The word “captive” in this article refers to a captive insurance company. Yes, this is an insurance company that you could own and from which your business could buy insurance.

It works like this. You form a captive insurance company. Your business deducts the insurance premiums it pays to your captive insurance company.

Now, get ready for this: It’s most likely that the premiums collected by your captive insurance company are tax-free. Tax code Section 831(b)(2) creates a “micro” insurance company (your captive insurance company) and works like this:

Your captive insurance company elects micro status and pays no taxes on the insurance premiums it collects so long as they don’t exceed $1,200,000 for the year.1

Your business deducts the monies that it pays to your captive insurance company.

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