Captive Insurance (§831(b))
A small insurance company you own that insures legitimate, hard-to-cover risks of your business — premiums deductible, up to ~$2.8M/yr received tax-free by the captive.
What it is
An §831(b) 'micro-captive' is a licensed insurance company you (or a trust for your family) own. Your operating business pays premiums to the captive for legitimate insurance coverage — deductible to the business — and the captive can elect to be taxed only on its investment income, receiving up to ~$2.8M of premium tax-free annually.
Legitimate uses
Cover real but hard-to-insure risks: cyber, supply-chain, product recall, business interruption, regulatory, key-person, deductible buy-down. Surplus accumulates inside the captive and can later fund expansion or estate planning.
IRS scrutiny
Listed transaction in 2016. The IRS has aggressively challenged abusive structures (sham risk, excessive premiums, no actual claims). Done properly with arms-length premiums, real risk distribution, and a licensed manager — they hold up.
Watch out for
- •Setup $50k–$100k; annual ongoing $40k–$75k.
- •MUST have real underwriting and real claims activity.
- •Use only well-known, audit-tested managers.
Educational only — not tax, legal, or investment advice. Talk through your specific situation with a qualified advisor.