Product Update

Tax Implications of Risk Financing Updated

This release of Risk Financing updates the discussion on "The Tax Implications of Risk Financing" plans. This section is authored by Mr. Bruce Wright and Saren Goldner, attorneys with Eversheds Sutherland (US). The first part of this discussion is focused on the US federal income tax characterization of various risk financing methods. The primary issue is whether transactions are characterized as insurance. There is no statutory or regulatory definition of "insurance" for federal income tax purposes. The analysis of whether a transaction is characterized as insurance most often occurs in the context of the deductibility of premiums under Internal Revenue Service (IRS) Code section 162. For transactions that qualify as insurance, premiums paid are generally deductible as an ordinary expense. Alternatively, self-insured losses are subject to IRS Code section 165. The issue is one of timing. It is more favorable for insureds to take deductions for losses at the earliest possible time, thereby receiving the greatest present value benefit from such deductions. The updates reflect the most recent tests faced by insureds in this regard.