“Officer’s life insurance premiums” are not allowed as a deduction on a corporation’s tax returns. Why is this? Is this one of those unfair tax rules?
Well, when a corporation takes out a life insurance policy on one if its key employees — and the corporation is both the owner and beneficiary of the policy — the proceeds paid to the corporation upon the death of the employee are generally tax-exempt (I.R.C. §101). Because I.R.C. §101 serves to exclude life insurance proceeds from income, I.R.C. §264 prevents a second tax benefit by disallowing a deduction for any premiums paid on a policy on which the payor is the beneficiary. That way, the taxpayer doesn’t get a deduction for premiums AND tax-exempt proceeds when the policy is paid out.
The rules regarding COLI are complex. Did you know that there are special rules for COLI policies issued after August 17, 2006? Whereas under I.R.C. §101 the proceeds paid to the corporation upon the death of the employee are generally tax-exempt, the proceeds from corporate owned life insurance policies may be taxable to the corporation upon receipt. To avoid having life insurance proceeds taxable, certain notice and consent requirements must be met. I.R.C. §101(j) provides that life insurance premiums paid to a corporation upon the death of an employee will be excludable from income only to the extent of any premiums or other amounts paid for the policy. Proceeds in excess of such costs will be taxable to the corporation.
In order for the entire amount of life insurance proceeds to be tax-exempt to the beneficiary corporation, the employee must:
- Be notified in writing that the applicable policyholder (employer) intends to insure the employee’s life and of the maximum face amount of the policy at the time of issue,
- Must provide written consent to being insured and that the coverage may continue after the insured terminates employment, and
- Must be informed in writing that the applicable policyholder (employer) will be a beneficiary of any proceeds payable upon the death of the employee.
In addition, every applicable policyholder corporation owning one or more employer-owned life insurance contracts issued after August 17, 2006 must file a Form 8925 for each year such contracts are owned, showing:
- The number of employees at the end of the year and the number of those employees insured under employer-owned life insurance contracts;
- The total amount of insurance in force under such contracts at the end of the year;
- The name, address, TIN, and type of business of the applicable policyholder; and
- That the applicable policyholder has a valid consent for each insured employee or the number of insured employees for which no consent has been obtained.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, including how to adopt an age-weighted profit-sharing plan, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.