Not So Captivating: Tax Court Rules Against Microcaptive Tax Break!

A microcaptive arrangement is a type of self-insurance that allows businesses to form their own small insurance companies to insure risks specific to the businesses. In a new case, the U.S. Tax Court ruled that a married couple wasn’t allowed to deduct insurance premiums paid to a microcaptive arrangement. The premiums were paid by an S corporation in which they were shareholders. The court ruled that the arrangement “is not insurance for federal income tax purposes.” Several reasons were cited, including that the microcaptive arrangement didn’t distribute the risk of loss among policyholders, the premiums were unreasonable and funds circulated among related entities. (TC Memo 2025-81)