New guidance released: Discounted loss reserves and the transition adjustment
Nearly a year after the Tax Cuts and Jobs Act (TCJA) passed, the insurance industry now has guidance on how to proceed with the new loss discounting rules. On Dec. 19, 2018, the IRS issued Revenue Procedure 2019-06, which includes preliminary discount factors for loss reserves, salvage, and subrogation for the year ending Dec. 31, 2018, and factors that will be used to recompute the Dec. 31, 2017, loss reserves in order to determine the “transition adjustment.”
Calculation: Taxpayers must recompute their discounted loss reserves as of Dec. 31, 2017. The pre-TCJA loss reserves per the 2017 tax return are recomputed using the Dec. 31, 2017, factors in Revenue Procedure 2019-06, tables 3 and 4. The difference between the pre-TCJA discounted loss reserves and the post-TCJA discounted loss reserves is deemed the transition adjustment. This transition adjustment will affect both deferred taxes and current taxes.
This transition adjustment will affect both deferred taxes and current taxes.
Deferred taxes: The transition adjustment is expected to increase the gross deferred tax asset (DTA) related to reserve discounting. The transition adjustment will also result in a gross deferred tax liability (DTL) that will reverse over the eight-year transition period, which begins in 2018. Consequently, the ending DTL as of Dec. 31, 2018, will be seven-eighths of the total transition adjustment, and will runoff to zero as of Dec. 31, 2025.
Current taxes: In the 2018 tax provision, one-eighth of the gross transition adjustment will be reflected as an increase to taxable income. The Dec. 31, 2018, discounted loss reserves will be calculated using Revenue Procedure 2019-06, tables 1 and 2. The post-TCJA discounted loss reserves will be used for calculating the prior-year amount for purposes of the 2018 loss discounting M-1.
The comment period for Revenue Procedure 2019-06 is open until Feb. 6, 2019, which could result in future changes. Stay tuned as more guidance becomes available. If you have questions about how the proposed regulations might affect your company, and if you want to learn more about these rules, please contact us today.