LONG-TERM CARE INSURANCE

TAX TREATMENT FOR BUSINESSES

Professional Corporations (PCs)

Professional Corporations are generally taxed

similarly to C Corporations; check with your state.

C Corporations

• The company can deduct the entire

premium paid for an employee, regardless of

whether he is a greater-than-2% shareholder

in the company.

• The employer’s method of accounting—

cash or accrual—determines the timing of

the deduction.

When the employer pays the premium on a tax qualified LTCI contract covering an employee,

the premium is excluded from the employee’s

income and, therefore, is also not subject to

federal income tax withholding, Social Security,

Medicare and federal unemployment taxes.50

However, if the employee pays for such coverage

through an after-tax payroll deduction, all such

taxes do apply, as tax-qualified LTCI contracts are

not eligible for payment from cafeteria plans.51

 

The company…

• Can also deduct the entire premium paid for

an employee’s spouse or tax dependents, such

as parents52

• Is not subject to anti-discrimination rules

—It can discriminate by class, offering the

insurance to some employee classes but

not others.53

Premium paid for a shareholder who is not an

employee is not tax-deductible to the company.

THE SHAREHOLDER:

• Pays for the actual premium from gross

revenue (similar to health insurance)42

• Deducts his eligible premium on Form 1040,

line 2943 and pays self-employment tax on the

premium (similar to health insurance)44

• Is limited to deducting only the eligible

premium (unlike in deducting health insurance)

—The balance (the difference between the

actual premium and the age- based eligible

premium deducted) is subject to full taxation.

C-Corporations

• Can deduct the entire premium paid for

other employees from business income45

—The premium is excluded from employee

income, and benefits are tax-free.46

• Deduct the eligible premiums it paid for a

shareholder’s spouse and tax dependents,

such as parents.47

• Is not subject to anti-discrimination rules; it can

discriminate by class, offering the insurance to

some employee classes but not to others48

CONSIDER: Employment of a spouse or

dependent parents yields no additional tax benefit,

because of the rule of attribution; the spouse’s

premium deduction is still capped at the eligible

premium.49

 

Premiums paid by the company for

such family members must be included as wages

on their Form W-2, and the family members

can deduct the amount, if they meet the other

requirements of Internal Revenue Code §162(l).

Subchapter S Corporations

Shareholders in S Corporations file as individuals.

With respect to benefits, S Corporations are treated

like partnerships, and shareholders who own

more than 2% of an S Corporation are treated like

partners rather than employees.34

 

Those greater than-2% shareholders can deduct eligible premium payments as self-employment health insurance premium on Form 1040, line 29, as follows35:

 

• The corporation may pay the entire premium

and deduct it,36 if the LTCI contract is in the

name of the greater-than-2% shareholder

and he pays the premium from personal

funds, the corporation may reimburse the

shareholder, if he provides the company with

adequate proof of the premium payment.37

 

• The entire premium paid, whether paid

by the corporation directly or through

substantiated reimbursement, is treated

in a manner similar to the way in which a

guaranteed payment is reported and taxed

to a partner. It is considered part of the

shareholder’s salary and is reported to him

on his Form W-2, as well as to the IRS on the

S Corporation’s return, Form 1120S.38

 

• Payment or reimbursement of actual

premium is considered part of the

shareholder’s salary and is reported on 

Form W-2, as well as to the IRS on the S

Corporation’s return, Form 1120S.

 

Generally, such income would be subject to income tax but excluded from employment taxes.39

For the greater-than-2% shareholder to be

allowed any deduction on his or her Form

1040, all of the following conditions must be true:

• The premium must be paid directly by

the company or the shareholder must

substantiate the premiums he paid to the

company and be reimbursed by it.

• The premium paid or reimbursed must

be reported by the company on the

shareholder’s Form W-2 for that year.

• The shareholder must report the premium

paid or reimbursed by the S corporation as

gross income on his Form 1040.

If any of these conditions are not true, the greater than- 2% shareholder is not allowed a deduction for any premiums paid or reimbursed.40

If the above events have occurred, the greater than-2% shareholder may deduct the eligible

premium payments as self-employment

Limited-Liability Companies (LLCs)

A Limited-Liability Company (LLC) is a statedefined

business structure that protects owners

from the liabilities of their companies. By

default, an LLC with one owner is treated for tax

purposes as a sole proprietorship.

An LLC with more than one owner is treated as

a partnership. An LLC may even elect another

tax status, including that of a C Corporation or

an S Corporation.

39 Revenue Code §3121 (a)(2)(b)

40 Revenue Service Notice 2008-1, 2008-2 IRB 251

41 Revenue Code §162(l), 213(d)(1)(D), 213(d)(10)

42 Internal Revenue Code §162(1)(2)(C)

43 Internal Revenue Code §162(l), §162(l)(2)(C) and §213(d)

44 Internal Revenue Code §162(l)(4)

45 Internal Revenue Code §162(a)

46 Treasury Regulation 1.106-1

47 Internal Revenue Code §162(l), §162(l)(2)(C) and §213(d)

48 Treasury Regulations 1.105-5

49 Internal Revenue Code §318 and §1372

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