The 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:
- Using the Revised Discount Factors for (a) losses in the year of change and for (b) computing the eight-year Transitional Adjustment.
- 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.
+1 212 542 9865
+1 212 542 9662
+1 212 542 9526
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.