What is an 831(b) micro-captive?

A small insurance company that elects under Section 831(b) to be taxed only on investment income, not underwriting income. Premiums up to ~$2.9M (2026) can be received tax-free by the captive. This is the most common captive structure for small and mid-size businesses.

Why is the IRS scrutinizing captives?

Some promoters have set up captives that insure fake or inflated risks, using them as tax shelters. The IRS has placed micro-captives on its "Dirty Dozen" list. Legitimate captives insure real business risks at actuarially justified premiums - make sure yours passes the smell test.

What kind of businesses benefit most?

Businesses with significant uninsured or underinsured risks: cybersecurity breaches, supply chain disruption, regulatory changes, key person risk, or industry-specific exposures that commercial insurers won't cover.

How much does it cost to set up?

Expect $50,000+ for formation, plus $15,000-$30,000/year for management, actuarial, and regulatory compliance. The tax savings need to substantially exceed these costs to make it worthwhile.

Where should the captive be domiciled?

Popular domiciles include Vermont (largest US captive domicile), Delaware, Utah, Tennessee, and offshore jurisdictions like Bermuda or Cayman Islands. Each has different regulatory requirements and costs.

Business Owner

Captive Insurance Company

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advanced · $500K+

Create a small insurance company (831(b) captive) to insure your business risks.

Premiums paid by your business are deductible; captive can elect favorable tax treatment on underwriting income.

Complex but powerful.

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Key takeaways

A captive is your own insurance company that insures your business's risks; premiums the business pays are deductible.
An 831(b) micro-captive can receive premiums up to about $2.9 million (2026) taxed only on investment income, not underwriting income.
Setup runs $50,000+ with $15,000-$30,000/year to manage, so tax savings must clearly exceed costs.
The IRS scrutinizes captives heavily; premiums must be actuarially justified for real risks.

Requirements

Business with legitimate insurance needs
Premium volume $1M+/year typically
Work with captive insurance specialists
IRS scrutiny - must be legitimate

How to Implement

1Identify insurable business risks not covered by commercial insurance
2Work with captive manager to form insurance company
3Set actuarially justified premium rates
4Business pays premiums to captive (deductible)
5Captive invests reserves and pays claims

The bottom line
A captive lets a business formalize and deduct self-insurance of real risks, with favorable tax treatment under 831(b). It only makes sense at scale and with legitimate, well-documented risk.

Frequently Asked Questions

Minimum Investment

$50,000+ setup, $100K+ annual premiums

Educational Only: This information is for educational purposes. Consult a qualified financial advisor or tax professional before implementing.

Last reviewed: April 2026

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Sources

Internal Revenue Service, Rev. Proc. 2025-32
2026 inflation-adjusted amounts (tax brackets, standard deduction, estate & gift, FSA, credits)
Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
Internal Revenue Service, Rev. Proc. 2025-19
2026 HSA and HDHP inflation-adjusted limits

Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.