Today TaxMama® hears from Hernandez in the TaxQuips Forum with good question. “I am one of two partners in a architecture service partnership. We are considering using life insurance, specifically whole life, as a way to save excess cash and lower our taxes. Are payments for insurance considered business expenses for a partnership? What is the limit of cash that I can stash away into a whole life insurance policy? If not a business expense can it be deducted on my personal tax return?”
That’s always a nice position to be in. Alas, life insurance for the owners of a business is rarely a deductible expense.
The only time it IS deductible at all is in a C corporation. Even then, the limit is – the premiums on up to $50,000 worth of coverage per person.
So, while the whole life insurance might be a good long-term investment (especially if it’s key man insurance to buy out a partner’s heirs in the event of a death), there is no tax benefit whatsoever.
I did a little further digging to see if key man life insurance would be deductible to the business. There’s a private letter ruling about this issue, asked by a corporation in 2003. Essentially, the IRS still says this isn’t deductible. However, the payments won’t be considered constructive dividends to the shareholders or their heirs.
Contributions to a SEP-IRA or a defined benefit plan would give you each substantial personal tax deductions. It won’t reduce your self-employment taxes.
The only things that reduce your self-employment taxes as well as your income taxes are direct business-related expenses – new equipment, advertising, wages and bonuses to employees… stuff like that.
Sorry this isn’t the answer you wanted. But congratulations on your profits.
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