MoldMaking Technology

MAY 2017

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moldmakingtechnology.com 49 CONTRIBUTOR Michael J. Devereux II, CPA, CMP, is a partner and director of manufacturing, distribution and plastics industry services at Mueller Prost. FOR MORE INFORMATION Mueller Prost / 314-862-2070 mdevereux@muellerprost.com / muellerprost.com properly limiting their S corporation losses to the sharehold- er's stock and debt basis is the S corporation. In addition, the IRS intends on creating a new form to assist shareholders in properly computing their basis. Micro-captive insurance arrangements. The IRS recently added micro-captive insurance company arrangements to the transactions of interest list, requiring those that participate in micro-captives to file appropriate disclosures via the reportable transaction/tax shelter disclosure forms. Years ago, the IRS began to require companies to report their involvement with tax shelters and other transactions that had the potential for tax avoidance (transactions of interest). In a micro-captive transaction, a company directly or indirectly owns an interest in an operating entity. In addi- tion, the company or persons related to the company own an entity that has elected to be treated as a small captive insur- ance company ("captive") under IRC §831(b). Generally, a cap- tive insurance company is an insurance company formed for the sole purpose of insuring the risks of related companies. Captives that have premium revenue of less than $2.2 million may elect to be taxed only on taxable investment income. That is, the captive does not pay income tax on its non-life insurance premium revenue. In this arrangement, the oper- ating company claims a deduction for insurance premiums paid. The captive excludes the premium income from its taxable income. In order for the transaction to qualify as insurance and allow for a deduction for insurance expenditures, the insur- ance company must act like an insur- ance company. That is, the insurance company must actuarily determine pre- miums at arm's length, share risk among multiple customers and shift risk from the insured (the operating company) to the insurance company. However, if the transaction does not meet the insurance company require- ments, the operating company is not entitled to deduct the amount of the insurance premium payment. In addi- tion, if the captive does not qualify as an insurance company, the captive must be treated as a domestic insurance com- pany, subject to tax at the regular corpo- rate tax rates. While the IRS has recognized that related parties may use captive insur- ance companies for risk management purposes that do not involve tax avoid- ance, it believes companies are using such arrangements to claim the tax benefits of captives in a related party transaction. That is, the IRS believes that many captives, along with their related party counterparts, are not shifting and sharing risk. So, the IRS will be conducting issue-based examinations to ensure that captives and their related parties are engaging in transactions for permitted business purposes and not using the captive arrangements as a means of avoiding income or estate tax. With the IRS' new focus on these issue-based campaigns, mold builders should ensure they are in compliance with the Internal Revenue Code. Moldmakers receiving letters from the IRS or notice of examinations related to these issues should work with their CPAs and attorneys to ensure they are treating these items properly. © The helmet was programmed and produced by DAISHIN www.openmind-tech.com CAM? Still satisfi ed? Explore the benefi ts of hyperMILL ® and switch to the CAM solution for all of your 2.5D, 3D, 5-axis, mill-turn, HSC and HPC requirements.

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