8174 / What is an IRC Section 831(b) captive? When are the insurance profits earned by an IRC Section 831(b) captive taxed?

In order to qualify as an IRC Section 831(b) insurance company, the captive must have net written premiums of less than $2,200,000 per year ($1,200,000 per year prior to 2017). For tax years after 2017, the $2,200,000 amount will be indexed annually for inflation, rounded to the lowest multiple of $50,000 (the amount is $2,800,000 in 2024, $2,450,000 in 2022 and $2,400,000 in 2021).1

The captive must also satisfy certain diversification requirements. A captive satisfies the diversification requirements ifno more than 20 percent of the net written premiums (or, if greater, direct written premiums) of such company for the taxable year is attributable to any one policyholder, or, if the captivedoes satisfy this requirement, no person who holds (directly or indirectly) an interest in the captive is a specified holder who holds (directly or indirectly) aggregate interests in the captive which constitute a percentage of the entire interests in such captive which is more than a de minimis percentage higher than the percentage of interests in the relevant specified assets with respect to such insurance company held (directly or indirectly) by such specified holder.2

Under Section 831(b), an insurance company meeting the premium requirement is not required to pay any income taxes on its insurance profits. Federal tax therefore applies only to investment income realized by the captive.