A “Captivating” Tax Minimization Structure

A “Captivating” Tax Minimization Structure

March 7, 2014 Uncategorized
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(Last Updated On: January 18, 2017)

http://www.journalofaccountancy.com/Issues/2013/Mar/20126102.htm

This is dedicated to all our tax-minimization fans out there.

In recent years, smaller, closely held businesses have also learned that the captive insurance entities can provide them significant benefits. These include the attractive risk management elements long appreciated by the larger companies, as well as some attractive tax planning opportunities.

“Barney Style” breakdown of the mini-captive trade:

  • Mothership LLC starts captive with an 831 b election .
  • Mothership LLC pays captive insurance premium of $1.2mm to insure various risks; taking a tax-deduction in the process.
  • Captive receive premium and is not required to realize a taxable gain once the premium is earned (i.e., skipped income taxes on $1.2mm–whoohoo!)
  • Captive invests capital
  • Captive makes distributions at capital gains rates (via dividends)

There are some important details related to forming up a proper insurance company, but the jist of the trade from a tax perspective is to minimize income tax on a sizable chunk of change!

Give you local tax guru a holler!

Disclaimer:

First, we love paying our “fair” share of taxes and are in the unfortunate position of not having enough wealth to enjoy the finer things in life, such as estate planning and tax consulting. We are probably not the right people to rely on when it comes to professional tax advice.

Moreover, tax laws and regulations change frequently, and their application can vary widely based on the specific facts and circumstances involved. You are responsible for consulting with your own professional tax advisors concerning specific tax circumstances for your business. Intuit disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns.

If you have questions regarding accounting issues specifically related to your industry or your business circumstances, you should consult with your own professional tax advisor, accountant, attorney, industry expert or professional association.


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.