The IRS Shocks Everyone On Captive Taxes

One of the most hotly debated and controversial topics since the bid rigging accusations has hit the Workers Compensation world. The Internal Revenue Service has performed a complete U-turn on attempting to tax captives upfront, or actually to not allow the upfront tax write-off.

As I said in my last blog from a few weeks ago on this situation, I felt that the IRS was going to completely tax captives on the funds that were set aside to pay claims and not allow the taxes to be written off on the reserves set aside to pay claims when the claims were paid. The IRS had always said that a taxable event happens when the money is set aside for any type of financial arrangement. However, now captives are an exception to the rule.

Ever since September 2007, the IRS had said they were going to have public hearings on them taxing captives. I was 99.9% sure they were going to tax captives upfront when the money is set aside for paying claims - or in reality - were not going to allow a tax write-off, which is one of the main benefits for a large employer to create a captive for their insurance, especially for Workers Comp. Captives may now spread very quickly as an alternative risk financing arrangement. That is, until the IRS takes another crack at trying to disallow the reserve write off for taxes.

Captives are not the answer for all insurance situations, but they are now much more appealing with the advantage of an upfront tax write-off for reserves.

Next Up - The Woes of North Dakota's Workers Compensation Program