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Life insurance deductions for S corporations?

December 03, 2009

A question in the comments of an old post:

I have been talking with an insurance professional, and she has told me that I can deduct my life insurance premiums through my S corp. She has mentioned doing this through owner distributions (draws). The life insurance is in my name and my wife and I each own 50% of the business and are active participants. What is she talking about?

I would say "I have no idea what she's talking about," but it's more accurate to say that about the agent. The only way for an S corporation to get a deduction for life insurance on its owner is to put it on the owner's W-2 -- creating an offsetting income amount, and a payroll tax liability to boot. As the IRS web site says,

You cannot deduct the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business, if you are directly or indirectly the beneficiary of the policy. See Regulations section 1.264-1 for more information.

The Moral? An insurance agent can tell you a lot about coverage, but they can be excessively optimistic about the tax effects of their products. Check what they say with your tax pro.

Tags: life insurance.

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