Business life insurance premiums are generally not tax deductible as ordinary business expenses, but the death benefit received by the company is tax‑free. However, the tax treatment varies by policy type and ownership structure.
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1. Types of Business Life Insurance
• Key‑person policies: Paid by the company to protect against the loss of a critical employee. Premiums are not deductible, but the death benefit is excluded from taxable income.
• Owner‑controlled policies: When a business owner holds the policy and the company is the beneficiary, premiums may be deductible as a business expense if the owner is not a shareholder of more than 10% in the company. If the owner has a significant ownership stake, premiums become a non‑deductible personal expense.
2. IRS Rules Governing Deductibility
• Section 162(c)(1)(B) of the Internal Revenue Code specifically disallows the deduction of life insurance premiums paid by a business for its own benefit.
• Section 162(c)(1)(C) allows a deduction if the business is the policyholder and the owner is not a shareholder of 10% or more of the company's stock.
• Premiums paid for policies where the business is the beneficiary but the owner is a shareholder may be treated as a personal expense and are not deductible.
3. Practical Implications for Business Owners
• If you are a sole proprietor or a partner in a partnership, you can deduct premiums for a key‑person policy if you are not a shareholder of more than 10% of the company.
• For corporations, the deduction is only available if the owner's share is below the 10% threshold; otherwise, the premium is treated as a non‑deductible personal expense.
4. How to Document and Claim
Maintain clear records showing ownership percentages and policy ownership. When filing taxes, report the premium as a business expense only if it meets the 10% ownership condition; otherwise, exclude it from deductions.
5. Bottom Line
Business life insurance premiums are typically not deductible, except under specific circumstances where the owner's ownership stake is below 10%. The death benefit remains tax‑free, providing a financial safety net without tax consequences.