Are Small Captive Insurance Companies Tax Scams?

Increasingly, small and mid-sized businesses are setting up small or microcaptives. With a small captive insurance company, the insured can deduct up to U.S. $1.2 million in premiums and choose to be taxed on net investment income instead of premium income. This is all clearly spelled out in Section 831(b) of the tax code. Meanwhile, in February on 2015, the IRS has placed these captive insurance companies on its “Dirty Dozen” list of abusive tax schemes.