Introduction to Mini-Captive Insurance

Mini-captive insurance companies ( “mini-captives”) are a form of self-insurance whereby small businesses can establish an affiliated property and casualty insurance company to achieve a multiplicity of benefits.

Benefits include control in selecting the specific risks to insure, direct access to the wholesale reinsurance market, control over premium costs, the ability to insure what may be otherwise uninsurable in the commercial marketplace, control over the claims process, substantial tax savings, and the creation of a new profit center.

Mini-captives are frequently domiciled off-shore for regulatory and other reasons. However, many states have established legislative paradigms to encourage the formation of domestic mini-captives.

Mini-captives insure only the risks of the affiliated small business; they are not authorized to offer insurance to the public at large.

Tax Benefits of Mini-Captive Insurance

Prior to 2017, insurance premiums paid by an insured small business to its mini captive, not to exceed $1.2 million, were deductible by the small business entity as ordinary and necessary business expenses under section 162 of the Internal Revenue Code (“IRC). Insurance premiums were not taxable as income to the mini-captives as they were reserved to cover possible insured claims. Profits of the mini-captive and excess reserves could be returned to the small business entity as qualified dividends, taxed at capital-gain,not income, rates.

The federal tax provision governing mini-captives, IRC section 831(b), was amended effective 2017. The amended provision continued and, in certain respects, expanded the mini-captive program.

IRS Audit Initiative

Beginning in 2010 or thereabouts, the IRS began a blanket audit program, attacking mini-captives as abusive tax shelters, generally alleging that they did not qualify as “insurance” and lacked “economic substance” under various tax authorities. Thereafter, the IRS stepped up its attack by adding mini-captives to its “Dirty Dozen” list of questionable tax transactions, implying widespread and egregious taxpayer abuse.

Almost a thousand small business entities were caught up in the blanket audit program and were faced with millions of dollars in tax deficiency claims.

Tax Court Litigation

In response to IRS assessments, many aggrieved business entities filed petitions with the United States Tax Court challenging the assessments and claiming that the IRS was seeking to completely gut a program enacted by Congress for the express benefit of small business entities under a simplified tax framework, consistent with similar benefits long enjoyed by Fortune 500 companies.

Presently, there are over 500 cases pending in the Tax Court, involving the interests of small business people, their lawyers and accountants. This website is devoted primarily to the interests of these people. We also treat the matter of settlements between small captive companies and the IRS.

Congressional & Regulatory Initiatives

Since 2022, Minicap and its supporters have led educational initiatives to advise Congress on IRS enforcement and regulatory abuses with respect to IRC Sec. 831(b). Since 2024, the Minicap Coalition has funded a congressional lobbying effort to amend Sec. 831(b). The effort is led by Maggi Lazarus, Esq. of Barnes & Thornburg’s Washington, D.C. office. These initiatives have produced promising results which are discussed in month-to-month Congressional and regulatory reports set forth in this website.

About This Site

There presently exists a state of war between the IRS and the small captive insurance industry. This site is designed to report on the legislative, regulatory, and litigation fronts of that war for the benefit of interested taxpayers.