Check me on this please - Key man Life insurance costs

[BulldogTom]

Here is how I understand the rules:

 

Key man life insurance is not deductible even if the payment under the policy is to the company if the insured life is a owner/shareholder/partner in the company.

 

It can be deducted if it is required by an outside company (like a bank to secure a loan) and is required by the contract with the outside company.

 

Do I have this correct?

 

Thanks

 

Tom

Newark, CA

[Elrod]

Tom, This may not be the answer to your question...But for a quick look up... this is what I found...hope it helps.

 

Section 264(a)(1) provides that no deduction is allowed for premiums paid on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.

Section 1.264-1(a) provides that the premiums paid for life insurance on the life of any officer, employee, or person financially interested in a business carried on by the taxpayer are not deductible where the taxpayer is directly or indirectly a beneficiary of the policy.

[BulldogTom]

Thanks Elrod for the cite.  That confirms my thought on the general rule.

 

Tom

Newark, CA

[jklcpa]

Tom, keep in mind that life insurance proceeds are subject to corp AMT if the company gross receipts are high enough for it to be subject to this tax.  If they are close to being subject to the AMT and life insurance is being used to fund a buy-sell agreement, you want to make sure the company doesn't fall short of the goal because of having to possibly pay taxes on the proceeds. If it's a small enough company, this probably isn't an issue.

[BulldogTom]

Judy,

 

I just had a client try to get me to put the insurance on the partnership return as a deduction when I had it as non-deductible.  I wanted to make sure I had it right.  I do.

 

This is just my sounding board when I double think myself into thinking that I might be thinking something that I thought I know.

 

Thanks

 

Tom

Newark, CA

[Margaret CPA in OH]

Tom, so elegantly stated....