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IRS simplifies insurance company accounting

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Tax Hot Topics newsletterThe IRS has issued Rev. Proc. 2019-30 on July 22, providing simplified procedures for insurance companies to obtain automatic consent to change their methods of accounting for discounting unpaid losses or expenses, estimating salvage recoverable and unearned premiums attributable to title insurance.

The discounting rules, both prior to and after the amendment of Section 846 by the Tax Cuts and Jobs Act (TCJA), are used to determine the discounted unpaid losses and estimated salvage recoverable attributable to property and casualty insurance companies, and discounted unearned premiums of title insurance companies for federal income tax purposes under Section 832.

The TCJA also provided a “Transition Adjustment” in Section 13523(e) for the first taxable year of change related to transitioning the preceding year’s discounted losses to the new rates required by the TCJA. Specifically, it required an insurance company to calculate its unpaid losses using the new discounted rates and compare them to the discounted losses calculated in the year preceding the TCJA. The adjusted difference between the two calculations is included in the insurance company’s gross income over an eight-year period.

On Jan. 7, 2019, the IRS issued Rev. Proc. 2019-06 that included the Proposed Discount Factors for 2018 and earlier accident years used for computing discounting under Section 846. However, concurrent with the issuance of Rev. Proc. 2019-30, the IRS has published Revised Discount Factors in Rev. Proc. 2019-31. Because of the timing of the change in discount factors, the IRS has provided a simplified process that allows taxpayers to appropriately address the changes required by the TCJA. The revenue procedure explicitly waives the requirement to file a Form 3115 when utilizing one of two procedures discounting unpaid losses and salvage recoverable. It also waives the eligibility rules in Sections 5.01(1)(c) & (d) of Rev. Proc. 2015-13 to allow taxpayers to make the change in the final year of a trade or business, or in the year in which the taxpayer engages in a liquidation or reorganization to which Section 381 applies.

Generally, the guidance provides two procedures for a taxpayer to administer the automatic change:

  1. Using the Revised Discount Factors for (a) losses in the year of change and for (b) computing the eight-year Transitional Adjustment.
  2. Using the Proposed Discount Factors for losses in the year of change and the Revised Discount Factors for losses in the year subsequent to the year of change. The Transitional Adjustment is calculated in two parts: (i) the Proposed Discount factor is used in calculating the adjustment for the eight-year period, and (ii) a Partial Transitional adjustment is computed using the net difference between the Proposed and Revised Discount factors, which is then taken into account over the remaining seven-year period beginning with the year subsequent to the year of change.

Transition Adjustments are also made for salvage recoverable, but those are only taken into account over the standard four-year spread period for a positive Section 481(a) adjustment.

This procedure is effective for taxable years beginning after Dec. 31, 2017, and ending on or before Dec. 31, 2019, including calendar-year taxpayers with short periods beginning between Dec. 31, 2017, and June 17, 2019.

Contacts:
John Forni
Managing Director
Manhattan Office
T +1 212 542 9865

Gary Berger
Senior Manager
Manhattan Office
T +1 212 542 9662

Arash Barkhordar
Director
Manhattan Office
T +1 212 542 9526


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