The IRS after more than a year's delay has provided small insurers with guidance on how to obtain a tax exemption under a law that was revised to prevent abuses by wealthy individuals.
Under the IRS' ruling the exemption applies only to nonlife insurance companies with "gross receipts" for the taxable year that do not exceed $600,000, if premiums make up more than 50 percent of gross receipts. Reinsurance recoverables are not counted as gross receipts.
A mutual nonlife insurance company also may be exempt if its premiums make up more than 35 percent of its gross receipts and its gross receipts do not exceed $150,000.
Before the clarification, the issue of what constituted gross receipts under the law had been undetermined. Under the agency ruling return premiums or premiums paid for reinsurance are not counted as gross receipts.
The law, enacted in April 2004, introduced a gross receipts threshold in order to qualify for the tax exemption, as well as mandating that more than 50 percent of those revenues be from premiums.
Previously the exemption threshold was applied to companies who listed a net premium ceiling of $350,000 or less.
Congress acted after reported abuses by wealthy corporations and individuals who formed small p-c companies as a tax shelter for investment income.
These entities had taken advantage of the fact that insurers qualified for the exemption from federal taxation if net written premiums did not exceed the $350,000 limit, which had been the law since the Tax Reform Act of 1986 was passed.
The change was also aimed at eliminating the exemption for investment companies, which wrote a minimal amount of insurance but had disproportionately high capital and surplus and investment income.
The IRS decision announced Friday means small, mostly farm-oriented one-state property-casualty insurance writers can retain their federal income tax exemption, according to the National Association of Mutual Insurance Companies, which requested the IRS ruling on behalf of some of its members.
NAMIC asked the IRS and related agencies for priority action on the clarification after a November 2004 IRS notice implementing a provision of an April 2004 bill left the gross receipts definition unclear.
"This new definition gives NAMIC member companies the much needed guidance in order to file their 2005 taxes and re-file their 2004 returns," said David Winston, NAMIC senior vice president for federal affairs.
"We are pleased that the IRS agreed with NAMIC that gross receipts include "both tax-free interests and the gain (but not the entire amount realized) from the sale or exchange of capital assets," Mr. Winston said. "We're also pleased that the IRS agreed that gross receipts do not include reinsurance recoverables."
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