The IRS issued proposed regulations (REG-103163-18
) providing guidance on rules for calculating the discount for unpaid losses of insurance companies under Section 846.
The Tax Cuts and Jobs Act modified Section 846 in an effort to simplify discounting rules for unpaid losses. This included a new annual rate of discount tied to the corporate bond yield curve and not the annual federal rate, a repeal of Section 846(e) that previously allowed taxpayers to elect to use their own historical information for purposes of determining the loss payment pattern, and otherwise amended the general rules for computation of loss payment patterns.
The proposed regulations address the method of determining the annual rate of discount, the method of determining the loss payment patter, and the authority of the IRS to make “smoothing adjustment” should the loss payment pattern calculation result in a negative payment for a given year or to otherwise smooth out an outlier result. The proposed rules are effective for tax years beginning after Dec. 31, 2017.
The actual methods are not within the proposed regulations, however. The preamble to the proposed regulation, however, specifies a seven-step method that the IRS anticipates using.
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