Micro-Captives — Understanding Micro-Captive Insurance Companies for Risk Management & Tax Planning
What This Video Covers
Micro-captive insurance arrangements are a legitimate business planning tool that the IRS has placed on its Dirty Dozen list — not because the structure is inherently illegal, but because bad actors have repeatedly abused it. The result is that a valid risk management strategy has become one of the most scrutinized areas in small business tax planning, and business owners who use it properly are getting caught in the same enforcement net as those who used it improperly.
This video explains how micro-captive insurance works, what the IRS’s actual objection is, how to distinguish a compliant arrangement from an abusive one, and what to do if you have already used a micro-captive and are concerned about your exposure.
Key topics addressed include:
- What a micro-captive insurance company is and how the structure works
- The legitimate tax deduction available under IRC § 831(b)
- How bad actors have abused the structure through inflated premiums and improper use of funds
- Why the IRS targets micro-captives and what it looks for in an audit
- The difference between a compliant micro-captive and a listed transaction
- What to do if you have an existing micro-captive arrangement
- Why consulting a tax professional before entering or exiting a micro-captive is essential
Why This Matters
The IRS has devoted significant audit resources to identifying and unwinding these abusive arrangements. Taxpayers who participated in promoter-driven micro-captive structures — particularly those where premiums were large relative to the business’s actual risk profile — face real exposure. But the enforcement action should not deter business owners from evaluating whether a properly structured micro-captive serves their legitimate risk management needs. The structure itself is not the problem. How it is implemented and operated determines whether it survives scrutiny.
About the Presenter
Benjamin A. Goldburd, Esq.
Goldburd McCone LLP
Benjamin brings focused experience in IRS collection defense, including lien and levy disputes, CDP hearings and negotiated resolutions. Our team’s combined backgrounds in accounting, business and wealth management ensure that enforcement responses account for the full scope of a client’s financial position.
Frequently Asked Questions About Micro-Captive Insurance Companies
What is a micro-captive insurance company?
A micro-captive is an insurance company, typically owned by a business or its principals, that insures the risks of that business. Under IRC § 831(b), captives that receive annual premiums below the statutory threshold — currently $2.65 million, indexed for inflation — can elect to pay tax only on investment income rather than premium income.
Why is the IRS targeting micro-captives?
The IRS’s concern is with abusive implementations — arrangements where premiums are inflated, risks are not genuine, and the captive functions as an investment or tax deferral vehicle rather than a real insurance company. These structures produce large deductions for the operating business without corresponding economic substance. The IRS has designated certain micro-captive transactions as listed transactions or transactions of interest, requiring disclosure and subjecting participants to heightened scrutiny.
How do I know if my micro-captive is compliant?
The key markers of a compliant arrangement are genuine insurable risks, actuarially sound premium pricing, proper claims handling, and real economic substance — the captive actually operates as an insurance company. If the premiums were set by a promoter without reference to your actual risk profile, if the risks insured are unlikely ever to produce claims, or if the captive’s funds have been used for purposes unrelated to paying claims, those are indicators of a problematic arrangement that needs legal review.