By: Mark A. Rysberg
The short answer is: no. From the perspective of some people, the reduction in the corporate tax rate from the rate that existed in 2017 to the rates that will be applied in 2018 eliminates the incentives for captive insurance participants to elect 831(b) taxation. To some extent, that perspective is unfortunately understandable as many people view 831(b) captive insurance programs as purely a tax shelter. While there can be tax benefits to participating in captive insurance, the potentially more significant benefits lie in the ability to compress insurance premiums (i.e. pay less in insurance premiums), reduce risk by intentionally making risk management part of the corporate culture, and to provide the opportunity for a corporation, or its key shareholders, to build long-term cash reserves which increase the value of the corporation.
Further, the taxation benefits of 831(b) election are not entirely eliminated by the 2018 reduction to corporate tax rates. In fact, one taxation benefit to 831(b) captive programs is the ability to outright eliminate the double taxation that exists for subchapter-C corporations. Another exists when the captive owners form an 831(b) captive with the goal of creating a long-term cash surplus as part of a succession plan. In that sense, ownership of the captive entity can be sold as part of a transaction in which the ownership of the entity for which the captive provides insurance. If that occurs, a sale of the ownership interests in the captive entity may be subject to tax treatment as capital gains, which avoids altogether the double taxation inherent in subchapter-C corporations and allows the selling shareholders to enjoy a long-term capital gain rate that will likely be much less than their ordinary income rate.
In short, the tax reductions being implemented this year have little to no effect on whether to form a captive insurance program or to do so by electing 831(b) taxation. The principal reason is that the benefits and concepts behind forming a captive insurance program are not hinged entirely on taxation benefits. Even when they are, a reduction to the corporate tax rates does not eliminate the issue of double taxation or recognize the difference between long-term capital gain rates and ordinary income rates. In conclusion, there are many ways to implement captive insurance programs into the risk management strategies of a company. People interested in how captive insurance could benefit their business enterprises should consult with attorneys, insurance brokers, and accountants who understand the intricacies of captive insurance.