Is Disability Insurance A Deductible Business Expense?

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William Bridgers
Specialist, LTCi, DI, Annuities, Life, Designs In Life, LLC, Utah
In a word, yes. But, it's more complicated than that. There are three different types of DI insurance and each has its on tax-treatment strategies.1. Individual disability insurance (IDI) - This is what most people are referring to when they use the term "DI". It replaces a percentage of income. It comes in two flavors: long-term and short-term. If the premium is deducted as a health insurance medical expense on a schedule C, the income replacement benefit - should one become disabled - may be taxable as regular income. If it is "paid-out-of-pocket", the income replaced when disabled is not income taxable. The choice should be referred to a qualified tax advisor as insurance agents are not authorized to advise on tax issues. However, I don't know a CPA that would recommend deducting premiums as a health insurance business expense. If one becomes disabled, they are going to want their benefit checks to be free from income taxes.2. Business Overhead Expense (BOE, or simply OE) - If a business owner or partner becomes disabled, this type of insurance pays for a percentage of fixed business expenses. In my experience, tax advisors will direct that the premiums for this coverage be deducted as a business expense because while that makes the benefits income-taxable, the benefits will immediately pay for business expenses which are deductible. So, it's a bit of a wash, so to speak.3. Buy-out disability insurance - This type of DI is most commonly purchased to sever a business relationship of an owner or partner that becomes totally disabled and thereby be a drain on the business without being able to actively produce or grow the company. The amount paid out is a lump sum which can be based on percentage of ownership (or stock) and theoretically be placed into a fund that would produce a continuing income to the bought-out owner or partner. Typically, the business owns this policy and pays premium on it. The tax treatment of the premium and payout depends on how the Articles of Incorporation are written or what kind of buy-sell agreement is in place. Both the company attorney and tax advisor need to be in on how the contract is titled and who pays premium at the time of application.It is imperative for the consumer of DI insurance to consult with qualified legal and tax advisors if there is any question at all about how the payment of premiums will be treated and/or the benefits used. The agent may offer an opinion, but it should not be accepted as legal or tax advice.
Answered on June 10, 2013
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