Taxation Issues for an Insurance Company
- Without a captive, self-insurance reserves are not generally tax deductible.
- For insurance premiums to be tax deductible, the captive must be recognized as an insurance company for federal income tax purposes.
- Risk transfer.
- Risk distribution.
- Third-party risk (usually).
- Adequately capitalized.
- Captive conducts itself like an insurance company.
- Business purpose for Captive.
- Premiums must be reasonable for risk assumed.
Tax Advantages of a Captive Insurance Company
Although tax benefits should never be the primary purpose of forming a captive, the following benefits can be available with a properly structured Captive Insurance Company:
- A properly structured Captive will allow for deductions of premiums.
- Generally, the Captive can deduct estimated future claims payments; unlike other taxpayers that may deduct claims only when paid.
- Small insurance company provision allows up to $2.2 million in annual premium exemption (effective 1/1/17) and adjusted for inflation thereafter.