Captive Insurance Services and Solutions - WMS, LLC , Captive Insurance Planning , Captive Insurance Taxation , Captive Insurance Feasibility Studies , Captive Insurance Risk Pools , Captive Reinsurance , Captive Insurance Management , Captive Insurance Underwriting , Captive Insurance Accounting , IRS Letter Rulings, Turnkey Captive Insurance Services
Captive Tax Benefits |
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Captive Insurance Company Tax Benefits, Savings and IncentivesCaptive Insurance Companies can provide big Tax Savings as well as Estate Planning & Retirement Benefits to Small Businesses and their Owners!Although a Captive Insurance Company is not formed for tax purposes, it can none the less provide substantial Tax Savings as well as Estate Planning and Retirement Benefits to its owners. The table below provides a list of Captive Insurance Tax Savings, Captive Insurance Tax Planning Benefits, Captive Insurance Estate Planning Benefits and Captive Insurance Retirement Benefits. These Captive Insurance Company Tax Benefits are best understood if they are read in the same order as they appear below. All Premium Payments are 100% Tax Deductible, and are Tax Free to the Captive Insurance Company - up to $1.2 million each year!A properly structured Captive Insurance Company that meets the requirements of IRC section 831(b) can be considerable! For example, the premiums paid to the Captive by its affiliates for insurance are 100% tax deductible as ordinary and necessary business expenses under IRC section 162. In addition, a Captive that makes an IRC Section 831(b) election to be taxed as a Small Insurance Company (a.k.a. Small Insurance Company Tax Election ) and which meets the requirements of IRC section 831(b) can receive up to $1.2 million in premiums each year - Tax Free! The net result is a reduction in the taxable income of the Captive's affiliated business in the amount of their annual premium payments to the Captive, up to $1.2 million each year.
In order to insure that every Captive we create receives the maximum possible tax benefits, WMS carefully structures every Captive to comply with IRS Safe Harbor Rulings and Guidelines which govern the definition and taxation of insurance and insurance companies. As an added layer of insurance, WMS will also be happy to act on your behalf to obtain a Private Letter Ruling from the IRS pursuant to Rev. Proc. 2002-75 which states that your Captive will receive favorable tax treatment from the IRS with regard to its most important tax aspects. This virtually eliminates all tax risks associated with forming and operating a Captive Insurance Company, and as a result, we highly recommend it! Over time Captives convert Ordinary Income into Qualified Dividends or Long Term Capital GainsA properly structured Captive Insurance Company will allow a business owner to shift business income which is immediately taxable at the highest State and Federal tax rates to tax deferred income which will only be taxable to the Captives owners when the accumulated earnings and profits of the Captive are distributed to its owners as Qualified Dividends, or as long term capital gains in the case of stock repurchase or a partial or complete liquidation of the Captive. Amounts which the Captive's owners receive as claims payments, loans, or return of capital are not taxable. Since the maximum Federal tax rate for Ordinary Income is 35% versus a 15% tax rate on Qualified Dividends or Long Term Capital Gains, a Captive generates a 20% tax savings on every dollar of premiums it receives up to $1.2 million each year! It also has significant investment income tax advantages as well as tax deferral and planning advantages which are discussed below. Tax Preferred Dividend Income accrues at a low tax rate in a Captive! A Captive Insurance company also has a big tax advantage on its Investment Income compared to an individual or a Sub S corporation, or a partnership. A Captive Insurance Company must be taxed as an association or Corporation for tax purposes. A properly structured section 831(b) Captive pays no tax on its premium income up to $1.2 million each year and only pays taxes on its investment income. However, Captives are only taxed on 30% of the US Stock Dividends which they receive at an effective Federal tax rate of between 4.5% to 10.2% depending on the total amount received. Captives pay no State taxes on their premium income or investment income. The shareholders of the Captive are only taxed when they remove accumulated earnings from the Captive as Qualified Dividend or Long Term Capital Gains at a 15% Federal tax rate. Captive Insurance Company Tax Planning and Retirement Benefits Captive Insurance Companies can also provide substantial Tax Planning and Retirement Benefits for their owners! Captive Insurance Companies that meet the requirements of IRC section 831(b) can receive up to $1.2 million in premiums each year Tax Free. The insurance profits a section 831(b) Captive earns are only taxed when they are actually distributed to its shareholders as Qualified Dividends, or as long term capital gains in the case of stock repurchase or a partial or complete liquidation of the Captive. The qualified dividends a Captive Insurance Company pays to its shareholders would be taxed for federal tax purposes at the 15% "qualified dividends" tax rate vs. the much higher federal tax rate on ordinary income of 35%. The "tax deferral" feature of Captives can provide substantial Tax Planning options and advantages especially as the US Congress changes the tax rate on ordinary income, dividends, and long term capital gains in the years to come. Since a Captive's owners control the timing and amount of distributions they receive from their Captive, they can choose to receive these distributions in the manner and time which provides them with the greatest tax benefits. Business owners find the "tax deferral" flexibility a captive provides very appealing since virtually all of their current income from salary, bonuses, partnerships, sub-S corporations, etc, is taxed immediately as it is earned at the highest federal and state tax rates. The "tax deferral" flexibility which a Captive provides can also produce significant Retirement benefits. Most people retire in a State which is different from the one they lived in during their productive earning years. There are several States in the US which have no State income tax including Florida, Nevada, Texas, Washington, South Dakota, Wyoming, and Alaska. By choosing a retirement state that has no state income taxes, or has a lower state income tax rate than their current state of residence, a Captive owner can eliminate or radically reduce state taxes on dividends or long term capital gains distributions they receive from their Captive. See example below Captive Insurance Company Estate Planning Benefits A Captive Insurance Company can provide substantial Wealth Transfer and Estate Tax Planning Benefits. Typically the Captive is owned directly or indirectly by the same individual or individuals who own the businesses which the Captive insures. However, if the Captive is owned by the children or heirs of the owner(s) of the insured businesses, then significant Estate Tax benefits can result. Under such a scenario, the owners of the insured businesses would receive a current year tax deduction for every dollar of premiums paid to the Captive and their children or heirs who own the Captive would not be taxed on these premium receipts up to $1.2 million each year provided the Captive has made an IRC Section 831(b) election to be taxed as a Small Insurance Company and meets the requirements under section 831(b). This effectively transfers wealth from the insured business owners estate in the form of a premium payment, to the estate of his/her children or heirs, without the imposition of any Estate Taxes and with no erosion of his/her Estate's Unified Credit amount. These Captive Estate Tax benefits are significant and should be explored by high net worth individuals who have already decided to form a Captive for non-tax business reasons. No Loss of Control - a Captive's Shareholders Own and Control Everything The owners of a Captive Insurance Company are in complete control of their Captive all times. The Captive's owners have complete control of the Captive's stock, bank accounts, investment accounts, premiums receipts, etc. Although the bank accounts and investment accounts of a Captive must be kept separate from those of its insured's, the Captive's owners decide which US Banks and Financial Institutions will hold the Captive's accounts, and who will have signature or any other authority over these accounts. Tax Savings Start Immediately and allow for Flexi bile Participation for Years to Come Captive Insurance Companies can generate immediate results and continue to deliver large tax savings that increase over time! Since a Captive Insurance Company and the affiliated businesses it insures share common ownership, the owners can decide when, how much, and for how long their businesses will pay premiums to their Captive Insurance Company. There are no restrictions regarding the amount of time a Captive can be owned. A Captive Insurance Company can usually be formed and licensed in as little as 3 weeks. Once established, a Captive Insurance Company can consistently generate large tax savings for the next 5, 10, 15 or 25+ years. No Impact on Consolidated Financial Statements or Debt Capacity A Captive Insurance Company and the affiliated businesses it insures share common ownership. A Captive Insurance Company can be owned by the Parent or Holding Company or their shareholders without any loss of tax benefits. A Captive Insurance Company which is a wholly owned subsidiary of a Parent or Holding Company will have no negative effects on the Consolidated Financial Statements of the affiliated businesses. This means that a Captive will not impair the overall credit worthiness of debt capacity of its Parent, Holding Company or any affiliates. On the contrary, owning a Captive Insurance Company can significantly improve the financial strength and cash flow of the Captive's affiliated insureds by virtue of the State and Federal Tax Savings it produces. EXAMPLE: How a Captive Insurance Company can Increase the value of a Business owner's after Tax Income The table below gives an example of how dramatically a Captive Insurance Company can increase your after tax income. The example below assumes the following: · The Taxpayer is a Businessowner, who currently lives and operates a business in Ohio. The Taxpayer's business is either a Sub S Corporation, Sole Proprietorship, or a Partnership which is taxed currently on all Salary and profits of his business. · Taxpayer pays a Federal Income Tax of 35% on all Salary and Profits attributable to his business. · Taxpayer also pays an Ohio State Income Tax of 7.5% on all Salary and Profits attributable to his business. · The Businessowner plans to retire to a State which has no State Income Tax such as Florida, Nevada, Texas, etc. · The table below shows the net after tax benefit which the Taxpayer will receive from a single premium payment of $1,000,000 made by the Taxpayer's business to his Captive Insurance Company. The single payment of $1,000,000 in invested in US Stocks which have a Dividend yield of 6.55%. The single premium payment amount as well as the accrued Dividend income is retained in the Captive for 5, 10, 15, or 25 years at the end of which time the Taxpayer will retire to a State with no State Income Tax and will distribute all the accumulated earnings and profits of his Captive to himself as Dividends. · The Dividends which Taxpayer receives from his Captive during retirement are considered Qualified Dividends for Federal Income Tax purposes and are only taxable at a Federal Tax Rate of 15%. The Taxpayer will pay no State Income Tax on the receipt of these Dividends since he will reside in a State which has no State Income Tax such as Florida, Nevada, Texas, etc. A Captive's Impact on the value of Net Income after Tax Over Time
Note how a Captive Insurance Company can dramatically increase the Taxpayer's after tax income by 60% after 5 years to as much as 180% after 25 years! (See Additional Details) Get a Free Consultation by calling (201)-995-9085 ext- 5 If you or your designated tax representative would like to learn more about how one of our IRS Approved Captive Insurance Transactions can be used to eliminate all taxes on up to $1.2 million of your annual business income from all State and Federal Taxes, please call (201)-995-9085 ext 5 to arrange a Free Telephone Consultation. You can also arrange a free telephone consultation by clicking on this "Free Consultation" link. Either way, we hope to hear from you or your designated tax representative soon! | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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