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What is the financial benefit of having a CIC?

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The CIC can sell insurance to the owner’s operating business to cover its risks that are normally uninsured, or too expensive to insure. In some circumstances it may also make sense to replace some of the insurance that the operating business normally purchases from a public insurance company. The premium paid to the CIC for that insurance is completely deductible to the operating company, reducing the tax owed by the business owner. Then, in the type of CIC that we generally recommend, the CIC does not have to pay tax on the premium received from the operating company. This is neither magic nor is it suspicious. Congress has specifically exempted these special “small” insurance companies from paying tax on the premium collected (maximum of $1,200,000 per year). The CIC will have to pay tax on the investment income earned on the money accumulated in the CIC. Example – If the combined state and federal tax rate on profits is 45% then a $1,200,000 deduction reduces tax liability by $540,000. If this is a cell captive and each member owns 25% and can pay $300,000 in premiums, then each member’s operating company will reduce tax liability by $135,000. (Note – a 45% combined tax rate is used here as an assumption. It could be a little lower in North Carolina if none of the profits are being taxed as earned income and it could be a little higher if employment taxes are being paid on profits.) Also, this does not take into account the fact that income taxes are almost certain to increase in the future as our massive national debt is repaid.

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