Allen owns a small construction business and has been self-insuring property and casualty insurance risks using a captive insurance company. Is the IRS planning to crack down on these arrangements?
Businesses are allowed to create their own captive insurance entities to help cover risks that aren’t covered by ordinary business insurance policies. These arrangements are perfectly legal — when structured properly. But some businesses have abused the privilege to avoid paying taxes. The IRS has signaled that it may audit more firms claiming deductions for payments to captive insurance entities.
Remember, the primary purpose of the captive entity must be insurance, not tax avoidance. Premium pricing should be actuarially sound and based on exprected claims. The IRS will look at deductions for premiums paid to captive insurance companies that go years without ever paying a claim. The captive should not invest its float in “loans” to related parties.
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