We have purchased Life insurance paid by my unincorporated business. The premium is quite expensive expensive and I would like to ask you, is this tax deductible?

Also, I may form a C corporation, and am considering making payments from the New C Corporaitons. Is the Life Insurance premium going to be tax deductible when I file my Corporation tax return?

Dear Shabby,

The life insurance premiums paid on behalf of an officer of a Corporation are not deductible for tax return purposes.

They are deducted for books but not for tax purposes and this amount is added back on the M-1 schedule as an ajustment to income.

__________________
Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.

Thanks for the reply. At least now I am aware of this.

No problem!

__________________
Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.

what is a basis in a s corporation

It is worth noting that there are 2 basis that are important to an S Corporation Shareholder. These are Stock Basis and the other is Debt Basis.

What is Stock Basis?
Stock Basis in an S corporation is a complicated term but it is mathematically computed as follows;

1. the initial capital contribution to the S corporation or the initial cost of the stock purchased (the same as a C corporation).

2. this amount is then increased and/or decreased based on the flow-through amounts from the S corporation. Generally speaking, an income item will increase stock basis, whereas, a loss, deduction or distribution will decrease stock basis.

Why is Stock Basis Important?
Stock basis is important whenever a shareholder is attempting to determine the taxability of a non-dividend distribution the shareholder looks solely to his/her stock basis.

__________________
Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.

OK - lets look at what the regs specifically state:

Section 1.264-1(a) provides that the premiums paid for life insurance on the life of any officer, employee, or person financially interested in a business carried on by the taxpayer are not deductible where the taxpayer is directly or indirectly a beneficiary of the policy.

OK - so the way I interpret this reg is that IF the corporation is the benficiary, either directly or indirectly, THEN the premiums are not deductible. However, if we look at the inverse of this, one could argue that IF the corporation is NOT the beneficiary, either directly or indirectly, THEN the life insurance premium IS fully deductible by the corporation.

However... then there are some fringe benefit rules that may have taxable income consequences to the covered employee/officer, specifically:

IRC section 79 provides an exclusion for the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by an employer. There are no tax consequences to the policy holder (i.e., the covered employee/officer) if the total amount of such policies does not exceed $50,000. The imputed cost of coverage in excess of $50,000 must be included in the employee's/officer's income, using the IRS Premium Table, and are subject to social security and Medicare taxes.

But this begs the question, "Does IRC section 79 apply only to group term life insurance coverage? or is it intended to apply to non-group term life insurance as well?" The code specifically defines group term life insurance as well... So I'm looking for someplace in the code that specifically disallows life insurance premiums as a deduction for a C-Corp when the beneficiary is NOT the corporation. The only M-3 adjustments I've seen corporations make for life insurance premiums is when the policies are owned by the corporation (i.e., Corporate Owned Life Insurance - or COLI) - and generally this only occurs for "Key Officers and Employees" and seems fairly rare in my experience with large corporations.