Life Insurance

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?
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If not a business expense can it be deducted on my personal tax return?
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Dear Hernandez,

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.
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There’s a private letter ruling about this issue, asked by a corporation in 2003. Essentially, the IRS still says this isn’t deductible.
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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…
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stuff like that.

Sorry this isn’t the answer you wanted. But congratulations on your profits.

And remember, you can find answers to all kinds of questions about business decisions and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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