning after Dec. 31, 2017:
- repealed the election of a company to use its own historical loss payment patterns for discounting purposes;
- amended the computational rules for determining loss payment patterns; and
- established that Treasury will calculate discount factors by using a corporate bond yield curve to determine the annual rate.
A transitional rule exists for the first taxable year beginning in 2018 under which the amount of unpaid losses and expenses at the end of 2017 are to be recalculated under the new provisions. The adjustment is spread over eight years in the first taxable year beginning in 2018 and the seven succeeding taxable years.
With Rev. Proc. 2019-06, the IRS issued discount factors for 2018 and prior years. Additionally, it determined the applicable interest rate for accident year 2018 under section 846 and revised loss payment patterns defined for the 2017 determination year. The discount factors were identified by using the applicable interest rate of 3.12% compounded semiannually.
Additionally, 2019-06 established that separate discount factors for estimated salvage recoverable would no longer be published by the IRS, and instead expected salvage recoverable will be discounted using the published discount factors applicable to unpaid losses.
On June 14, 2019, the IRS issued final regulations and announced the following items:
- The Treasury will be revising the factors published in Rev. Proc. 2019-06. As a result, taxpayers will be allowed to use the factors previously issued in Rev. Proc. 2019-06 or the revised factors.
- The IRS plans to publish guidance that provides simplified procedures for companies that previously used their own loss payment patterns to obtain automatic consent to change the method of accounting.