Who knows and understands tax code 831B…. Here is what ChatGPT says.

[Ronald Cedillo]

Someone is giving me a webinar about it tomorrow and I want to make sure that it is legitimate and want to know from seasoned veterans like yourself the good, bad and ugly of it.  This is what ChatGPT said about it.

IRS Code § 831(b) refers to a special tax provision under the Internal Revenue Code that applies to small insurance companies, particularly “micro-captive insurance companies.”

Here’s a plain-English summary:

IRC § 831(b) - Overview

What it does:

Allows small insurance companies to elect to be taxed only on their investment income (and not their underwriting income, or insurance premiums received).

Key Features:

• Eligibility Cap:
  As of recent updates, to qualify under § 831(b), the insurance company must have annual net written premiums or direct written premiums that do not exceed $2.8 million (as adjusted for inflation).
• Election Required:
  The insurance company must formally elect 831(b) treatment with the IRS. Otherwise, it is taxed under regular rules.
• Tax Advantage:
  Qualified insurers under 831(b) do not pay tax on underwriting profits (i.e., the premiums they collect), only on their investment income.

Who Uses It?

• Often used by closely held businesses that create their own captive insurance companies to insure against risks not covered by traditional policies (e.g., supply chain disruption, key employee loss, reputational damage).
• These “micro-captives” can be a legitimate risk management strategy, but have also drawn IRS scrutiny for abuse.

IRS Concerns and Abuse:

The IRS considers some 831(b) structures to be “listed transactions” (i.e., potentially abusive tax shelters), especially when:

• The insured risks are minimal or implausible.
• The premiums are inflated.
• The captive returns most of the money back to the owner tax-free.

In Notice 2016-66 and subsequent actions, the IRS signaled a strong crackdown on abusive micro-captive arrangements.

Why It Matters:

Used correctly, § 831(b) can be a powerful tax and risk management tool. Used incorrectly, it can trigger IRS audits, penalties, and back taxes.

Actionable Tip:

If you’re considering a micro-captive under § 831(b), consult a tax attorney or CPA experienced in insurance and captive compliance. The IRS has increased enforcement, and structures must be carefully designed and documented.