When you are running a business, every penny counts. Investigating ways to save you your taxes keeps capital in the business so that you can continue to grow. One of the areas that many businesses look at for tax benefits is insurance, including life insurance.
Many wonder whether the premiums that they pay each month for their life insurance polices are tax deductible business expenses. The simplest answer is “no.” Life insurance premiums are personal expenses that generally are not eligible for deduction. However, there are some exceptions.
- Life Insurance & C Corporations
- Life Insurance & LLCs
- Life Insurance & S Corporations
- Life Insurance Policies That Benefit Employees
- Life Insurance Premiums Paid on Group Life
- Frequently Asked Questions
Life Insurance & C Corporations
Many companies, including C Corporations, consider insuring the lives of their employees and officers because of the value those people bring to the business. Life insurance is also offered as a benefit to attract and keep high quality employees. When life insurance is provided as a fringe benefit, it is taxable for the employee.
C Corporations may also choose to insure an employee or a group of employees and make the company the beneficiary. These policies are known as corporate-owned life insurance. Any proceeds from the policies are typically used to fund employee benefits such as deferred compensation or executive health plans. These plans offer many tax benefits, but deductibility is not one of them.
C Corporations cannot deduct life insurance premiums when they are the beneficiary of the policy. This is because the company stands to receive a financial benefit if the policy pays out. Since the company is benefiting, the premiums are not considered deductible even if they would otherwise be considered valid business expenses.
Life Insurance & LLCs
Under some very specific circumstances, LLCs can deduct expenses related to life insurance premiums. First, the people who are insured must be either employees or corporate officers. They must be insured under a group life insurance policy. And, the company cannot be the beneficiary of the life insurance policies. Additionally, only the first $50,000 of premium costs are deductible. Any amounts paid over that cannot be deducted from taxes
Life Insurance & S Corporations
S corporations have a special tax status that sets them apart from standard or C corporations. S corporations are pass-through entities. While they file informational tax returns, no income tax is paid by S corps at the corporate level. Instead, income that passes through the corporation is reported on owners’ personal income tax returns.
Because of this, people who own S corporations are also subject to different rules than C corporations when it comes to deducting life insurance premiums.
As with other insurance premium costs, they can only be deducted when the business is not the named beneficiary. They can only be used for employees or corporate officers. And, the $50,000 limit still applies.
Life Insurance Policies That Benefit Employees
When life insurance is offered as a benefit to an employee, they may be tax deductible under certain circumstances.
If the insurance premiums are considered part of the employee’s taxable income, then those premiums can be deducted as a business expense. This only holds true if the company is not the beneficiary of the policy. All other rules for life insurance premiums also apply in this case.
Life Insurance Premiums Paid on Group Life
Group life insurance premiums are the only ones that are eligible for tax deductions as a business expense. Make sure that any policies purchased meet the requirements for deductions. Taking a tax deduction on life insurance premiums when ineligible can lead to costly penalties later on.
Frequently Asked Questions
- What are the benefits of an insurance policy in tax deduction?
- How is life insurance taxed?
- Is money acquired by a life insurance payment taxable?
- Which insurance premiums are tax deductible?
- How do you write off life insurance premiums?
What are the benefits of an insurance policy in tax deduction?
Often, this is not an area where the benefit of the product is in a potential tax deduction. While some life insurance policy premiums can be deducted in certain circumstances, their biggest benefits lie elsewhere. Life insurance is often offered to employees as a fringe benefit, for instance. This benefit allows companies to reward the employees who help build their success.
Additionally, corporate-owned life insurance can offer some tax advantages outside deductions. For instance, any death benefit payouts would not count toward the company’s annual revenue, nor would any cash value growth. Consult with an accountant to find out whether there are tax benefits to these policies for your company.
How is life insurance taxed?
How a policy is taxed depends on the policy type. Cash Value policies accumulate tax-deferred until the policy pays out. Additionally, they are only taxed on the amount paid out in excess to the total premiums that are paid on the policy.
In a Whole Life policy, by contrast, pay outs are tax free. This is because the proceeds from this type of policy are not considered income.
If the life insurance policy pays dividends, these are not taxable. However, ay interest earned on them will be taxed at the capital gains rate.
Is money acquired by a life insurance payment taxable?
Again, it depends on the policy type. Cash Value insurance functions, in part, as an investment. Profits are taxed as capital gains.
Whole Life is purely an insurance product. As such, money acquired through a payout is not taxable income.
Which insurance premiums are tax deductible?
Life insurance premiums are only tax deductible when the business is not the beneficiary of the policy. Additionally, certain rules must be met in the business classification; this deduction is only available to S corporations and LLCs. There is an upper limit of $50,000 for this tax deduction. Any expenses that go over this amount are no longer tax deductible.
How do you write off life insurance premiums?
In most cases, these premiums cannot be written off. There are, however, exceptions. Life insurance policies that are purchased for employees or officers in your company can be written off as operational expenses under certain circumstances.
You can also write off life insurance premiums for yourself if you maintain the policy as a way of protecting business assets.
Consult with a tax professional to find out how to write off life insurance premiums and whether your business and the life insurance policies you use qualify.