Why Is Tax-Deductibility of Captive Premiums Important?

 
Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

Tax-deductibility of premiums is a key issue for captive insurance companies, and in this video, P. Bruce Wright of Eversheds Sutherland (US) LLP discusses why. In most situations, if the premium collected by a captive insurance company is not considered to be part of an insurance contract (as far as the Internal Revenue Service (IRS) is concerned), the result is an inability for the captive insurance company to write off its reserves—which are subtracted from that year's premium—as a (discounted, per IRS factors) deduction. This is economically less beneficial, as it generally means that the benefit from this deduction is spread out over time when losses are paid versus taking the reserve deduction up front all at the same time—in short, there is a timing issue. For 831(b) captive insurance companies that are not considered to be insurance for tax purposes, the benefit of being able to write off reserves as a deduction over time is lost.