Under a microcaptive insurance company, California businesses may seek this controllable risk management option to self-insure specific risks as it relates to supply chain interruptions, regulatory shutdowns, loss of key clientele, cyber incidents, etc. which company policies can be customized to fit actual exposures. Another benefit of owning a microcaptive insurance company is the stabilization of costs and cash flow control measures that keep premiums consistent. This reduces the added pressures of unexpected annual rate changes or increases which commonly are associated in working with third parties. There could also be opportunities for tax deferrals or reductions that could lower tax liability so businesses are only paying for the insurance coverage needed and are not battling volatile market conditions. In some instances, any assets held in a properly structured microcaptive may be shielded from creditors of the parent company.
While microcaptives offer significant advantages, they also come with important drawbacks to weigh carefully and merit close consideration. Some potential hazards to consider with microcaptives may include whether it makes sense for businesses to pull away from traditional commercial insurance in favor of flexible and diversified insurance. Without guidance from a licensed financial advisor, CPA and a local tax attorney, California businesses may run the risk of failing to meet Internal Revenue Code §831(b) requirements if unable to demonstrate business purpose beyond tax benefits and cannot prove such business is functioning like a real insurance company (issuing bona fide policies, charging actual premiums, managing claims and distributing risk exposure). Additionally, there are setup fees, actuarial fees, legal fees, and ongoing management costs plus a substantial financial commitment, often into high six figures, to adequately fund a microcaptive insurance company.
Under Internal Revenue Code §831(b), eligible microcaptives may elect to exclude premium income from taxable income at the captive level and deduct insurance premiums as a business expense at the business operating level if premiums are below an annual threshold of approximately $2.85 million for 2025. Microcaptive insurance regulations change frequently and for this reason, California businesses should consider advisement from a licensed tax attorney who will have the legal expertise to assist with understanding the unpredictable and closely scrutinized tax climate for purposes of staying compliant. Despite their appeal, microcaptives present significant risks and obligations that cannot be ignored.
If you have any questions regarding your individual or businesses’ state and/or federal tax return(s)/tax liabilities or received a notice from the IRS, FTB, EDD, CDTFA or any other regulatory agency, please call or email Wilson Tax Law Group, APLC, to setup a consultation with our firm.
Wilson Tax Law Group, APLC is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense. Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board. Wilson Tax Law Group, APLC, is comprised of former IRS litigators & Special Agents, and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division, which at the time handled both civil tax lawsuits and criminal tax prosecutions on behalf of the United States of America.
For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC
Tel: (949) 397-2292 (Newport Beach Office)
Tel: (714) 463-4430 (Yorba Linda Office)
Disclaimer: This blog post is for informational purposes only and does not constitute legal, tax or financial advice. Please consult with a qualified attorney, accountant or financial advisor for specific guidance related to your circumstances.
The Newport Beach Tax Attorney blog is dedicated to tax issues serving Orange County and Southern California. Posts cover recent news and tax cases including audits, tax litigation, IRS, and cryptocurrency tax issues. For more on the Orange County Tax Attorney Joseph P. Wilson, visit https://www.wilsontaxlaw.com or 949.397.2292
Microcaptives Unmasked: Several Hidden Hazards Mitigating the Minefield
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Microcaptives Unmasked: Several Hidden Hazards Mitigating the Minefield
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