Microcaptives: The advantages are there, but the rules need to be followed

Recently, we explored the topic of captives as a risk management tool. Now, we turn our attention to microcaptives. A microcaptive, as the name implies, is a smaller version of a captive, with less than $1.2 million in annual premium. One advantage of a microcaptive, per Captive.com: U.S. microcaptives are taxed only on investment income.

Captives can present advantages for companies. However, they do take a good deal of investment, both in money and time. For smaller companies, though, microcaptives might have some appeal.

However, microcaptives have come under IRS scrutiny as potential tax shelter scams. That’s because a microcaptive must be qualified as an insurance company operating as a real business entity, not just a vehicle to reduce taxes.

The Internal Revenue Service recently noted that abusive tax shelters and structures to avoid paying taxes continues to be a problem, and microcaptives made the IRS’s annual list of tax scams known as the “Dirty Dozen” for the 2016 filing season.

"Taxpayers should steer clear of unscrupulous promoters who sell phony tax shelters with no real purpose other than to avoid paying what is owed,” IRS Commissioner John Koskinen said in February. "These schemes can end up costing taxpayers more in back taxes, penalties and interest than they saved in the first place.”

In short, companies wanting to play in the microcaptive space need an experienced insurance broker to help them out to ensure the rules are being followed. After all: starting a captive means a company is in the insurance business, whether it wants to be or not.

To learn more about microcaptives, contact a Plexus Groupe client service professional by calling 847.307.6100 (Chicago) or 972-770-5010 (Dallas/Oklahoma), or visit us online at plexusgroupe.com.