Section 831: Small Insurance Company Tax Election
Explore the alternative tax treatment for qualifying small insurance companies that modifies their tax liability to be based on investment income, not premiums.
Federal tax law provides a specific election for smaller insurance companies. This option permits qualifying entities to be taxed only on their investment income, rather than on the premiums they collect. This approach offers a distinct method for calculating the annual tax liability for eligible property and casualty insurance companies. The election is a strategic choice that alters the financial reporting and tax planning for eligible property and casualty insurance companies.
Qualifying for the Small Insurance Company Election
To be eligible for this alternative tax treatment, an insurance company must satisfy two conditions. The first is a financial threshold known as the gross receipts test. For the 2025 tax year, the company’s net written premiums, or direct written premiums if greater, must not exceed $2.85 million. This figure is indexed for inflation and can change in future years.
This premium limitation is comprehensive. If an insurance company is part of a controlled group of corporations, the premiums from all other insurance companies within that group are aggregated to determine if the threshold is met. This rule prevents businesses from splitting their insurance operations into multiple smaller companies to qualify for the election. The definition of a controlled group is broad, often including situations where a few individuals own a majority stake in two or more corporations.
Beyond the financial cap, the company must also meet risk diversification requirements. These rules ensure the company operates as a legitimate insurer spreading risk, rather than a tool for tax avoidance. The first way to satisfy this is a test where no single policyholder accounts for more than 20% of the company’s annual net written premiums. For this calculation, all related policyholders are treated as a single entity.
If a company does not meet the 20% test, it may qualify under an alternative facts-and-circumstances test. This option compares the ownership of the insurance company to the ownership of the business being insured. The ownership of the insurance company by certain individuals cannot be greater, by more than a two percent margin, than their ownership of the insured business. Meeting the premium limit and one of these diversification tests is mandatory.
Determining Taxable Investment Income
The primary benefit of making this election is the resulting change in how the company’s income is taxed. An insurance company generates income from two main sources: underwriting and investments. Underwriting income is derived from the premiums collected from policyholders. Investment income is earned by investing those premium dollars before they are needed to pay claims.
For a company that makes the election, its underwriting income is exempt from federal income tax. The profits generated from insuring risks are not taxed at the corporate level. The trade-off is that any underwriting losses cannot be used to offset taxable income.
The company’s tax liability is based solely on its taxable investment income. This category includes gross income from sources such as interest, dividends, rents, and royalties. It also includes income from any trade or business other than insurance and gains from the sale of property. The company calculates its tax on this income at the regular corporate tax rates.
How to Make the Election
The process of making the election is handled as part of the annual tax filing. A company must attach a statement to its Form 1120-PC, the U.S. Property and Casualty Insurance Company Income Tax Return. This statement must include the company’s name, its Employer Identification Number (EIN), and a declaration that the company is electing to be taxed under Internal Revenue Code Section 831.
The deadline for making the election is the due date of the tax return for the first year the election is to take effect, including extensions. For example, the election for the 2025 tax year must be attached to the return filed in 2026. Once made, the election is continuous and remains in effect for all subsequent tax years unless revoked or terminated.
Revocation and Termination of the Election
An election can end through a voluntary choice by the company or by an automatic termination if the company no longer qualifies. A voluntary revocation requires the company to obtain consent from the IRS. To do this, the company must file a request and receive approval to switch its tax status.
Involuntary termination occurs automatically if the company fails to meet the eligibility requirements in a given tax year, most commonly by exceeding the annual gross receipts limit. If a company’s net written premiums surpass the threshold, its election is terminated for that year and all future years. The company must then revert to being taxed as a standard insurance company.
Whether the election is revoked or terminated, the company is barred from making the election again for five years, starting the year after the change took effect. During this waiting period, the company will be subject to tax on both its underwriting and investment income. This restriction prevents companies from moving in and out of the election based on short-term financial results.