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DOWC® Tax Differences
What are the tax differences between a DOWC and a reinsured structure? How does a DOWC work?
- Most reinsurance companies are formed outside of the US and make the 831(b) election to be taxed as a micro captive. This means only investment income will be taxed in the current tax year and underwriting profits will flow to shareholders and only be taxed when profits are distributed.
- Alternatively, DOWCs are domestic companies whose revenue meets the IRS definition of an insurance company. As a result, DOWCs file an 1120-PC and are only taxed on a pro-rata amount of earned premium. One of the distinct advantages that DOWCs enjoy is that the dealer profit (commission) is a write off (expense) to the DOWC and creates a long-term loss carry forward. As a result, DOWCs do not generate a tax liability for many years. Once these companies are generating positive income, and assuming the 831(b) election is stable, filing for the election is one of the options DOWCs utilize to exempt premium on a go-forward basis.