Auto dealers beware: IRS raising questions about “captive insurance”
Does your dealership have a “captive insurance” company? Are you familiar with the new IRS reporting requirements?
Auto dealerships have long enjoyed potential tax benefits by creating their own “captive insurance’’ companies for insuring losses, but questions are now being raised after the IRS late last year changed how these arrangements need to be reported.
The benefit to dealers that set up these companies can be significant. Dealerships may deduct the premium payments as an expense ($1,200,000 in net premiums written for each taxable year or $2,200,000 for taxable years beginning after 2016) and the premiums accumulate to pay claims.
In November 2016, IRS Notice 2016-66 changed the way dealerships now have to disclose captive insurance companies.
By May 1, 2017, the IRS is requiring auto dealers to file Form 8886, which details information about their captive insurance companies. The form requires information on captive insurance transactions going back 10 years (all transactions dating to November 2, 2006) and must be filed with the IRS Office of Tax Shelter Analysis (OTSA) Application.
The following is a summary of IRS responses to dealer CPA questions about the new disclosure requirements. These responses are not IRS guidance, have not been reviewed by the IRS, and do not bind the IRS on the subject matter. It is essential that dealerships review these matters and their compliance obligations with their tax professional.
Q: Does the disclosure statement (Form 8886) for tax year 2016 have to be included in the 2016 tax return or does filing the form with OTSA by May 1, 2017 fulfill the 2016 disclosure requirements?
A: Filing Form 8886 with OTSA by May 1, 2017 fulfills the 2016 disclosure requirement. It does not need to be included with the 2016 tax return if the return is filed before May 1, 2017. If a return is extended and filed after May 1, 2017, then the Form 8886 for 2016 needs to be attached to the 2016 tax return.
Q: If the form submitted to OTSA is the form to check the box for “initial year filer”, and assuming that form never attaches to a tax return, then should the first form attached to a 1040/1120/1120PC also be checked as “initial year filer” even though it is not the initial form?
A: No. If the first form attached to a tax return is NOT the same as the form that was submitted to OTSA (e.g., the first year a tax form had an attachment was 2017), then it does not have the “initial year filer” box checked.
Q: Has the issue of GAP waiver products appearing in a Captive caused a filing requirement or not? Remember that the dealer is insured under that product until the finance contract is purchased by a financing source but that is only for a very transitory period of time.
A: As the notice is currently written, any GAP appearing in a captive does cause a filing requirement.
Q: If the insured is a C corporation, are the owners of the insured required to file the transaction of interest disclosure?
A: Owners of partnerships and S corporations (including minority owners) have filing requirements; owners of C corporations might not.
- A owns 100% of ARC and 80% of dealership. B and C own 20% of dealership. A, B, and C all need to file if the dealership structure is an S corporation or partnership, but not if it is a C corporation unless the C corporation declared a dividend in any open tax year.
- A owns 100% of dealership and 80% of ARC. B and C own 20% of ARC. B and C do not need to file.
Q: If the taxpayer chooses for the 2016 calendar tax year to file the disclosure with their tax return, do they also need to file a copy with OTSA even if 2016 is the first year in which the taxpayer had the reportable transaction?
A: No matter what, a copy is filed with OTSA even if 2016 is the first year of the transaction and the Form 8886 is filed with tax return prior to May 1, 2017.
If it is determined that you have a federal reporting requirement, be sure to determine what, if any, state filing requirements you may have. Compliance requirements vary on
Jay A. Goldman and Daniel P. Thompson are Principals with Boyer & Ritter LLC. Thompson, the chair of B&R’s Dealership Services Group, may be reached at 717-761-7200 or firstname.lastname@example.org; Goldman, whose practice primarily focuses on auto dealerships, may be reached at 717-761-7210 or email@example.com