January 16, 2025
Regs. Sec. 1.6011-11 of the final micro-captive regulations outlines the elements that need to be present for a micro-captive transaction to be considered a transaction of interest in the eyes of the IRS. This includes all the following:
The micro-captive’s loss ratio is less than 60% during whichever of the following periods is applicable: (1) the last ten taxable years, or (2) all taxable years of the micro-captive, if the micro-captive has been in existence for less than ten taxable years.
A micro-captive’s loss ratio is computed as follows:
During the last five tax years, the micro-captive made financing available to (1) an insured entity, (2) an owner of an insured entity, or to (3) a party related to (1) or (2) in a transaction that did not result in taxable income to the recipient of the funds, such as a loan or guarantee, or
Prior to the last five tax years, the micro-captive made financing available to (a) an insured entity, (b) an owner of an insured entity, or (c) a party related to (a) or (b) in a transaction that did not result in taxable income to the recipient of the funds, such as a loan or guarantee, and the financing provided has not been returned to the captive as of the end of the preceding tax year.
If the above elements are present, the IRS will consider the micro-captive transaction to be a transaction of interest, and the participants to the transaction will be required to comply with additional reporting and disclosure requirements.
For more information contact our Larson captive team to find out how this will affect your micro-captive.