Weekly Round-Up: Are Taxing Authorities Holding Your SALT Planning Captive?

Captive insurance companies, which enjoy certain tax advantages under state law, lately have made their appearance in corporate structures as a means of preserving tax benefits that would not normally be allowed to related parties, most notably in the area of holding and managing intangible assets. 

Today, roughly thirty states have adopted captive insurance statutes and structures, and many are in the process of altering their current laws in an effort to attract new captives and claim a piece of a more than $10 billion industry. So, SALT impact as to the use of captives has surfaced, and is on many a taxing agency's radar screen.

In this week’s issue of Weekly State Tax Report, prominent state tax practitioner and BBNA advisory board member Mark F. Sommer, along with Ross D. Cohen, and Jennifer Y. Barber, all with Bingham Greenebaum Doll LLP, provide an in-depth look at captive insurance trends in state and local tax.

At the state tax level, captive insurance companies may afford insured parent corporations and other affiliates, important income tax advantages, and cash savings, because premium payments to the captive are generally deductible. 

The captive is then generally required to recognize the payment as premium income – but since premiums are usually taxed at a more favorable rate than most other state level taxes, including income taxes, an advantage exists. 

At the state level, nearly all states do not subject an “insurance company” to a corporate income tax otherwise in place. Thus, even if a state has consolidated or combined corporate filing requirements, an insurance company oftentimes is carved out of the taxable group.

In such an instance, as the income tax deduction for premiums paid may ultimately not be reduced or denied (or added-back), that tax benefit, coupled with the earnings of the captive upon its assets and reserves likely escaping state corporate income tax, makes the prospect of permanent, and material, tax benefits come front and center. While exceptions to all of the above may exist in various corners of the country, in theory the general rules prevail. And any premium tax which applies, if any, is generally that of the state where the covered risk is located. 

All of this enables a parent to shift risk to a captive insurance company, take a deduction for its premiums, and usually pay only a smaller premium tax through its captive insurance company and zero tax on non-premium earnings and gains.

In light of these benefits, the use of captive insurance companies has increased dramatically in recent years.

For a comprehensive lookat captive insurance in state and local tax, check out the complete article by Sommer, Cohen and Barber in this week’s issue of the Weekly State Tax Report .

In other developments…

Alabama ALJ finds single return limitation year rule inapplicable for 1999 and after, Bloomberg BNA State Tax Law Editor Erin McManus reports in this week’s issue of the Weekly State Tax Report [ which can be read in its entirety here ].   

Providing streaming videos to Texas customers over the internet is a taxable cable television service , the Texas State and Local Tax Law Blog reports.

Deficit-reduction package that lacks significant revenues would shift very substantial costs to states and localities , according to a new report by the Center on Budget and Policy Priorities.

The New York Department of Taxation and Finance b egins posting pending Advisory Opinion issues on its website , the September 2012 issue of Morrison & Foerster’s New York Tax Insights reports.

Compiled by Priya D. Nair
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