Case law impacting business owners who created captive insurance companies began in the early 1900s. This long-standing history of court decisions provides us with a roadmap to allow successful implementation of a captive insurance company, with predictable tax results.
Captives generally pay income tax on net earnings annually. If the captive meets certain qualification requirements, it may elect favorable taxation under Internal Revenue Code 831(b), which provides significant tax advantages for small captive insurance companies. Captive insurance companies may be taxed only on their investment income, and do not pay taxes on the premiums they collect, providing premiums to the captive do not exceed $2.3M annually. Further, the captive may retain surplus from underwriting profits free of income tax. Investment income is taxable to the captive insurance company at graduated corporate rates, while dividends paid out of a captive, if any, should be taxed at long-term capital gains rates as a qualifying dividend.
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