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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