What the 2018 Tax Law Said About S-Corp Life Insurance Deductions
In 2018, the Tax Cuts and Jobs Act (TCJA) altered the landscape for S‑Corporations seeking to deduct premiums paid for life insurance policies. While the law preserved deductions for certain employee benefit plans, it specifically excluded life insurance premiums paid by the corporation on policies that insured the owners or officers. The deduction was therefore unavailable for S‑Corps that used life insurance to protect owners or key employees, unless the policy qualified under the "group term life insurance" exception and the premiums were paid as part of an employee benefit program.
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Key Rules and Thresholds
| Attribute | Detail | Context |
|---|---|---|
| Owner Coverage | Premiums not deductible if the insured is an owner or officer. | Only applies to S‑Corps, not C‑Corps. |
| Group Term Life | Deductible if policy is part of a bona fide employee benefit plan. | Must be offered to all eligible employees, not just owners. |
| Premium Cap | Deduction limited to premiums that are part of the employee benefit plan. | Excess premiums over the plan's value are not deductible. |
Why the Deduction Was Eliminated for 2018
The TCJA closed a loophole that had allowed S‑Corp owners to shift life insurance premiums into the business's tax return. The change was designed to prevent tax avoidance where the policy's primary purpose was to protect the owner's wealth rather than to provide a bona fide employee benefit.
Impact on S‑Corp Planning
Owners who had relied on life insurance deductions in previous years needed to adjust their financial strategies. Common alternatives include:
- Using cash‑value policies held personally and funding them with after‑tax dollars.
- Converting to a C‑Corp structure where owner‑insured life policies can be fully deductible.
- Investing in other qualified employee benefits, such as health savings accounts, that retain tax advantages.
Current Status and Future Outlook
As of 2024, the 2018 provisions remain in effect. The IRS has not announced any amendments that would restore the deduction for owner‑insured policies in S‑Corps. Businesses should consult a tax professional to ensure compliance and to explore alternative tax‑efficient benefits.