Taxation and Captives
Important: Oak Harbor Re cannot and does not provide advice regarding the legal, accounting, regulatory, and tax issues associated with participating in an Oak Harbor Re insurance program. If you’re considering participating in a protected cell or captive-type insurance program, you should seek appropriate tax, accounting, regulatory, and legal counsel regarding your rights and obligations. The following is not an exhaustive list of the questions you should consider and is not a substitute for obtaining appropriate counsel.
Are premiums tax deductible?
You and your advisers should evaluate the deductibility of your costs related to your participation in an insurance program and whether they are an “ordinary and necessary expense” of carrying on a trade or business. One area to consider is the degree to which your participation in the protected cell program involves risk transfer. Risk transfer refers to both “risk shifting” and “risk distribution.” Risk shifting is a process where an insurable loss will be borne by someone other than the insured. Risk distribution is the process of pooling risks from various insureds.
Oak Harbor Re structures its protected cell programs so that the losses of each program participant are shared with the other participants in that protected cell. Therefore, each participant has exposure to the losses of the other participants in their particular protected cell program. Oak Harbor Re assumes that the premiums paid by each program participant to the insurance carrier will be deducted by the participant as ordinary and necessary business expenses in the year in which such premiums are paid.
Additional Resources
Protected Cell Company Tax Guidance – IRS Notice 2008-19
www.irs.gov/irb/2008-05_IRB
In early 2008, the IRS proposed changes in the way protected cell companies are taxed. The IRS proposed that taxes be calculated and paid by each protected cell. Depending on the IRS’s final determination, the tax allocations as described above may change.