If you’re a business owner, chances are you’ve heard of captive insurance. But did you know there were captive insurance tax benefits? A lot of company owners miss out on tax breaks because they’re not aware of how it all works.
If you’re interested in learning more about captive insurance benefits, just keep reading.
What Is Captive Insurance?
A company goes through a structured arrangement with captive insurers to set up its own insurance provider to handle identified and proven risks. Micro-captives—better known as 831(b) captives— also provide some tax incentives to smaller companies.
Insurance rates charged under an 831(b) captive contract by the corporation are deductible as corporate expenditures. If the payment does not surpass $2.3 million years, they are not considered revenue to the captive insurance business.
Captive Insurance Tax Benefits
The following tax and non-tax advantages could be offered by a properly organized and controlled captive insurance company:
- Tax credit on the insurance payment paid to a captive by the parent company
- Multiple other tax savings measures, including savings on gifts and property taxes for lenders Savings on payroll taxes for both captives and parents
- Possibility in a tax-favored system to generate wealth
- Derivatives at preferential income tax rates to captives
The captive must be able to prove that it is a legitimate insurance provider for the premiums to the captive to be exempt as an insurance charge. The captive must offer cover to the operating providers in addition to acquiring an insurance permit from a state or a foreign territory.
Insurance is defined for tax reasons as having risk shifting and risk distribution components.
In order to fulfill the risk-shifting provision, the holding company must establish that in exchange for a fair premium, it has shifted particular liabilities to the captive insurance provider.
The Best Candidates for Captives
- Entities that meet the following criteria should use captives:
- Major annual adjustable tax deductions are pursued by profitable company organizations.
- Businesses of multiple organizations or others who may create multiple branches or affiliates
- Companies with a sustainable annual income of $500,000 or more.
- Uninsured or underinsured enterprises with the requisite risk
- Company owners who are involved in methods for acquiring personal capital and/or shifting family wealth.
- Companies in which the owners want wealth security
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Take Advantage of Captive Insurance Tax Benefits
The captive insurance tax benefits make having the coverage well worth it. It’s good to know that as a business owner, you’ll receive incentives for your company endeavors.
If you’re considering getting captive insurance, hopefully, the information above helps you make a decision. Of course, the tax perks should be a good incentive as well.
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