Advanced Underwriting Consultants

Question of the Day – May 13

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

  1. When business tax deductibility is a more important goal than
    1. Control of the policy, or
    2. Control over the employee’s behavior;
  2. Or when the employee benefit must be simple to implement and administer, and the employee needs coverage.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.