News and Insights

President Signs New Tax Act with Small Insurance Company Taxation Changes

Tax Development Dec 28, 2015

The Protecting Americans from Tax Hikes Act of 2015 (“PATH” or “Act”), which was signed into law by the President on December 18, 2015, has modified Section 831(b) of the Internal Revenue Code, which provides an election for property and casualty insurance companies that receive less than $1.2 million in premiums to recognize only investment income, in lieu of the broader income definition under Section 832.

Effective January 1, 2017, Section 831(b) is amended as follows:

Premium Limits

Premiums allowed under Section 831(b) will increase from $1.2 million to $2.2 million and would be adjusted to inflation for the first time since 1986.

Diversification Requirement

Under the current code section, an insurance company must only have premiums below the threshold and make a timely election to qualify for Section 831(b) treatment. With the new legislation, an insurance company must pass one of two tests to satisfy the legislation’s diversification requirement.

The first is that no more than 20% of net written premiums may be attributable to any one policyholder.

The second test, which applies if the insurance company fails the first, is that no family member—either “spouse or lineal descendant (including by adoption)”—of the policyholder’s owner may own assets in the captive insurance company in a percentage higher than the family member’s ownership in the policyholder.

There is an exception to the second test for de minimis (2%) amounts of ownership percentage difference.

New Reporting Regime

The legislation would require the Internal Revenue Service (IRS) to collect information on the diversification test, which would presumably require the agency to create a separate form for insurance companies using the Section 831(b) election.

Currently, taxpayers use Form 1120-PC, “U.S. Property and Casualty Insurance Company Income Tax Return,” to indicate their election under the code section.


Kenneth D. Kotch