831(b)

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Internal Revenue Code §831(b) offers small insurance companies a very powerful tax advantage that can provide financial resources to pay claims. This benefit assumes that legitimate risk is being transferred. It is available to both onshore and offshore captives. This election makes the premiums paid to the captive not subject to income taxes. The reserves are accumulated, and the insurance company is only taxed on its investment income. The application of the 831(b) election is straightforward. Any properly structured insurance captive writing less than $2.2 million of annual premium may take this election.

IRC 831(b) allows for a property and casualty company to be taxed only on its investment income. The advantage of this structure is that it allows the company to accumulate surplus from underwriting profits free from tax. However, it is important to note that while an 831(b) pays no tax on underwriting profits, its owners are still taxed on dividends and other compensation received.

An 831(b) insurance company has become a popular structure for captive promoters, and I have found the basic sales pitch is “how would you like to deduct $2.2 million and ultimately pay capital gains on the distribution?” Let me say this is dangerous and I will revisit this topic after my discussion of Non-831(b) insurance companies below.