Tax avoidance is perfectly legal and encouraged by the IRS,
but tax evasion is against the law.
– Internal Revenue Service Website
Countless business owners across America mailed checks to the IRS this week. It certainly is difficult to part with hard earned profits. Which begs the question, to what lengths should business owners and professionals go to reduce their taxes and keep more of their hard earned money?
The words “tax avoidance” may sound a bit sinister, particularly in a culture where politicians and the media rail against “loopholes that help the rich.” And, billionaire Warren Buffett tells the press his secretary pays a higher effective tax rate than he does. Buffett hasn’t written any checks to the Federal Treasury lately to “right” this great “wrong” he has complained about… curious isn’t it? For the business owner and professional looking to Warren Buffett as an example, this is a clear case of ”Do as I do, not as I say.” Buffett is a business man with an array of financial vehicles at his disposal and a staff of lawyers and financial professionals working to make the most of every dollar earned.
CIC Services, LLC recently attended the Captive Insurance Companies Association (CICA) Conference in Palm Springs, California as part of our on-going efforts to stay abreast of shifting trends, strategies and regulations in the captive insurance industry. The conference was thematically focused on the future of the captive insurance industry. We attended multiple presentations and workshops covering a wide range of topics, including demographic trends, risk management, medical malpractice, preparing witnesses in a lawsuit, reinsurance, captive investments, regulatory trends, and the creative employment of captive insurance companies.
At the conference, we attended a session titled “Successful Strategies for the Exploding Small Captive Market.” This session had three industry experts including David Provost, the Deputy Commissioner of the State of Vermont’s Captive Insurance Division. The session included a slide which quoted the IRS web site – “Tax avoidance is perfectly legal and encouraged by the IRS, but tax evasion is against the law.”
The panel was in complete agreement that one of the benefits of owning a captive insurance company is tax avoidance. After all, all insurance companies avoid taxes to one extent or another on reserves set aside for future claims.
Provost noted – and I’m certain other captive insurance regulators would agree – that the State of Vermont is not concerned with the tax implications of captives domiciled in the state. He noted that “Vermont licenses insurance companies based on the detailed plan of operation included in their application.” He also noted “We do not track captives by the tax elections they may make – it does not further our regulatory interest.”
What Is A Captive Insurance Company?
A captive is a unique insurance company. It includes its own corporation, insurance license, reserves, policies, policyholders, and claims. It is a formal way for business owners to self-insure risk, and captives are generally formed to insure primarily though not exclusively the risks of one or more businesses owned by the same or related parties.
What Can a Captive Insurance Company Do For your Business?
Simply put, it can enable your small or mid-sized business to access the same tax avoidance strategies employed by business empires like Berkshire Hathaway and their owners. For instance, “A typical captive insurance company created for legitimate risk management and asset protection reasons can save as much as half a million dollars a year or more in combined federal and state income taxes.” It is no surprise that Warren Buffett built much of his wealth through the insurance company he owns.
Reach out to us to discuss if a captive insurance company or additional captive is the right solution for your business.