Can C‑Corporations Deduct Life Insurance Premiums?

Eligibility for Deduction

C‑corporations may deduct life insurance premiums only when the policy is an employee‑benefit plan or a business‑risk policy. Premiums paid for an owner‑oriented policy that merely protects the corporation from loss of a key employee's life are generally not deductible unless the plan meets the requirements of Section 162(a) of the Internal Revenue Code.

Employee‑Benefit Plans

If the corporation sponsors a group term life insurance plan for its employees and the premiums are paid by the company, those premiums are deductible as a business expense. The policy must be a qualified group term life policy, and the coverage amount cannot exceed $50,000 without triggering a taxable benefit.

Business‑Risk Policies

When a corporation purchases a life insurance policy to insure a key person or to fund a buy‑out agreement, the premiums can be deducted as a business‑risk expense. The policy must be used to protect the company's financial interests, and the corporation must retain control over the policy and its proceeds.

Tax Treatment of Policy Proceeds

Premiums are deductible, but the death benefit received is generally tax‑free to the corporation. If the policy is owned by a shareholder and the corporation receives the proceeds, the shareholder may need to report the benefit as income unless the policy meets the requirements of a qualified small business policy.

Compliance and Documentation

To preserve the deduction, the corporation must maintain proper documentation: a written policy statement, proof of premium payments, and a clear statement of the business purpose. Failure to document the policy as a business‑risk or employee‑benefit plan can result in the loss of the deduction and potential penalties.