Topic 11 · 6 min read
Section 831(b) Captive Insurance
Insuring your own risks — legitimate, and heavily scrutinized.
A business can form its own small insurance company to cover risks commercial carriers price poorly or will not cover. Under Section 831(b), a qualifying small captive is taxed only on investment income, not on the premiums it collects.
What to know
- Deduct premiums, defer income
- The operating business deducts premiums it pays; the captive excludes them from taxable income within the annual cap.
- Real risk is required
- There must be genuine risk shifting and risk distribution. A captive that never expects to pay a claim is not insurance.
- Actuarial pricing
- Premiums must be set by an independent actuary at arm's length, not reverse-engineered from the deduction the owner wants.
- On the IRS radar
- Abusive micro-captives are a listed transaction with mandatory disclosure and substantial penalties for getting it wrong.
- Fit matters
- This suits businesses with real uninsured exposure and consistent profit — not a small company looking purely for a deduction.
The tax benefit
Premiums are deductible in the operating business while reserves accumulate inside the captive taxed only on investment earnings.
Worked example
Uninsured exposure
A contractor with genuine but hard-to-insure warranty and supply-chain risk forms a captive, pays actuarially set premiums, and builds reserves it can actually draw on when a claim arrives.
Watch out for
- Promoter-driven captives with no claims history have repeatedly lost in court.
- Disclosure obligations are mandatory; silence is itself a penalty.
- Ongoing actuarial, audit, and regulatory costs are significant.
Terms from this topic
Captive insuranceSection 831(b)Risk distributionListed transaction
0 of 11 topics done in this installment.