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last updated on February 18, 2009

TAXATION OF SMALL PROPERTY/CASUALTY COMPANIES

The investment income election for small property/casualty insurance companies (Internal Revenue Code Section 831(b)(2)) must be changed to reflect the inflationary impact since its enactment in 1986.

NAMIC SUPPORTS the expansion of Internal Revenue Code Section 831(b)(2) to reflect the inflationary impact since its enactment 24 years ago. Many small companies are approaching the current $1.2 million limit and both they and their customers will be adversely impacted if it is not raised and tied to an annual adjustment in the cost of living.

BACKGROUND

There are many small property/casualty insurers organized as mutual companies. These companies were originally formed to offer insurance coverage to specific groups, often in rural areas, that may not have otherwise been able to obtain affordable coverage. Many of these small mutual companies serve farming communities and rely on the tax benefit to provide additional surplus and cash flow so that all available financial resources can be used solely for paying claims.

Since the Tax Reform Act of 1986, Section 831(b) of the Internal Revenue Code has allowed property/casualty insurance companies with direct or net written annual premiums not exceeding $1.2 million to elect to be taxed on their net investment income.

However, this election level has not been adjusted since the Code went effect in 1986. For instance, what was once $1.2 million in 1986, after 24 years of inflation, would now be $2.028 million. Thus, while a company’s annual costs have increased over the years with inflation, the investment income election level has not.

Because these small, mutual property/casualty insurance companies have such limited financial resources, all of their assets must be preserved for claims paying to ensure their important niche market is protected. Providing these small insurers with this tax election accomplishes that goal.

In the 111th Congress, Reps. Earl Pomeroy, D-N.D., and Paul Ryan, R-Wisc., introduced H.R. 3301. The legislation would increase Section 831(b) investment income election under the Internal Revenue Code from the current $1.2 million to $2.025 million with an annual cost-of-living index for future years.

CONTACT INFORMATION

For more information please contact Marliss McManus, senior federal affairs director, at (202) 628-1558 or mmcmanus@namic.org.

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