Life Insurance Tax Deductions for the Maryland Business Owner

What types of Maryland businesses can deduct Life Insurance Premiums?

This is one of our most asked questions when consulting with the many business owners we advise. Like many things finance related, the answer is complex, but we can point to the most common business structures that are able to deduct life insurance premiums as a possible clue. The schedule “C” corporation has the most avenues towards being in the position to deduct because they often employ the most employees and more importantly, ownership can pay themselves as employees. A LLC or incorporated company that chooses the tax designation commonly known as the “S-Corp” also has the ability to declare equity holders as employees of the business and therefore has a few avenues towards contributing to life insurance on themselves in a tax free way.

How can a Maryland business deduct Life Insurance Premiums?

You may have noticed a repeated term up to this point that offers insight into this answer. When a business offers employees fringe benefits or qualified retirement options they have the ability to deduct the business contribution to those plans as a expense. A schedule “C” corporation can not only deduct employee life insurance premiums it provides, it can also legally discriminate what type of insurance the different employees can get through Section 162 of the IRC (known as a Executive Bonus Plan). A “S-Corp” tax designated company can again declare ownership to be employees and set-up qualified retirement plans that carry life insurance. A life insurance policy being held in a 401k, SEP, or IRA can be funded with pre-tax dollars.

Who can deduct Life Insurance Premium in a Business?

You might be asking at this point, what about all the other business structures? The truth is that any legal business structure can provide employees with employer sponsored life insurance, and deduct the contribution they provide as a expense. The reason why we have yet to mention Sole proprietorship or general partnership is because these companies do not have the ability to pay ownership as an employee. They also can not set up qualified retirement plans contributions made on behalf of the business. This is a key detail when speaking with our business owner clientele because of course everyone wants to know how they can get an advantage for themselves. Only a company filing as a Schedule “C” incorporated company or one that designated itself as a “S-Corp” can do those two things.