IRS Guidance Offers Simplified Method Change for Insurers
In order to assist insurance companies and their advisors in implementing the changes put into law by the Tax Cuts and Jobs Act (TCJA), the IRS recently issued two revenue procedures impacting the property and casualty insurance industry, providing guidance on the specifics to be considered during implementation.
Insurance companies are one of the few industries permitted to deduct loss reserves that do not meet the all-events test or economic performance, but they are required to be “reasonable.”Prior to the passage of the TCJA, when discounting loss reserves, taxpayers could elect to utilize factors based upon either their own historical payment pattern or the industry payout pattern, both of which were determined by applying the applicable “annual rate.”
The TCJA repealed the election for insurance companies to use their own historical payout pattern and amended the definition of “annual rate” to be used to discount loss reserves and salvage and subrogation. In November 2018, the Department of the Treasury (Treasury) issued proposed regulations which provided that the annual rate should be based on a specific set of maturities from the bond yield curve, ranging from half a year to 17.5 years. In accordance with these proposed regulations, the Treasury published Rev. Proc. 2019-06, providing the discount factors to be applied to the 2018 and earlier accident years for taxpayers’ loss reserves, salvage and subrogation. (The annual rate under these Proposed Regulations was 3.12 percent.)
In June 2019, the Treasury issued final regulations that change the specified range of maturities from the corporate bond yield (now from four and a half years to 10 years). In order to guide taxpayers and their advisors on addressing these changes, Treasury published Rev. Proc. 2019-30. The Revenue Procedure provides that the revised annual rate is now 2.94 percent, which creates a smaller reduction in the losses incurred deduction. Under the terms of the Revenue Procedure, taxpayers may use either the factors published earlier in 2019 in accordance with the proposed regulations or those published in Rev. Proc. 2019-31, which reflect the revised annual rate provided for by the final regulations.
As these changes resulting from the TCJA alter the timing of taxpayers’ deductions, adoption of this new, required method is considered a change in accounting. Rev. Proc. 2019-30 stipulates that this is an automatic change in accounting method, meaning that the filing of Form 3115 is not required. The reduction in the losses incurred deduction for the year of adoption resulting from the change with respect to losses reserves is spread over eight years; the additional deduction related to the difference for salvage and subrogation is spread over four years.
Read the full IRS guidance here.
For more information on how Rev. Proc. 2019-30 may impact accounting changes for your organization, contact Alan Fine, Insurance Industry Group Leader, at firstname.lastname@example.org or 314.983.1292.