On Sept. 27, 2018, the Internal Revenue Service (IRS) released Notice 2018-80. This notice announced the intent of the IRS and Department of the Treasury (Treasury) to issue proposed regulations clarifying that accrued market discount is not includible in income currently under section 451(b) as amended by the Tax Cuts and Jobs Act (TCJA). The guidance described in Notice 2018-80 will be applicable as of Jan. 1, 2018.
Insurance organizations generally defer accrued market discount from taxable income until market discount bonds are retired or otherwise disposed of. This creates a taxable temporary difference for the company that sits within the deferred tax inventory. The enactment of the TCJA on Dec. 22, 2017 brought about some uncertainty related to this general treatment of accrued market discount.
Accrual method taxpayers generally look to the “all events test” under section 451 to determine when income is includible in gross income for tax purposes; that is, when all of the events have occurred which fix the right to receive such income and the amount of such income can be determined with reasonable accuracy. Now, pursuant to section 451(b) as amended by the TCJA, the all events test is treated as met no later than when any item of gross income is taken into account as revenue in an applicable financial statement. Furthermore, this new provision applies except with respect to any item of gross income for which the taxpayer uses a special method of accounting provided elsewhere, other than any provision of part V of subchapter P. As market discount falls within part V of subchapter P, taxpayers had requested guidance as to whether market discount is includible in income under section 451(b).
As Notice 2018-80 clarifies that the IRS and Treasury intend to issue proposed regulations providing that accrued market discount is not includible in income currently under section 451(b), insurance organizations do not need to change their method of accounting for accrued market discount under the TCJA. This additional guidance provides some much-needed clarification and removes one item of uncertainty as insurance organizations close in on year-end 2018.
As always, we highly recommend you confer with your Baker Tilly tax advisor to understand your specific situation and how this impacts your organization. For more information on this topic, or to talk with your Baker Tilly insurance tax specialist, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
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