We at alliantNational wanted to discuss some recent developments with regard to the captive insurance space – specifically, with respect to IRC § 831(b) micro-captives. However, let’s begin by walking through the definition of captive insurance.
When businesses can’t find affordable commercial insurance to cover their risks, they may establish an insurance company of their own to do it for them. This company is what we refer to as a captive insurance company. The Internal Revenue Code provides that captives earning less than $2.2 million in premiums may make an election to only have their investment income taxed. These are what are referred to as 831(b) captives or “micro-captives”.
Due to their increasing popularity and favorable tax treatment, our friends at the IRS have increased their scrutiny of micro-captives. Following the rulings in Avrahami v. C.I.R., Reserve Mechanical v. C.I.R., and most recently Syzygy Insurance v. C.I.R. (all U.S. Tax Court cases), taxpayers engaged in micro-captives have been feeling the heat.
So, what should you be doing to ensure your client’s micro-captives are in compliance with IRS standards? If in audit, the client needs to ensure it is adequately represented. If not in audit, the captive and its owner should take a look at marketing, formation and operational documentation to ensure that the best possible story is told if the IRS comes knocking. It is never too late to ensure your client’s story is told correctly and in a positive fashion.
alliantNational has been working with 831(b) captive tax compliance and audit defense for years. We have a wealth of experience and expertise as it pertains to the tax treatment of captive insurance. Both myself and John Dies, our Managing Director of Tax Controversy Services, are frequently sought out to provide our thoughts and insights at captive insurance industry events and industry publications. As industry leaders, the team at alliantNational can provide the proper guidance on the tax consequences of captives.
If you have any questions about captives, please feel free to contact me at [email protected]. We will be more than happy to help educate you.