All captives formed in the US or electing to be taxed as a US insurance company must file income taxes as a corporation on form 1120-PC. Generally captives are exempt from state income tax reporting, and alternatively when domiciled in a US state, usually are subject to annual fees and sometimes premium taxes by the state of licensure.
Structured and designed correctly, premium payments made by related US based operating businesses to an affiliate captive should be deductible as ordinary and necessary business expenses. The premium income received by the captive may however benefit by special accounting and tax rules afforded insurance companies. Captives that qualify for and make the special 831(b) election, which exempts premium income from all federal income tax for small insurance companies (those doing not more than $1.2 million in annual earned retained premium), must however pay income tax on the captive’s investment earnings.
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