Are Life Insurance Premiums Tax Deductible for an S Corp?

When an S corporation purchases life insurance, it must comply with the IRS rules concerning corporate-owned life insurance (called COLI). Corporations filing under Subchapter S for the year may be able to write off premiums payable to a life insurance policy under certain circumstances. Make sure that you, as a business owner, understand these circumstances so that you and your financial officer don't make a mistake on the corporation's taxes for the year.

Corporate-Owned With Corporate Beneficiary

    When an S-Corp takes out a life insurance policy on the life of an employee, it must have the employee's permission to do so. If the corporation pays the premiums on the policy, while also being the beneficiary on the policy, the corporation cannot deduct the premium cost. Instead, the corporation receives the death benefit tax-free. In this sense, the policy is treated the same way a personal, individual, policy would be treated.

Corporate Owned With Individual Beneficiary

    When the corporation owns the policy, but the beneficiary is an individual, the corporation may be able to deduct the premiums from the corporation's gross income. (A tax attorney would be needed depending on the specific circumstances.) For example, if a corporation purchases life insurance on the life of an executive and then the corporation names another individual (perhaps the executive's family) as beneficiary, then the corporation's purchase of the policy is a benefit to the employee's family and not the corporation.

Employee-Owned With Corporate Beneficiary

    If an employee owns the policy, but the corporation pays the premiums on the policy, but the corporation is the beneficiary of the policy, then the employer may not deduct the premiums. This follows the same general rule as if the corporation owned the policy.

Employee-Owned With Employee Beneficiary

    A corporation may pay the premiums on a policy that an executive owns. This is also referred to as an "executive bonus plan." Premiums paid under this arrangement are considered to be income to the employee that is fully taxable, but the premiums will be deductible to the corporation. The corporation may then choose to pay the taxes on the premiums paid to the policy for the employee as a deductible expense.



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