In Revenue Procedure 2018-13, the Internal Revenue Service (IRS) released the unpaid loss discount factors and salvage discount factors for the 2017 accident year. These factors are to be used in taxable years beginning on or before Dec. 31, 2017. Insurance companies should use these factors for computing discounted unpaid losses and estimated salvage recoverable for each property and casualty line of business.
It is important to note that 2017 is a "determination year" in which an insurance company can elect to use its own company experience discount factors, which are based on the company’s historical payment patterns, instead of the prescribed Department of Treasury (Treasury) discount factors noted in the Revenue Procedure above. If an insurance company elects to use its own company experience discount factors, all eligible lines of business by accident year must be discounted using this method for the 2017 accident year.
The Tax Cuts and Jobs Act (TCJA), signed into law on Dec. 22, 2017, repeals the election permitting a taxpayer to use its own company experience discount factors, as well as modifies how the Treasury will calculate its discount factors, for taxable years beginning after Dec. 31, 2017. 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 the preceding year (2017) are to be recalculated under the new provisions of the TCJA. Such adjustment is spread over eight years in the first taxable year beginning in 2018 and the seven succeeding taxable years.
The Revenue Procedure mentions the intent of the Treasury and the IRS to publish discount factors to be used in accordance with the transition rule as described above, but does not provide a timeframe for doing such.
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