Washington–Legislation clarifying the scope of a tax exemptionfor small property-casualty insurance companies was introduced inboth the House and the Senate before Congress departed for itsannual summer recess.

|

The bills would modify existing law to say that "gross receipts"means premiums plus gross investment income. It also would increasethe income election limit under another section of the IRS Codeprovision from $1.2 million to $1.971 million, and index itannually for inflation.

|

Introduction of the measure was sought by the NationalAssociation of Mutual Insurance Companies after one of theprovisions governing small p-c companies was changed last year toclose a loophole exploited by investment companies that createdsmall insurers as a tax shelter.

|

In the process of amending the provision last year to close theloophole, "gross receipts" was left undefined, leaving legitimatesmall insurers facing inappropriate tax liability if the IRSdecided to define "gross receipts" inappropriately, according toDavid Winston, senior vice president for government affairs atNAMIC in Washington.

|

The corrective measure NAMIC is seeking was introduced lastFriday in the Senate by Sen. Christopher Bond, R-Mo., and in theHouse July 20 by Rep. Jim Nussle, R-Iowa.

|

In a floor statement Friday, Sen. Bond said small p-c insurerscovered by the provisions of the IRS Code were often originallyorganized as mutual companies to offer insurance coverage tospecific groups, mainly to serve rural areas and farmingcommunities that otherwise may not have been able to obtainaffordable coverage.

|

This tax exemption helps to provide additional surplus and cashflow for these small companies, Sen. Bond said.

|

Last year in omnibus tax legislation according to Mr. Winston,"there was no definition of the term 'gross receipts'
and there is no uniform definition in the Code," he said.

|

"Without further definition, there are many unanswered questionsthat companies are facing with respect to determining whether asmall property-casualty insurance company would qualify for theexemption,"
Mr. Winston said.

|

According to Mr. Winston, under the proposed law, the newdefinition will be very similar to the standard that was used priorto the changes enacted as part of the 1986 tax reform laws.

|

Another provision would allow small property-casualty insurancecompanies to elect to be taxed only on investment income. Thiselection could be made if the greater of net or direct writtenpremiums for the
taxable year are greater than $350,000 but do not exceed$1,200,000. The election
level was last set in 1986.

|

"Since the provision was never indexed for annual inflation,this amount has remained the same since 1986, thus stifling thegrowth of small property-casualty companies that provide valuableand affordable services for their customers," Mr. Winston said.

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

  • All PropertyCasualty360.com news coverage, best practices, and in-depth analysis.
  • Educational webcasts, resources from industry leaders, and informative newsletters.
  • Other award-winning websites including BenefitsPRO.com and ThinkAdvisor.com.
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.