Change Country

Tax & Assurance Guidance

831(b) – Captive Insurance Company

Posted on August 13, 2014 by

Sue Tuson

Sue Tuson

Share This

Considering a Captive Insurance Company

Many companies may encounter a situation where the premium to cover an insurable risk in their business comes with a very high price tag. The Section 831(b) captive insurance company (“CIC”) has become an attractive option for small to midsize companies looking for a way to manage their risks in a cost-effective way.

What is a Captive Insurance Company?

An 831(b) captive is an entity that holds an insurance license, and has made an election under Section 831(b) of the Internal Revenue Code that allows insurance companies with less than $1.2 million in premiums to be taxed on their investment earnings rather than their gross income. In order to qualify for this favorable tax treatment, a CIC must be insuring “real risks,” and must provide “risk shifting” (risk must be transferred from an operating company to the CIC for a reasonable premium), and “risk distribution” (CIC must accept risk from multiple operating companies. This can happen either directly or by unrelated companies participating in risk pool arrangements.)

Key Benefits of CICs

  • Insurance coverage for risks that may be “uninsurable” in the retail market.
  • CIC tax savings – CIC pays tax on investment earnings versus gross income. This allows funds to accumulate for claims in the future on a pre-tax basis.
  • Tax deductible premiums for operating company – Even though the CIC does not pay tax on premiums under $1.2 million, the company paying those premiums may still deduct those payments for federal tax purposes.
  • Lower premiums than retail insurance.
  • Insurance policies tailored to meet specific needs.
  • A means of wealth accumulation and potential estate planning strategy.
  • Asset protection from the claims of creditors.

Who is a Candidate for a CIC?

A CIC may be a very viable option to investigate if:

  • Your company is profitable and has ample cash flow to pay insurance premiums.
  • Your company is part of a related group with multiple entities that would be interested in pooling insurance risk.
  • Your company has not experienced significant insured losses in the past, yet the cost of insurance is still rising.
  • Insurance is a significant cost for your company. In order to outweigh start-up costs and on-going maintenance costs, CICs make sense for companies currently paying high insurance premiums.
  • Your company owners are interested in new wealth accumulation and transfer ideas.

The proper formation and maintenance of a CIC (and assistance from qualified professionals) is key to the success of this tax savings strategy.

If your traditional insurer or self-insured plan is not meeting your needs, please contact your tax advisor to discuss whether a CIC could be the risk management solution that you are looking for.

Sue Tuson

Shareholder

As an international tax advisor, Sue helps businesses structure their operations globally to mitigate tax costs and maximize profits.

Related Insights

Tax & Assurance Guidance

Keeping Up With Digital Taxes

Posted on September 6, 2022 by

Miroslav Georgiev
Sue Tuson
To the uninitiated, selling digital products and services can seem like a much easier business model than selling physical goods. While there may be advantages to skipping inventory and warehouse needs, the digital tax landscape can be tricky to navigate. 

Tax & Assurance Guidance

Insights from Washington: Inflation Reduction Act Signed

Posted on August 19, 2022 by

Sarah Russell
On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act of 2022, a bill to finance climate and energy provisions and an extension of the enhanced Affordable Care Act (ACA) subsidies totaling $369 billion in additional spending.

Tax & Assurance Guidance

Insights from Washington: Senate Passes the Inflation Reduction Act

Posted on August 9, 2022 by

Nick Lloyd
On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act of 2022, a bill to finance climate and energy provisions and an extension of the enhanced Affordable Care Act (ACA) subsidies totaling $369 billion in additional spending.

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content