Program How It Works Key Features What It Achieves U.S. Federal Income Tax Consequences Domestic Captive Insurance Company Same as reinsurance company, but company is 100% U.S. based. Same as reinsurance company. Obligor Structures* Dealer receives commission for the sale of certain F&I product, plus underwriting and investment income in dealer-owned obligor company. Dealer-owned company is obligated party to perform on any losses (not administrators). Dealer pays administration and claim processing fees. Dealer is responsible for maintaining reserves. Contractual liability policy may be required. No reinsurance required. Dealer keeps all funds received, less administration and claim processing fees. Obligor will be treated as a C corporation for U.S. Federal Income Tax purposes, subject to double taxation regime of IRC Subchapter C. Retail price to consumer (as opposed to reserve) counts against $2.8 million USD cap under Section 831(b). If premiums exceed $2.8 million annually, company is fully taxable on underwriting and investment income from first dollar. Initially generates tax losses because a 100% deduction is allowed for amounts above reserve (F&I commission, management money, etc.), and reserves earn over the life of the VSC, subject to the 20% UEP “haircut.” Eventually, all underwriting and investment income is subject to tax at 21% corporate rate (on a deferred basis), and shareholders will be taxed a second time upon distribution from the company (double taxation). Distributions/liquidations taxed at long-term capital gains rate of 23.8% (20% capital gains rate, plus 3.8% Obamacare tax). No premium tax is paid if no CLP required. Hybrid Structures Dealer receives commission for sale of F&I products plus underwriting and investment income through a combination of participating structures. Hybrid structures allow programs to be built to achieve specific dealer objectives. May be set up for partners, key associates or family members. Split business among a combination of participating retro/CFC. Customized. Varies. A STRONG ADVISORY TEAM CAN CRAFT A PLAN THAT BEST FITS YOUR GOALS Determining the right F&I approach requires having the right advisory team in place. Anchor your search with a strong team of specialized experts who can help you hone in on your specific objectives and identify a profit participation program that best meets those goals. Your team should include trusted individuals who bring insights and informed perspectives from many angles, including: • An F&I program provider who can bring numerous options to the table and is prepared to tailor a formula to your needs. • A tax advisor with a keen understanding of the tax code — current laws, in addition to clear projections for how future vada.com 23
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