A friend of mine told me he started an LLC/partnership with his wife. There are only two employees, he and his wife and they are both officers in the company owning 50% each. He got a term life insurance policy for himself with his wife the beneficiary.
He told me (according to what he read some place) that even though his company is paying the premiums he can’t use the term life insurance premiums as a business expense. Said it was because the company can’t benefit directly or indirectly in the event he dies, his wife who is part of the company would benefit.
Is he correct? I’ve heard of companies having life insurance on its employees and making the company the beneficiary. So in that case, I can see it is clear they can’t use the premiums as a business expense. But in the case of his LLC/partnership he isn’t making his company (the LLC) the beneficiary, but his wife, who happens to be 50% owner of the company.
I asked if he was concerned that taxes would have to be paid when he dies, because his wife is “the company” that would be benefiting at that point. He said he didn’t think of that but was actually more concerned about an IRS audit and them disallowing the premiums being used as a business expense.
Anyone here a CPA or tax attorney, or have done this themselves?
If he is right, it seems unfair that his wife shouldn’t be part owner in the business then.
Anyone know the straight-dope on this?
All I could think about when he was telling me this was, so much for these “perks” you get for owning your own small business.
If the company was the beneficiary, then the premiums would be a deductible expense. This is called a ‘key man’ policy. When his wife is the beneficiary, the whole endeavor is unrelated to the business and is therefore not deductible.
Many of the ‘IRS benefits’ for owning a small business are being used illegally. A few years back, I was exploring purchase of several small businesses. The business broker industry has a concept called ‘add backs’. Those represent expenses on the books that they add back when listing a company for sale (to accurately indicate the potential profitability of the company). Legitimate ones include owner salary. Less legal ones I saw included paying non-working children, home landscaping and groceries.
Life insurance premiums in which the company is the beneficiary are never deductible.
From the last: “In general, a business cannot deduct premiums paid on a life insurance policy (even though they are otherwise deductible as a trade or business expense) if the company is directly or indirectly a beneficiary under the policy and the policy covers the life of a company officer or employee or any person (including the company) with a financial interest in the business.”
The main justification is that the proceeds are not taxable.
(If I was at work, I could provide proper citation to the law, but I think a few search results is good enough to get the point across)
Thanks for your reply and research. What I bolded answers the question. The wife of the owner who also owns 50% of the business therefore has a financial interest in the business. With her being the beneficiary of the term life insurance policy, she would benefit no different than if the company itself were named as the beneficiary. So the company couldn’t take the term life insurance premiums as a business expense.
That answers the tax question for the company, but I’m wondering about possible taxes for the spouse herself? Since there is no tax due on term life insurance beneficiaries, would the IRS consider her “the company” and expect her to pay taxes on it through the LLC/partnership? This is assuming they have been making the premiums payments through their company and considering it a business expense. I’m going to guess and say not, because she isn’t “the company” to the life insurance company and her husband is/was the owner of the policy.
“Taxable Proceeds
In most situations, no income taxes are due on life insurance proceeds received by beneficiaries. However, certain circumstances result in taxes owed on some or all of a life insurance policy death benefit. If your employer contributes any portion of the premium, and receives any portion of the death benefit, that portion is taxable to the company. If you pay the premiums for your life insurance with pretax money, and your beneficiaries receive more than $50,000, that excess payout is taxable.”
The wife has 50% owner of the LLC/partnership and is the 100% beneficiary. If the premiums were paid by “the company” (LLC/partnership) would what she would normally receive as non-taxable, be taxable? Or is it only taxable if “the company” is the owner of the policy and a beneficiary?