Washington–Legislation clarifying the scope of a tax exemption for small property-casualty insurance companies was introduced in both the House and the Senate before Congress departed for its annual summer recess.
The bills would modify existing law to say that "gross receipts" means premiums plus gross investment income. It also would increase the income election limit under another section of the IRS Code provision from $1.2 million to $1.971 million, and index it annually for inflation.
Introduction of the measure was sought by the National Association of Mutual Insurance Companies after one of the provisions governing small p-c companies was changed last year to close a loophole exploited by investment companies that created small insurers as a tax shelter.
In the process of amending the provision last year to close the loophole, "gross receipts" was left undefined, leaving legitimate small insurers facing inappropriate tax liability if the IRS decided to define "gross receipts" inappropriately, according to David Winston, senior vice president for government affairs at NAMIC in Washington.
The corrective measure NAMIC is seeking was introduced last Friday in the Senate by Sen. Christopher Bond, R-Mo., and in the House July 20 by Rep. Jim Nussle, R-Iowa.
In a floor statement Friday, Sen. Bond said small p-c insurers covered by the provisions of the IRS Code were often originally organized as mutual companies to offer insurance coverage to specific groups, mainly to serve rural areas and farming communities that otherwise may not have been able to obtain affordable coverage.
This tax exemption helps to provide additional surplus and cash flow for these small companies, Sen. Bond said.
Last year in omnibus tax legislation according to Mr. Winston, "there was no definition of the term 'gross receipts'
and there is no uniform definition in the Code," he said.
"Without further definition, there are many unanswered questions that companies are facing with respect to determining whether a small property-casualty insurance company would qualify for the exemption,"
Mr. Winston said.
According to Mr. Winston, under the proposed law, the new definition will be very similar to the standard that was used prior to the changes enacted as part of the 1986 tax reform laws.
Another provision would allow small property-casualty insurance companies to elect to be taxed only on investment income. This election could be made if the greater of net or direct written premiums for the
taxable year are greater than $350,000 but do not exceed $1,200,000. The election
level was last set in 1986.
"Since the provision was never indexed for annual inflation, this amount has remained the same since 1986, thus stifling the growth of small property-casualty companies that provide valuable and affordable services for their customers," Mr. Winston said.
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