By Ryan Hanlon
A key provision in the Trump administration’s 2017 Tax Cuts and Jobs Act was the reduction of the corporate tax rate from a maximum of 39% to a flat 21%. The Biden administration has proposed raising the corporate tax rate to 28% to fund an ambitious infrastructure bill, sparking opposition from Republican legislators.
RV dealers who own IRC 831(b)-qualified reinsurance companies will be watching the negotiations with great interest, because investment income derived from their reinsurance companies’ earnings is taxed at the corporate rate.
But even if that rate goes back up, those dealers will continue to earn tax-advantaged income — and they will have the option to leverage their earnings to reduce their liability.
Taxation of Reinsurance Company Earnings
The income an RV dealer earns from a true third-party reinsured program comes from two sources: underwriting profits and investment income. When a reinsurance company makes an election under IRC 831(b), underwriting profits are not taxable and investment income is taxed at the corporate tax rate.
Let’s say an RV dealer’s reinsurance company makes $1 million, with $800,000 derived from underwriting profits and $200,000 from investment income. Assuming no distributions are taken, at the current rate of 21%, that’s $42,000 in taxes; divide that by $1 million in total earnings and the effective tax rate for the reinsurance company is 4.2%.
Now let’s say the Biden administration gets its way and the corporate rate goes up to 28%. That’s $56,000 in taxes and a 5.6% effective tax rate — still a very low rate, particularly compared with regular income tax rates.
Loans and Dividends
As we have discussed, reinsurance company ownership allows RV dealers to become their own lenders, maximize their borrowing power and protect their credit ratings. All this is possible because it’s your own personal financial asset, not the property of the dealership or any third party.
True ownership means you, in consultation with your provider and your tax and wealth advisors, get to decide how to leverage your earnings.
If you own a reinsurance company and the corporate tax rate spikes, you may decide to pivot to a more aggressive strategy, stop taking distributions and start taking loans and dividends. You can invest in your business rather than the market, buying more land or rooftops, for example, or building that high-volume service center you’ve always dreamed of.
If you have yet to form your first reinsurance company, now is a great time to find the right provider and program and get started. There is no way to predict the future — political or economic — but true reinsurance company ownership helps RV dealers control their own destiny no matter who is calling the shots in Washington.
As always, if you (and your advisors) would like to have a quiet, confidential conversation about reinsurance and the various programs available to RV dealers, please don’t hesitate to contact us today.
Ryan Hanlon is a managing director for Portfolio, a leading provider of reinsurance and F&I programs for RV dealers, and a 16-year industry veteran. For more information or to schedule a confidential consultation with a Portfolio reinsurance expert, email inquiry@portfolioco.com today.
The article above is provided for informational purposes only and it is recommended that you consult with qualified legal and/or tax professionals to review your particular circumstances. Portfolio is not providing legal or tax advice and takes no liability concerning the information provided verbally or herein.
Photo by saturnism via Flickr
