From: Captive Insurance Times

RH CPAs’ Teresa Jones, Diana Hardy and Daniel Milan provide commentary on the new US President Joe Biden’s major tax proposals and how they will affect the captive industry

It is well known that in many instances captives can be efficient tools for businesses to finance their risk as well as add profit to their bottom line. The consideration of captives has grown as businesses are evaluating their avenues for retaining risk versus offloading it to a commercial carrier, and in many instances, commercial coverage is just not available.

A major component of risk financing is the tax effect. Given the results of the recent election, it is important to consider the possible effects of proposed tax plans likely introduced by the new Joe Biden administration. There are of course many unknowns, but here are a few components of the plan and their impact.

It is more likely than not, that the Biden plan will have a positive impact on the tax effects of proper risk financing utilising a captive strategy, but a larger exit tax if not properly planned.

US President Joe Biden’s major tax proposals include:

Higher maximum rate: The Biden tax plan, subject to change, may raise the top individual federal income rate on ordinary income and net short-term capital gains back to 39.6 per cent, which was the highest rate prior to 2018.

This one is pretty simple if there was a deduction generated at the 39.6 per cent rate, which in theory generates a larger benefit than if the top rate was lower, assuming the insured is a pass-through entity. Therefore, a deduction by paying a premium to a captive is much more valuable.