While it’s still in its infancy, there is a notable provision amongst President Biden’s proposed green book that has advisors in the ag industry abuzz. Tax experts are watching closely at what may take shape moving forward. Why? Because it could result in high tax rates and increased premiums for captive insurance policy holders…often times, agribusinesses.
How Captive Insurance Programs Can Reduce Benefits for Farm Operations
Currently, there is a tax provision that allows ‘micro-captive’ insurance companies – created to provide insurance to small companies that create them – to earn premiums tax free. Ultimately, this was intended to provide more affordable insurance coverage to policyholders. When the insurance company is well diversified, these have not been an issue.
Unfortunately, some taxpayers have abused the system to benefit themselves without providing real or realistic insurance policies, or have provided minimal insurance for exorbitant prices. These cases of concern around micro-captive insurance companies that are set up with fully deductible premiums and no tax payments, and with little to no ability for the IRS to review them, has provided reasons for policy change. Therefore, under President Biden’s green book, there are several proposed provisions to make those arrangements much more costly for the captive insurance companies. Here is a summary of the proposed guidelines and impacts:
- Proposal to establish an untaxed income account (UIA) regime. This applies to any captive insurance companies that receive 20% of more of their premiums from any one policyholder or a related group of policy holders.
- Impact to captive insurance companies: It allows the company not to pay tax on these premiums, and dividends or loans made to the insured parties would be treated as a deemed distribution from the UIA and taxed at a high rate.
- Impact to agribusinesses: Many captives will ensure that no related group of companies will pay more than 20% of total premium income (the threshold that would create a tax payment by the insurance company). Should the company exceed this and pay taxes however, it will essentially reduce the benefit to farm operations that have created these captives – ultimately, reducing the ability for captives to survive, and leaving a high tax bill on the table for the previous net premiums earned.
“At this early stage, coupled with recent IRS activity, we’re watching to see what will take shape to stand before Congress. But we fully expect new tax requirements in some form to eliminate the ability of those captives abusing the tax-free provision for small insurance companies,” says Scott Miller, ag tax advisor at KCoe Isom.
If you own or participate in a “micro-captive” insurance company, speak to your captive manager about their reinsurance and ceding percentages, and to your captive manager and captive tax return preparer to discuss potential implications of these proposals.
To read more on the current law for certain small insurance companies, reasons for change, and the current proposal (March 2022), view page 67 of the Department of the Treasury’s document on Fiscal Year 2023 Revenue Proposals (also known as the annual President’s Administration ‘Green Book’): https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf
Contact a KCoe tax advisor to discuss potential implications this could have on your tax preparations.