To promote the use of insurance companies, Congress has given insurance companies — and especially “small” property & casualty companies — very favorable tax treatment. The very best tax treatment given by Congress comes in the form of the IRC § 501(c)(15) company. Essentially, so long as an insurance company is: (1) primarily in the business of insurance; and (2) receives less than $2,300,000 in annual insurance premiums, the company is tax exempt, subject to certain restrictions. This means that the insurance company may obtain the following tax benefits:
All Taxes Deferred
Although the 501(c)(15) insurance company typically pays no taxes, the owner of the company will pay taxes: (1) whenever a distribution is made or a salary or management fee paid, at ordinary income tax rates; and (2) when the insurance company is sold or liquidated long-term capital gains rates will be paid (assuming the insurance company has been held for a significant amount of time. But note that, at worst, the owner of a 501(c)(15) insurance company has converted ordinary income (premiums received) and non-long term capital gains investment income, into long-term capital gains which are deferred until the company is sold, etc.
Premium Income Received is Not Taxed
All insurance premiums are received by the company tax-free.
Passive Investment Income Received Is Not Taxed
This is the really Big Bang for qualifying 501(c)(15) insurance companies. So long as the company continues to qualify under the Internal Revenue Code, its passive investment income is NOT taxed. What this means for qualifying insurance companies, under certain circumstances is that:
Capital Gains Are Not Taxed
This means that if a person has a large appreciated asset, whether a large bloc of IPO stock or appreciated real estate, that they could transfer those assets to the insurance company as reserves and surplus, and the insurance company could liquidate and diversify those assets with NO tax immediately payable.
Income streams from patents, copyrights, and trademarks which have been contributed to the insurance company as reserves and surplus, are not taxed. [Caution: There are very complicated rules for contributing such intangibles to the insurance company, and the failure to follow these rules correctly can lead to unfavorable results.
Discover Why Increasing Numbers Take This Path
- Tax Deferred
- Complete Control
- Family Owned & Operated
- Enhances Asset Management
- Reduce Costs
- Enhance Privacy
- Control Assets Directly
- Separate Investment Activities
- Financially Tutor Younger Family
- Federal Approval Process
- State Approval Process
- There Must Be an Owner (Can be Trust)
- We Assist With All The Above