Should You Open a Captive Insurance Company?

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If you are having a hard time tax planning and want a different avenue of saving money on your tax return, a tax shelter may be a possibility to consider. One such example could be a captive insurance company. This strategy is recommended for those who already have some experience with tax planning and operating profitable businesses. If you think you are ready to try a more advanced strategy, stay tuned.

What is a captive insurance company? It is a separate entity you would establish to provide services—in this instance, risk shifting/distribution insurance—to an operating company (your main business). This allows you to tailor your risk distribution insurance to your specific needs, and can save you money in several ways, such as deducting the parent company’s insurance premiums. Previously, this strategy was used mostly by large corporations, but in recent years, closely held businesses have realized the benefits a captive insurance company can provide. Still, the ideal candidate for this strategy is a large, profitable business which lacks risk insurance.

There are some risks associated with this strategy. Primarily, you have a higher chance of incurring IRS scrutiny. Not all business owners are diligent in ensuring their compliance while tax planning, and some outright commit the crime of tax evasion by exploiting any potential saving opportunities. With the IRS on a crusade to large businesses accountable for their taxes, you’ll need to be extra careful in following IRS regulations.

Swindling the IRS is never a good idea, so we recommend a close relationship with a tax planning professional if you actively seek to lower your taxes by establishing a captive insurance company. If you’re not sure where to start, reach out to XQ CPA for a consultation. Tax planning is our specialty, and we’d love to help you. Give us a call or schedule an appointment online.

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Sources:

https://www.journalofaccountancy.com/issues/2013/mar/20126102.html