How to Save Money and Protect Your Business

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Is your business paying $100,000 or more per year in income taxes? Would you like to keep this money to grow your business and significantly enhance your personal finances and estate?

Many small- to medium-sized business owners and their CPAs are not aware of the power of a little known IRS regulation that allows them to protect and grow their business and enhance their personal finances in several ways.  Most Fortune 500 companies have been using this strategy for decades as a way to fund and manage risk on a tax advantaged basis.

How It Works

Internal Revenue Code Section 831(b) allows small business owners to form their own Captive Insurance Company (CIC) to insure and manage risks which often include risks not covered by their current insurance policies such as: policy exclusions, large deductibles, loss of a large client or key employee, or coverage that is unavailable or exceedingly expensive in the conventional market.

The business pays premiums to its wholly owned CIC and deducts these premiums as an expense and their CIC receives the premiums on a non-taxable basis. In the event that claims are less than the premiums paid each year, the CIC can produce a significant tax advantaged surplus that can be used to cover future business risks and provide favorable estate, gift, and generation skipping advantages to the business owner and his/her family. The CIC can also make distributions to the business owners, family members, or key executives at favorable tax rates.

CICs are managed by third party servicing companies approved by state insurance commissions, and the assets should be managed by an experienced wealth manager using a conservative investment platform. This frees the business owner from any active involvement in the CIC, thus allowing them to focus on managing and growing their business.

Under IRC section 831(b) the IRS allows the business to deduct up to $1.2 million dollars per year for each CIC that is formed.  The premiums paid to the CIC each year are non-taxable. Investment income of the captive is taxable to the CIC at corporate rates. And distributions are currently taxed at favorable long term capital gains rates.

The key to the effective use of a CIC is making sure it is formed and operated properly in compliance with all IRS laws and regulations. Utilizing an experienced servicing company that works well with your current tax advisor is important. Having an experienced financial advisor that will manage the assets using a conservative investment strategy is equally important.

Why Form a Captive

1) Gain deductions for risk the business currently self-insures. 2) Create a surplus that can cover future losses instead of funding that loss from current cash flow. 3) Increase wealth at a greater pace because of the available tax advantages. 4) Achieve estate, generation skipping, and gift tax advantages. 5) Choose which risks to insure if cash flow issues arise after the CIC is formed.

Things to Consider

1) Having positive cash flow each year to pay the premiums. 2) Hiring a qualified experienced servicing company. Experience matters. 3) Using an Investment Advisor that is experienced in managing the assets and surplus of the CIC. 4) Making sure the CIC works well with your estate plan and retirement goals.

A good rule of thumb is that if the business is paying more than a combined $100,000 in federal and state income tax, then forming a Captive Insurance Company is a good idea. Hire those who know how to do it right and you will be forever pleased with your decision to form your own Captive Insurance Company.

About the Author, Brian Gray is President of Asset Protect One located in Boulder, Colorado. He is an investment advisor representative for Horter Investment Management in Cincinnati, Ohio. His website is