It is critical for clients and practitioners to appreciate the Internal Revenue Service’s (“IRS”) historic positions and analysis regarding captive insurance companies, in order to fully understand the current captive insurance tax environment. The following discussion focuses on the relevant authorities contained in the Internal Revenue Code and Regulations, the current views of the IRS as set forth in administrative rulings and pronouncements and decisions dealing with what transactions qualified as insurance, and whether the activities of a related captive insurance company are those of a company primarily and predominately engaged in the insurance business.
Characterization as Insurance for Federal Income Tax Purposes
IRC Section 162(a) allows a deduction for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business…” Generally, insurance premiums qualify as ordinary and necessary if directly connected with the taxpayer’s trade or business.i Amounts set aside as reserves for the payment of anticipated losses are not deductible business expenses.ii
Should you have questions about the IRS’ current tax landscape of captives, structuring opportunities for a captive or a health check of your existing captive insurance company, contact Laurie Bizzell by calling 770.396.2200.