life insurance 2% or more shareholder

[TAXNJ]

Looking for an update to this question I posted two years ago.

Question:

Does anyone know where it is address in The Tax Book when Life Insurance paid by S-Corp for a 2% or more shareholder - where and how on the w-2 it is reported if:

1 - if the beneficiary is the spouse ?
or
2 - if the beneficiary is the S-Corp or the Partnership ?

thanks in advance




I believe it may be a taxable event if the beneficiary is the spouse versus if the beneficiary is the S-Corp or the Partnership??

thanks in advance

[Gretel]

Not a response, just bumping it up since I am interested in the response myself.

[Gretel]

I just found this below. My interpretation is that a more than 2% Shareholder can never deduct life insurance premiums paid by his S-Corporation not matter if he, his family or his corporation is the beneficiary. Makes sense, since life insurance proceeds would not be taxable either.

Anyone disagree? ..or has some other thoughts?

From Pub. 535

Certain life insurance and annuities.

1. For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business.
2. For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. The disallowance applies without regard to whom the policy covers.
3. Partners. If, as a partner in a partnership, you take out an insurance policy on your own life and name your partners as beneficiaries to induce them to retain their investments in the partnership, you are considered a beneficiary. You cannot deduct the insurance premiums.

[TAXNJ]

Gretel - thanks for bringing it up higher

Thanks for the response. This is a complex area and gets few responses. Hopefully we can get some other responses. Please see my additional comment below.

I agree that the life insurance premiums paid by the S-Corporation are not deductible (also find this in the TaxBook BUT cannot find if it is taxable to the more than 2% Shareholder.

So this is the question that remains -"if it is taxable to the more than 2% Shareholder and where reported on the w-2? I think it is because "medical" insurance paid by the S-Corporation to the more than 2% Shareholder is a taxable event as income reported in box 1 on the w-2.

I just found this below. My interpretation is that a more than 2% Shareholder can never deduct life insurance premiums paid by his S-Corporation not matter if he, his family or his corporation is the beneficiary. Makes sense, since life insurance proceeds would not be taxable either.

Anyone disagree? ..or has some other thoughts?

From Pub. 535

Certain life insurance and annuities.

1. For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business.
2. For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. The disallowance applies without regard to whom the policy covers.
3. Partners. If, as a partner in a partnership, you take out an insurance policy on your own life and name your partners as beneficiaries to induce them to retain their investments in the partnership, you are considered a beneficiary. You cannot deduct the insurance premiums.

[JohnH]

If there's no requirement to report it on the W-2, then it doesn't go there. But if the corp can't deduct the premium, then it is taxed to the shareholder by default. It shows up in the corp net income and finds its way into the shareholder's taxable income via the K-1. Now if there are multiple shareholders, then the ratio might be different, but it is being taxed. I guess multiple shareholders might still trigger a question about unequal distirbutions and all those associated complications, though. Maybe someone else will clarify that.

[TAXNJ]

John - medical vs life ins

John - thanks for the response

As far as a w-2 requirement seems to be the open issue, I think.

So this is the question that remains -"if it is taxable to the more than 2% Shareholder and where reported on the w-2?
I think it is because "medical" insurance paid by the S-Corporation to the more than 2% Shareholder is a taxable event as income reported in box 1 on the w-2.

to complicate it more, it is life insurance paid only for one of three more than 2% (I think discriminatory) shareholders with his family as beneficiaries.

[Burke]

There is a requirement to include the PS 58 cost of group life insurance exceeding $50,000 in an employee's W-2, since under that amt it is considered a non-taxable fringe benefit. There is a specific code for this in Box 12. You do not include an individual life insurance policy in a W-2, but it is not deductible by the Corp, and in the case of an SCorp will pass thru on the K-1 -- included in any ord inc figure as part of the profits -- (or in the case of a loss, will effectively reduce that loss) as mentioned in John's post.

[TAXNJ]

discriminatory plan

would the box 12 apply if it is a "non - discriminatory plan ? If it is a discriminatory plan then in box 1? (to complicate it more, it is life insurance paid only for one of three more than 2% (I think discriminatory) shareholders with his family as beneficiaries.)

[JohnH]

You really may have an "unequal distributions" situation here, which could potentially invalidate the S-corp election. I hope others will chime in with more details (or corrections if I'm barking up the wrong tree).

[Gretel]

I agree with John, since premiums are not deductible by corporation, they are distributions and if the other shareholders did not get an equal amount you have a problem.

If not deductible also means no reporting on W-2.

[veritas]

Life Insurance paid by the Corportaion

is an M-1 adjustment on the return.

Unless it is Group Term Life. Under 50k is a non taxable benefit to employees except for greater than 2% owners of an S Corp.