Captive Tax Provisions

Forming a captive insurance company is a powerful way for businesses to manage their risks and to boost their financial efficiency. One of the benefits of captive planning are tax-advantaged premiums. This means that premiums paid to a bona fide insurance company are deductible, whereas monies set aside in a savings account for self-insurance are not.

The video below discusses captive insurer tax challenges.

Also, the captive insurance company itself has tax advantages. These benefits are rooted in the Internal Revenue Code under Sections 831(a), 831(b), and 501(c)(15). Under Section 831(b), there is a 0% Federal income tax on the captive’s underwriting profits. In general, the various provisions of the Code are differentiated by the premium levels, gross receipts, net income, and other factors. Historically, captive insurance companies were formed only by large corporations under IRC 831(a), affording tax-advantaged premiums. As new legislation passed to encourage mid-market business growth, mid-sized businesses were able to leverage captive tax benefits under the 831(b) and 501(c)(15) provisions.

These benefits, along with other financial perks, still allow businesses to retain more of their profits through captive and alternative risk planning. Funds that accumulate inside the captive can be used for investments or can be used for other business purposes.

Tax benefits found in the Code are ancillary and come second to the risk coverage needs of the operating business. Businesses must have legitimate insurance needs—existing policies may carry exclusions, or “gaps” in coverage, leaving businesses financially vulnerable.

Commercial coverages that are unavailable or too expensive may leave business owners exposed to significant risks within their business. Forming a captive insurance company ensures that businesses remain operationally intact and covered in the case of a loss event. After the insurance needs are met, businesses may have the option to take advantage of ancillary tax benefits.

Learn more about the 831(a), 831(b), and 501(c)(15) tax provisions:

Captives for Larger Corporations: IRC 831(a)

Captive Insurance for the Mid-Market: IRC 831(b)

Tax-Exempt Captives: IRC 501(c)(15)


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