US President Joe Biden’s major tax proposals are set to have a positive impact on the tax effects of proper risk financing utilising a captive strategy, but a larger exit tax if not properly planned, according to RH CPAs’ Teresa Jones, Diana Hardy and Daniel Milan.
Given the results of the recent election, Jones, Hardy and Milan explain it is important to consider the possible effects of proposed tax plans likely introduced by the new Biden administration.
The CPAs suggest that the tax effect of the proposals “will likely result in larger upfront savings by utilising a captive as part of the risk financing strategy of a business who qualifies”.
One of Biden’s tax proposals is to increase the corporate tax rate to 28 per cent.
Hardy explains that for captives it would be an increase in taxes paid on the same amount of income.
Although it seems straightforward, Hardy states: “It will have a positive impact on the surplus/net worth of captives which have a deferred tax asset at the time of tax rate adjustment or a negative impact on the surplus/net worth of captives which have a deferred tax liability at the time of adjustment.”
For captives, the impact is quite large, according to Jones.
She suggests that insurance companies have advantageous tax rules such as the ability to deduct reserves prior to the actual loss being paid, which is not allowed in typical non-financial institution business enterprises.
“For example, assuming a construction company had a workers compensation claim which is likely to be paid over five years, an insurance company/captive can deduct the full amount of the reserve (subject to loss discounting) in the year of the loss. However, if the construction company did not have a captive, they would only be able to deduct the loss as it was paid,” Jones says.
For captives who make an 831(b) election, Milan highlights that the Biden tax plan will be “even more advantageous”.
The 831(b) election is for captives with premiums of $2.3 million or less, indexed for inflation.
He comments: “Given the increase in tax rates both corporate taxes and passthrough entities the tax effect of this election becomes much greater.”
You can read more on the new US administration major tax proposals in the latest issue of Captive Insurance Times.
