Tax Problems of Captive Insurance Companies
Tax Problems of Captive Insurance Companies
The tax concept of captive insurance is relatively straightforward. The parent company pays insurance premiums to its captive insurance company and seeks to deduct these premiums, usually in a high-tax jurisdiction.
Today, several U.S. states allow the formation of captive companies. Protection from tax assessment is a sought-after benefit for the parent company.
Whether the parent company realizes a tax break from creating a captive insurance company depends on the classification of insurance that the company handles. In the United States, the Internal Revenue Service (IRS) requires risk distribution and risk shifting to be present for a transaction to fall into the category of insurance. The IRS has publicly declared it would take action against captive insurance companies suspected of abusive tax evasion. Some risks could result in substantial expenses for the captive insurance company, potentially leading to bankruptcy.
Insurance is a significant expense for big or small companies. While buying into a captive may seem like a cost-effective plan, unfortunately, many captive insurance agents are not always aware of updated laws and restrictions. When you’re audited, you will end up having to pay huge penalties or be at risk of losing your company if you have not filed ccorrectly. Don’t risk an audit. Contact me for an assessment, nationwide!