by mbscpa » Thu Dec 30, 2010 10:02 pm
Are the proceeds from a Keyman Life Insurance contract were a C corporation is the owner and beneficiary an alternative minimum taxable item.
I understand that the procceds are not taxable for regular income purposes but I am concerned about alt min.
I understand that the procceds are not taxable for regular income purposes but I am concerned about alt min.
Posted: Fri Dec 31, 2010 03:45 am Post Subject:
Are the proceeds from a Keyman Life Insurance contract were a C corporation is the owner and beneficiary an alternative minimum taxable item.
Assuming the Corporation never attempted to deduct the cost of the insurance, life insurance proceeds such as this are not reportable as income and not subject to income tax -- full or alternative.
If the Corporation inadvertently deducted the cost of premiums (most accountants would not let this happen), then to make the death proceeds nontaxable, amended returns for the prior tax years would have to be filed and any resulting taxes/penalties paid.
Posted: Fri Dec 31, 2010 12:35 pm Post Subject:
If the Corporation inadvertently deducted the cost of premiums
I don't think it's a common practice. May I know under what circumstances it can happen?
Posted: Fri Dec 31, 2010 03:42 pm Post Subject:
I can think of a possible (but, yes, uncommon) scenario:
(1) An agent tells a business owner to use a "company check" to pay his insurance premiums so he can deduct the premiums. This works if we're talking about property and casualty or workers' compensation insurance, and group life or health insurance. It does not work for personal uses of insurance, such as one's own life insurance policy. Although a Key Person policy is a business use of insurance, like that which funds a buy-sell agreement between business partners, because it is intended to compensate the business, the premiums are not tax-deductible. But they could be inadvertently deducted. So . . .
(2) The business owner pays for group life insurance for his employees, and knows he gets to deduct the premium as a business expense. Thus, he thinks he can deduct the cost of Key Person insurance as a business expense, too. If the IRS discovers this, the deduction will be disallowed. If a Key Person death claim is paid in the wake of deducting premiums for that policy, the death benefit is potentially taxable to the extent the benefit exceeds the cost basis (premiums paid). The tax liability would likely be larger on the death benefit than the inadvertently deducted premiums, but there is a limit to the number of prior years' tax returns that can be amended.
Again, this is highly unusual, and in the case of a corporation, with highly-paid tax advisers, is not at all likely to occur. But a person using the "do it yourself" approach to accounting and taxes could easily make such a mistake.
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