On January 14, 2025, the IRS and Treasury Department issued final regulations on micro-captive transactions. These rules clarify the requirement for dealerships and their F&I captive reinsurance companies to file Form 8886 with their tax returns.
The good news, under these final regulations, if the captive reinsurance company is insuring or reinsuring at least 95% third-party risk (i.e., risks of customers unrelated to the dealership), no Form 8886 will be required to be filed.
This has been an area of uncertainty since 2016, when Notice 2016-66 was issued requiring Form 8886 to be filed for all micro-captive reinsurance companies. Form 8886 is used to notify the IRS of participation in a transaction of interest that has the potential for tax avoidance or tax evasion. Notice 2016-66 was intended to target abusive micro-captive insurance companies insuring their own related-party risks. The automotive industry has always felt that its F&I reinsurance of third-party customer risk was not intended to be pulled into Notice 2016-66, but the 2016 notice did not provide a definitive exception for these companies.
The final regulations issued last month provide for a long-awaited and welcomed “Seller’s Captive” exception, which states that the F&I captive reinsurance transactions will not be deemed either a “Listed Transaction” of “Transaction of Interest” if all of the following conditions are met:
- The reinsurance company is owned by the same individuals (or related individuals) who own the dealership selling the service contracts, warranties, etc.
- The reinsurance company issues or reinsures some or all of the contracts purchased by unrelated customers in connection with the products or services being sold by the dealership.
- 100% of the business of the reinsurance company is issuing or reinsuring contracts in connection with products or services being sold by the dealership; AND
- At least 95% of the reinsurance company’s business for the taxable year is issuing or reinsuring contracts purchased by customers unrelated to the dealership or reinsurance company owners. (This allows for F&I products to be sold to family members who may purchase vehicles in a given year.)
We believe most dealership F&I reinsurance participation structures will meet this “Seller’s Captive” exception and thus fall outside the reporting requirements relative to abusive micro-captive transactions. However, you should consult with your tax advisor to ensure you meet the exception based on your specific facts and circumstances.
If your captive is insuring any underlying business risk of your dealership itself, this exception may not apply and you will need to review additional facts to make the Form 8886 filing determination.
For more information or if you need assistance understanding these complex regulations, please contact Brett Cubellis or any of our SD Auto Advisors.
About Schneider Downs Automotive Industry Group
The Schneider Downs Automotive industry group serves dealers of all sizes, from single-point locations to mega-dealerships. Our members cross departments and meet regularly to ensure efficiency in the services provided to our clients and discuss issues, regulations and trends affecting the automotive industry.
To learn more, visit our Automotive Industry Group page.
