The IRS recently released the annual revenue procedure that provides 2017 accident-year discounting factors for loss reserves and anticipated salvage and subrogation. The procedure also includes the discount rate used to compute 2017 accident-year factors under the company factor election.
Rev. Proc. 2018-13 provides the detail discount factors for each line of business for loss reserves. This revenue procedure also contains the factors for salvage and subrogation.
The 2017 tax year is a determination year for companies that elect to use their own experience to discount tax reserves. For companies that elect to compute tax loss reserves using company factors for 2017, the applicable interest rate under Internal Revenue Code Section 846(c) is 1.46 percent for the 2017 accident year based on claims development in the 2015 annual statement. Please also note the election to use company factors has been repealed by the Tax Cuts and Jobs Act (TCJA), beginning with the 2018 tax year.
The TCJA defines a transitional rule for the difference between the previous basis and new basis of tax reserves. This transitional rule states that tax basis reserves determined under prior law as of December 31, 2017, shall be recalculated using the discount factors applicable to calendar year 2018, with any adjustment spread over an eight-year period beginning in 2018. Rev. Proc. 2018-13 states the IRS will publish discount factors to be used with the transition. The revenue procedure doesn’t speak to the timing of the release of these factors.
If you have questions about loss reserve or salvage and subrogation discounting or the effects of tax reform on these items, contact Brandy or your trusted BKD advisor.