If you are a small business looking at coverage options, you might be looking into captive insurance as an opportunity for you to save money and provide good coverage for yourself, your business, and your employees. However, you might be wary after hearing horror stories of the IRS and its general disapproval of captive policies. To understand why the IRS dislikes this type of coverage, we need to understand what it is. Captive insurance is basically an opportunity for businesses to self insure, effectively becoming their own insurance company. This helps them keep their money in the company while still allowing for coverage in their business’s operations. Once the small business owner decides to retire, he can liquidate this situation and reap benefits from the growing savings. This circumstance takes time and energy to handle, as the small business effectively needs to become a second company, which can be difficult for those with little to no experience in the insurance scene. Many companies, such as Larson and Company, specialize in helping small businesses navigate this difficult situation, but for those without help from a business like Larson and Company, there is real prejudice against the policy from the IRS. Here is the big reason why the IRS dislikes captive insurance:
It can be abused. For many businesses, this type of policy offers a way to save enough money to make it in an increasingly competitive world. For others, it is an opportunity to skip out on paying certain fees and taxes that would normally be contributing to general, personal expenses. That is the main difference: expenses under the captive insurance label should not be personal expenses, but business expenses. If an individual sets up a captive Insurance situation to save money and avoid taxes for personal expenses, it is an abuse of the policy and the IRS will see the company as dishonest and likely hold them accountable. The IRS focuses on these sorts of policies whenever it scrutinizes businesses yearly, so you are setting up your business for a higher level of accountability if you choose a captive insurance option, even if you are not trying to be dishonest.
So, to avoid any negative effects from the IRS scrutinizing your company more closely but to enjoy the real benefits of a captive policy, work with a quality business like Larson and Company, who will help you navigate these difficult waters and make peace with the IRS so that you can do what’s best for your company.
If you need answers about the IRS and captive insurance , Larson and Company is the business to turn to.