Captive Insurance Companies – Good for Business and Saves Taxes
$1.2 Million Deduction
Business Owners (or affiliated groups of individuals such as Professional practices and self-employed) can take advantage of section 831(b) of the Internal Revenue Code. The Code permits formation of a private insurance company known as a captive insurance company. Members of this group can take a Section 162 business tax deduction against ordinary income up to $1,200,000 per year in insurance premiums paid to the captive insurance company.
Types of Insurance Coverage
Premiums paid to the Captive may cover business, professional, and personal insurable losses. Such coverage can include Property and Casualty losses. These include general liability, auto liability, worker’s compensation, and professional liability. Personal losses such as Life and Health, customized disability and Buy/Sell can be part of the captive.
Income Tax Advantages
The first advantage is that the premium payments are deductible business expenses. Even if there are no losses and the premium is ultimately repaid to the owners, this converts ordinary income to capital gains rate (currently 15%). Finally, benefit payments returned for covered insured losses are excluded from taxable income.
In addition to the substantial income tax planning advantages, there are many business issues that provide compelling reasons to establish a Captive Insurance Company. The advantages include:
- Reduction and stabilization of insurance costs.
- Retaining underwriting profits and investment income.
- Improving cash flow to your business or professional practice.
- Making a profit!
There are several types of CIC’s that may be suitable for your particular circumstances. Call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121 to discuss this further.