Discussion:Am I seeing deductibility of disability premiums in corporation safely?
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Discussion Forum Index --> Tax Questions --> Am I seeing deductibility of disability premiums in corporation safely?
| 10 March 2007 | |
| C Corp, 25 employees, great health plan. But the 80% shareholder/president has the corporation pay $6K a year for his personal disability policy, and wants to deduct it as a corporation expense. No other employees get such a policy.
I say, sure, I will let the corporation deduct it, but I am going to put the $6K as income subject to SE on your individual tax return. Anyone see a problem with this? | |
Michaelstar (talk|edits) said: | 10 March 2007 |
| Kendrick - hate to keep hitting your posts but...... Is this a C-Corp? If so, It would be a line item expense of the C-Corp and not income to the s/h. It would not be income to the s/h until he starts receiving the disability income. If it was a S-Corp - I think it s/b reportable wages. | |
| 10 March 2007 | |
| Thanks Michaelstar. Please, always hit my posts. That is what I come here for.
To take your suggestion here is the problem. He sure doesn't want to treat the disability income as taxable income if he should ever receive it. And he won't if he pays the premiums himself. Plus, I don't believe he can get the disablility paid for by the corporation without treating it as income to himself unless everyone gets it too. I hope you know something I don't know. It would be great if all of my corporate clients could get disablility policies paid for by their corporations but NOT have to get them for any of their employees. Sounds too good to be true. | |
Michaelstar (talk|edits) said: | 10 March 2007 |
| One thing about disibility insurance is that if the premiums are paid for and it is NOT taxable income to the employee, then the benefits received by the employee once they are received as disability are taxable. This is one reason why I suggest that clients do not pay for their disability insurance via their sec 125 plan - life insurance as well for that matter.
One of the benefits of being a C-corp is that benefits such as this can be discriminating and paid for, for one class of employee while not the other. Riley2 will correct this if I am wrong but for now, I believe I am correct. Disibility insurance is no different than medical insurance. The corp can pay for medical insurance for one class of employee and not the other. Here again, Riley2 will post if I am wrong but actually I was surprised to see this to be true as discriminating like this should not be allowed in my mind. | |
| 10 March 2007 | |
| Couldn't an approach be used where the Corp pays the premium, deducts it, etc. and then should the Shareholder become disabled, he reimburses Corp. for premium paid for the year of the qualifying event (and going forward if diablity remained)? Wouldn't this work if the policyowner was the Shareholder and not the Corp? | |
| 10 March 2007 | |
| I usually set up employees with a deduction after taxes. I wasn't aware that the corp could deduct it. How would the employee know what amount is taxable? Do they get a statement at the end of year from the insurance co? | |
| 10 March 2007 | |
| Kendrick, disability insurance premiums for an officer are deductible under Reg. Sec. 1.162-10(a). In addition, the premium cost represents an excludible benefit under Sec. 106(a). | |
Michaelstar (talk|edits) said: | 10 March 2007 |
| Thank you Riley2 for attaching the code sections to this topic. | |
| 11 March 2007 | |
| Riley2, thanks for pointing out that the disability premiums are deductible by the corporation. However, I would expect that you would also point out that if the insured were to ever receive money from the disability policy on account of being disabled, all such monies would be taxable to the insured. Ouch. Please let me know how you see this. | |
Michaelstar (talk|edits) said: | 11 March 2007 |
| Kendrick - yes in this situation - all disibility would be taxable income as I mentioned above. That is why it is best that the t/p pay the premiums with after tax dollars - this way the disibility income would then not be taxable income to the receipent when received. | |
| 11 March 2007 | |
| Yes, if the premiums were paid by the employer, then the benefits are fully taxable. An old strategy that seems to work is having the employee pay the premiums, then after the current policy year is ended and the employee is not disabled, having the employer reimburse the premiums. | |
