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Focus on Taxation: Update on Small Captive Insurance Companies

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Current tax law allows business owners to create their own insurance company, to which the insured business makes premium payments and takes a deduction for those payments. If this insurance company, also commonly known as a “captive,” makes an election under Internal Revenue Code §831(b), net premiums received by the captive are not taxable.
January 11, 2017

Current tax law allows business owners to create their own insurance company, to which the insured business makes premium payments and takes a deduction for those payments. If this insurance company, also commonly known as a “captive,” makes an election under Internal Revenue Code §831(b), net premiums received by the captive are not taxable. Under the Protecting Americans from Tax Hikes Act of 2015, the annual premium exclusion increased from $1.2 million to $2.2 million effective in 2017.

Last fall the IRS issued Notice 2016-66 and declared that §831(b) captive insurance arrangements are “transactions of interest.” This means if you have a §831(b) captive in place and meet certain criteria in the notice, the IRS is mandating taxpayers and material advisors file IRS Form 8886, Reportable Transaction Disclosure Statement, or IRS Form 8918, Material Advisor Disclosure Statement, by May 1, 2017 (original due date of January 31, 2017 updated by Notice 2017-8). Noncompliance may result in penalties.

RubinBrown recommends any persons involved in an §831(b) captive insurance arrangement contact their tax advisor to determine the applicability of the above Notice. Additionally, RubinBrown recommends anyone involved in merger or acquisition transactions involving captives consider the application of the above Notice and the related reporting requirements.

If you have any questions as to the formation of a §831(b) captive insurance arrangement or the new Form 8886 reporting requirement, please contact your RubinBrown advisor for additional details and consultation.

 

Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.

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