Included in this article are two charts of the income tax treatment of “standalone” long term care (LTC) premiums for certain business owners and non-owner key executives. As you will see, the tax treatment for both the business entity and the insured is very favorable in many situations.
Sometimes, when filing a Corporate tax return, you’ll notice that the deduction for standalone LTC is limited to only part of the premium for certain business owners who are classified as self-employed under IRC Section 162(l). This partial deduction is determined by the indexed table of IRC Section 213(d)(10). These partial deduction rules apply to S corporation owners, LLC owners and sole proprietors.
IRC Section 213(d)(10) Limits (see Chart 1)
Other situations allow a deduction of the full standalone LTC premium for the business entity. Those rules apply to C corporation owners and qualified personal service corporation (QPSC) owners. In all cases, any standalone LTC policy claim benefits actually received are income tax-free.
Here are the typical legal business entities and corresponding tax forms for IRS reporting purposes that would reflect the business taxation of standalone LTC:
• C corporation (Form 1120)
• QPSC (Form 1120)
• S corporation (Form 1120S and K-1 “pass-through” to Form 1040)
• Partnerships and LLCs (Form 1065 and K-1 “pass-through” to Form 1040)
• Sole proprietor (Schedule C of Form 1040)
• Section 501(c) tax exempt organization (Form 990)
Business Tax Treatment of Standalone LTC Premiums (see Chart 2)
The idea is to use the cash flow of the business entity to fund LTC premiums for a personally owned standalone LTC policy that may be an annual pay-qualified LTC contract. The contract may or may not have a return of premium (ROP) option. The contract may or may not have inflation adjustable benefits. Finally, the contract may be subject to premium increases depending on claims experience of the carrier, interest rates in the economy and other actuarial factors.
Nevertheless, the ability to use the business checkbook to pay LTC premiums for a personal benefit plan can be the deciding factor to purchase the standalone LTC product as opposed to using the personal checkbook to pay premiums.
Client Profile:
Your clients are successful C corporation, QPSC, S corporation and LLC business owners and professionals. These clients wish to provide LTC insurance benefits to offset any LTC expenses that may accrue based on costs of extended care.
Key Phrases to Use with Your Business
Owner Client for Standalone LTC:
• Use your business checkbook to transfer the risk of long term care costs to an insurance carrier at the low present value cost of “pennies on the dollar.”
• LTC premium payments are either fully tax deductible or partially tax deductible as a business expense depending on tax status of your business (C corporation, QPSC, S corporation, LLC).
• Premiums paid from business cash flow are either fully tax free to you or only partially taxable to you depending on tax status of your business (C corporation, QPSC, S corporation, LLC).
• Tax-free LTC benefit payments to you to offset actual extended care costs.
• The plan can be offered selectively to you and your non-owner key executives without covering any other employees.
There are a number of different ways LTC coverage can be funded with different types of policies other than a standalone LTC contract. LTC coverage can also be funded via: a) a “linked-benefit” single premium or limited premium combo life insurance–LTC product; b) an annual premium no-lapse UL or indexed UL policy with a “reimbursement” type of LTC rider; c) an annual premium no-lapse UL or indexed UL policy with an “indemnity” type of LTC rider.
However, business cash flow used to fund personally owned linked-benefit combo life–LTC products or reimbursement or indemnity riders on a universal life base policy are defined as life insurance contracts for tax purposes and will be considered to be taxable bonus compensation under IRC Section 162. As such, the annual premium will be deductible to the business as current compensation paid and fully taxable to the policyowner as current compensation received. Nevertheless, any LTC benefit claims paid from LTC riders of these types of UL life insurance products will be income tax-free.
