While the COVID-19 pandemic prompted delays in some captive insurance tax case proceedings and IRS audit activity, there were many other captive insurance developments that occurred in 2020. Captive.com recently published an article that takes a closer look at the current captive insurance landscape, capturing insight from Laurie Bizzell, a Senior Manager in Bennett Thrasher’s Tax practice, Patrick Theriault, Managing Director at Strategic Risk Solutions, and Michael Domansky, Partner in Honigman’s Insurance Tax practice.
Despite the pandemic, the IRS has remained focused on abusive captive insurance transactions. Bizzell explained that there are several reasons as to why it’s important that captive insurance companies have valid insurance arrangements. For U.S. tax purposes, captive insurance companies must keep in mind that:
- Insurance premiums are deductible under the Internal Revenue Code (IRC);
- An insurance company is allowed to create a reserve and reduce its current income for unearned premiums; and
- An insurance company is able to establish a current deductible reserve for loss and loss adjustment expenses.
For these purposes, it’s important to understand how the IRC defines an insurance company. Bizzell explains that an insurance company is “any company for which more than half the business during the taxable year is the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.” The U.S. Supreme Court expanded the definition of insurance, establishing a three-part test for determining whether an insurance arrangement exists, including:
- Whether the arrangement involves insurance risk;
- Whether the arrangement provides both risk shifting and risk distribution; and
- Whether the arrangement is insurance in its commonly accepted sense.
Bizzell also emphasizes how states are becoming increasingly focused on applying procurement taxes to captive insurance company premiums. She notes that her larger clients in particular have experienced states being more aggressive towards them in these situations.
To read the full article, click here.
We’re Here to Help
Bennett Thrasher’s Captive Insurance practice helps its clients navigate industry complexities and keep their portfolio companies in compliance. To learn more about our services, contact Laurie Bizzell by calling 770.396.2200.