Life insurance premiums

[Unregistered]

I can't seem to find a straight answer in the regs on this:

S-Corp pays premiums on term life insurance, insuring the life (or actually against the death) of the owner. Beneficiarys are owner's two sons, who are employees of the S-Corp. The intended use of the proceeds are to partially fund the buy/sell--where the boys can buy the business from Mom upon Dad's death.

Can the S-Corp deduct the premiums? Only if the boys include in income? and would they also have to pay FICA/Med tax?

Or, can the S-Corp elect not to deduct the premiums so the boys would not have to include in income?

Or, is this a fringe benefit that the S-Corp can deduct and boys do not have to count as income?

But, if the boys do not declare premiums as income, are the proceeds (upon Dad's death) still excludable from the boy's income? Or are the proceeds only excludable if the boys can show that they've paid income tax on the premiums?

Any advice on how these situations are typically handled is appreciated.

[BOB W]

Life Insurance

This is what I know for sure. Only GROUP TERM LI is deductible. "Group" meaning all employees are covered under the plan. The maximum premium exclusion from taxable income is on the first $50,000 of insurance coverage. Any insurance benefit over $50,000 you need to go to a chart which is based on age. That chart is known as PS58 costs. The excess over $50,000 of insurance, the premium is includible in the insureds income. I can't remember off the top of my head if it is subject to SS. I've seen 1099 issued for this benefit as well as included on W-2s.

[Unregistered]

Group term life insurance is not deductible for 2 percent or more owners. So the answer is no the life insurance is not deductible. But it's not included in income if there is a payout in case of death.

[JON]

Life insurance

Even in the C corp situation I believe the employee is the OWNER of the policy and employee can designate the beneficiaries. What if you have the corproation as the owner and beneficiary. Premiums will not be deductable, but proceeds will be tax free to reitre stock and get the sons ownership % by buying or getting gifted the rest of the outstanding shares...

[Unregistered]

Thanks, Jon

That makes a lot of sense to have the S-Corp as the beneficiary. Even though the premiums won't be deductible for the S-Corp, they also won't be taxable income to the sons. Also, if something were to ever happen to either of his sons, the owner won't have to worry about changing beneficiaries.

I'll recommend that he change the beneficiary to the S-Corp.

Thanks

[Safire]

hmmm

I thought it was deductible to the S-corp, but it had to be added back to the W-2 of the more than 2% shareholder. ( thus cancelling itself out )

Also, I don't think it matters who the beneficiary is, the income will be always be taxable to the insured if he is a more than 2% shareholder.

It is definately subject to social security and medicare.

I guess I better look this one up again before W-2 time.

[Bees Knees]

Life insurance

From TTB, page 8-8:

"Death benefits paid on a life insurance policy are not taxable if proceeds are paid by reason of the death of the insured [IRC Section 101(a)]. Thus, no deduction is allowed by a taxpayer for life insurance premiums if the taxpayer is the beneficiary of the policy [IRC Section 265(a)(1)]. If an employer is providing the cost of life insurance as a fringe benefit for employees, the cost is deductible if it is reasonable compensation to the employee."

Then on page 13-29 it says:

“The cost of up to $50,000 of group-term life insurance coverage on an employee can be excluded from taxable wages…The group term life insurance policy must be for at least 10 full-time employees at some time during the year…”

Then on page 13-25 it says that more than 2% S corporation shareholders are not considered employees for purposes of the exclusion for up to $50,000 of group-term life insurance.

So the bottom line is, if it is a policy paid for by a corporation to cover the life of an owner in which the corporation is the beneficiary, the premiums are not deductible and the corporation does not pay tax on the proceeds when the person dies. But if the corporation pays the premiums on a policy that covers the life of an employee and the employee is the beneficiary, then the corporation can deduct the premium, and the employee pays tax on the benefit, unless the benefit is no more than $50,000 of coverage under a group-term plan, in which case the value of the benefit is excluded from wages. However, if the employee is a more than 2% S corporation shareholder (or wife of, child, etc.), then the value of the benefit is taxable as W-2 income. The S corporation, however, would still get to deduct the premiums as wages paid to the employee, also subject to FICA and FUTA. (The FICA and FUTA exemption only applies in the case of medical benefits provided to the more than 2% S corporation shareholder)

[Bird Legs]

Life Ins. premiums

paid by C Corp. on more than 2% stockholder, owner. Are these premiums subject to
the same rule as those paid by an S Corp.?

[Bees Knees]

paid by C Corp. on more than 2% stockholder, owner. Are these premiums subject to
the same rule as those paid by an S Corp.?

No. Only 2% S corp shareholders.

A C corp shareholder is treated like any other employee.

[JON]

Are we getting confused?

My point works C or S as long as the Corp is the owner and the beneficiary of the policy. No deduction for premiums.

Bees want on to point out, I think, the deductable possibility if part of a plan or add it as compensation if not part of a plan. Those polices are owned by the employees and they designate their own beneficiaries-family or girl friends.

Then there are those plans pwned by the corporation on the key owner and the beneficiary is the bank, as required. Not deductable and if proceeds happen they are not taxable as loan is paid off.