Show What Is It? Life insurance is an important feature of many business arrangements. Some of its more important uses are as follows:
Using business life insurance for these purposes raises many tax issues and presents many tax-planning opportunities. It's important to plan carefully because the tax consequences can be significant enough to spell the difference between a business's success and failure. You should consult your tax advisor to determine which approach is best for you. Funding a Buy-Sell Agreement With Life Insurance In General Owners of a closely held corporation or partnership generally want to retain control over the stock or partnership interests to prevent ownership interests from falling into the hands of spouses of deceased partners, competitors, or other outsiders. A buy-sell agreement allows the owners of a closely held C or S corporation or a partnership to restrict the transfer of ownership interests. One of the major problems the parties to a buy-sell agreement face is how to obtain funds to purchase the stock or partnership interest of a deceased shareholder. Life insurance is a preferred method of funding a buy-sell agreement. However, life insurance funding can create significant potential tax problems. Income Tax Considerations
Caution: If there is a transfer of a life insurance policy for value, serious tax consequences can result for the beneficiary upon receipt of the death proceeds. For more information, see below. Alternative Minimum Tax (AMT) Considerations Life insurance is not a perfect funding solution for a buy-sell agreement because a C corporation can be subject to the AMT on proceeds it receives even if it uses them to redeem a deceased shareholder's stock. Tip: This potential AMT problem does not affect S corporations or partnerships. Transfer-For-Value Considerations If a life insurance policy is transferred for value, all or a portion of the death proceeds received by the beneficiaries may be subject to income tax as ordinary income. In the context of a buy-sell agreement, a transfer-for-value could leave the parties to the buy-sell agreement short of funds to buy back the stock. One way to avoid this problem is to increase the amount of the insurance. Caution: The following situations can create possible transfer-for-value problems:
Life Insurance as an Employee Benefit Life insurance is a major component of many employee benefit packages. Many employees belong to group life insurance plans. Highly compensated employees can participate in carve-out plans that allow an employer to remove them from the group plan and structure individual policies that offer more attractive, customized life insurance benefits. Any employer planning to offer life insurance should consider the effects of the plan on current and future personal and corporate taxes. Group Term Life Insurance--Income Tax Considerations
For general information, see Group Life Insurance. Executive Bonus (Section 162) Plans--Income Tax Considerations
Split Dollar Life Insurance--Income Tax Considerations
Death Benefit Only Plans--Income Tax Considerations
Nonqualified Deferred Compensation (NQDC) Plans--Income Tax Considerations
Life Insurance in Qualified Plans--Income Tax Considerations Employers can deduct life insurance premiums as part of the contribution to a qualified retirement plan. Life Insurance Coverage on a Key Employee In General Key employee life insurance provides funds to help a business cover expenses and financial losses caused by the sudden or unexpected death of a key employee. If you are considering using a key employee life insurance policy, you should first understand the tax considerations and take them into account in your planning. Income Tax Considerations
Business Credit Life Insurance In General If a new or expanding business that is borrowing money does not have significant assets or the lender perceives that the business relies heavily on the talents of one or a few individuals, the lender will often require a borrower to guarantee the loan. Business credit life insurance guarantees repayment through a life insurance policy on the life of the owner or key employees. The use of a business credit life insurance policy creates a number of tax issues. Income Tax Considerations
Usually, a lender's proceeds are limited to the amount of the outstanding loan. Any additional death proceeds that are paid to the insured's estate or other beneficiaries are not taxable to the lender. This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867. The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process. The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com. Tags: Financial Planning, Lump Sum, Pension, Retirement Planning Can a partnership deduct life insurance premiums?Although the Internal Revenue Service permits LLCs to deduct most insurance premiums as a business expense, life insurance premiums are not eligible.
When can a business deduct life insurance premiums?Small businesses with a specific type of business structure (LLC, S-Corp, sole proprietors) can deduct the premiums they are paying for employees, typically through group life insurance. The most you can deduct is $50,000 per year. You also cannot benefit from the policy in any way.
Is life insurance premium deductible for self employed?No, life insurance is not tax deductible if you're self-employed and you're paying for your own policy. You don't have to report your own life insurance on your taxes because it's considered a personal expense.
Is life insurance a business expense?While business owners can technically deduct life insurance premiums as an expense, it is a bad idea. Unlike the strict rules for individuals, it's true that businesses have a bit more leniency with tax-deductible life insurance premiums. But only in very specific cases are they deductible as a business expense.
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