Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: My client is the 100% owner of his business. Does it make sense from a tax perspective for him to pay for his life insurance premium under a bonus arrangement through his business?
Answer: Maybe, if the company is organized as a C corporation.
If the company’s income tax bracket is higher than the owner’s personal tax bracket, a bonus plan may make sense. Say that Jared is the owner of Jeweler’s World, Inc., organized as a C corporation. Say also that Jeweler’s World pays corporate income taxes at a 34% rate. If Jared is in a combined personal income tax bracket of 28%, the personal bracket is lower than the corporate bracket. Imagine that Jared is considering how to pay the $1,000 premium.
Since in the example Jared controls both the corporate and his personal tax arenas, it makes sense to generate a deduction worth a savings of $340 in corporate taxes in exchange for a personal tax liability of $280.
Note that the tax bracket spread between the company and the owner/employee is only possible when the business is organized as a C corporation. Since proprietorships, LLCs and S corporations are pass-through entities, there is no tax leverage in using a bonus arrangement for the owners.
A bonus arrangement is more likely to be the right way to pay for needed personal coverage for a non-owner key employee. A bonus plan should be considered
- When business tax deductibility is a more important goal than
- Control of the policy, or
- Control over the employee’s behavior;
- Or when the employee benefit must be simple to implement and administer, and the employee needs coverage.
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