Technically there is no such thing as an 831(b) captive. 831(b) is a reference to U.S. Code, Title 26, Subtitle A, Chapter 1, Subchapter L, Part II, section 831, subsection (b), of the United States Internal Revenue Code, titled “Alternative tax for certain small companies.” Therefore 831 (b) applies only to insurance companies that are US taxpayers. You can read this 831(b) statute on the Cornell University website by clicking here.
This US tax code provision was enacted as part of the 1986 Tax Reform Act enacted by Congress and signed by President Ronald Reagan into law during his 2nd term. During this time the US insurance markets were a very “hard” market, meaning insurance was expensive and for many companies and professionals difficult if not impossible to find. Section 831(b) specifically created a powerful tax incentive for the formation and operation of small insurance companies so US businesses will hopefully never again find themselves in the disastrous commercial insurance market conditions existing in the mid-1980s without protection from operational risks.
This section 831(b) election is available to qualifying insurance companies who timely make the necessary election; otherwise applicable taxes dictated by section 831(a) applies to all insurance companies except life insurance companies. All US insurance companies, whether electing 831(b) benefits or not, must file IRS tax form 1120-PC (click here to see the form, or click here to see instructions).
Section 831(b) (2) (A) limits its application only to insurance companies if:
- The greater of net written premiums or direct written premiums do not exceed $1,200,000 in the taxable year, and
- Such company elects the application of section 831(b) for such taxable year.
This 831(b) election once made cannot be revoked without consent of the IRS.
Increasingly the terms “micro-captive” or “enterprise risk captive” are used to describe these small 831(b) election qualifying captives.
For more detailed information on 831(B) including cash flow projection impacts, 831(b) captive design examples, ownership structure considerations and key steps to designing, forming and operating an 831(b) captive, including best practice innovations, please read “831(b) Micro Captives Insurance Companies – Design and Tax Planning Guidance” by clicking here.
Nothing herein should be construed as tax advice. Consult with tax professionals before making complex decisions if tax impacts are of concern to you.