Ensuring that the IRS treats an insurer as an insurer for tax purposes is critically important for captive insurance companies. This may sound simple, but it can get complicated in certain captive situations.
A captive insurance company must be considered to be an insurer by the IRS for the premiums paid to be deductible. A summary article on the subject can be found at WebCPA (see here):
The IRS states that for a transaction to be considered insurance, both “risk shifting” and “risk distribution” must be present.
A prior revenue ruling, provided by Active Captive Mangement, disallowed premium deduction with insufficient risk distribution (see here):
Revenue Ruling 2005-40 disallows the premium deduction for a company that is the sole client of an insurance company. According to the IRS, such coverage does not spread risk among more than one policyholder and hence is not a bona fide insurance transaction.
Business Insurance summarizes a new ruling, Revenue Ruling 2009-26, which provides some detail on what structures do provide sufficient risk distribution (see here).
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great post
Posted by: Auto Insurance | October 10, 2009 at 07:11 AM
It could be very interesting how this plays out. Especially, with "Although the IRS has indicated that it will no longer invoke the “economic family theory” as an argument that risk has not shifted between related parties, the Service has indicated that it will continue to scrutinize each entity involved in an insurance transaction on many levels to determine if bona-fide insurance contracts exist." taken from the link above. Lets see what happens
Posted by: Discount Auto Insurance Quotes | October 22, 2009 at 10:35 AM
A captive is an insurance company that insures the risks of its owner, affiliated businesses, or a group of companies. It issues policies, collects premiums, and pays claims.
Posted by: what is captive insurance | November 13, 2009 at 07:12 AM