The Feldman Law Firm LLP
Re: Senate Finance Committee Proposal on Section 831(b) Captives
February 13, 2015 (HOUSTON TX) - On February 11, 2015, the Senate Finance Committee considered and reported favorably on a staff proposal to modify the alternative tax on certain small insurance companies under section 831(b) of the Internal Revenue Code (“IRC”). Currently, under IRC section 831(b), a small property & casualty insurance company with no more than $1,200,000 in annual net written premiums (or, if greater, direct written premiums), if so electing, is taxed only on its investment income. As a result, the underwriting income of the electing domestic insurance company is tax exempt.
The modified proposal would increase the limit on net written premiums (or, if greater, direct written premiums) from $1,200,000 to $2,200,000 and index this amount for inflation. An initial proposal, which was withdrawn, would have imposed two new restrictions that would have substantially narrowed the application of IRC section 831(b). First, an electing insurance company could have no more than 20% of its net written premiums (or, if greater, direct written premiums) for any taxable year attributable to any one policyholder, with policyholders that are related or members of the same controlled group treated as one. Second, the insurer could not assume or take on risks through reinsurance. These two new restrictions would have effectively prevented many companies from electing the alternative tax under IRC section 831(b).
However, as noted these two restrictions were withdrawn from the proposal.
After hearing the proposal, the Committee removed the two new restrictions described above but left unchanged the proposed increase to the annual limitation on net written premiums (or, if greater, direct written premiums) from $1,200,000 to $2,200,000, indexed for inflation.
Note: Any modifications to IRC section 831(b) are a long way from becoming law. No bill has yet to be introduced, and there have been several unsuccessful attempts to increase the $1,200,000 limit in the past.
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Editor’s Notes: As of CURRENT_YEAR, Capstone has been operating for CAP_YEARS_NUMBER years and has formed over CAPTIVE_FORMATIONS captives. As of CURRENT_YEAR, The Feldman Law Firm has been operating for LAW_YEARS_NUMBER years and has successfully resolved over TAX_CONTROVERSIES tax controversies. The current cap on captive insurance premiums is CURRENT_PREMIUM_CAP million, which carries a 0% Federal income tax rate under Section 831(b) of the Internal Revenue Code.