8173 / What tax benefits can be realized by a captive?
Often, the captive is able to substantially accelerate loss deductions available for the corporate group. Captives that qualify as insurance companies (see Q 8175), like traditional insurance companies, are permitted to take a loss deduction for losses that have been reported, or for losses that have been incurred but not yet reported, even if the claim has not yet been paid. Generally, a company would be required to wait to take the deduction until the claim has been paid.
However, smaller captives may be able to avoid all income taxation. Under IRC Section 501(c)(15), a very small insurance company can avoid paying income taxes on income from premiums and investments if it receives $600,000 or less each year and more than 50 percent of that income was premium income. IRC Section 831(b) increases the amount of non-taxable premium income permitted to $1,200,000 (increased to $2,850,000 in 2025 projected, $2,800,000 in 2024, $2,650,000 in 2023, $2,450,000 in 2022, $2,400,000 in 2021, and $2,350,000 in 2020, and indexed for inflation in subsequent years),1 but requires that the captive pay income taxes on any investment income it receives (see Q 8174).
While tax preferential treatment can provide a strong motivation for companies in establishing a captive company, in order to realize these benefits the company must have a legitimate insurance purpose for forming the captive (see Q 8175).
1. IRC § 831(b)(2)(A)(i), Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.