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Deduction for LTC Premiums in Professional Corporation

Question:
What is the available tax deduction on the purchase of long term care insurance for a Professional Corporation? Is it fully deductible by the PC and not income to the employee? Also, how does it work if the premiums are prepaid (10 pay)? Are the prepaid premiums deductible and to what extent?

Reply #1:
When trying to determine the tax deductibility of premiums paid by Professional Corporations, you would need to check with the PC itself to find out how they are incorporated and how their articles are written. Typically when dealing with PC's, they are going to be taxed like Partnerships, as are Sub S Corporations and Limited Liability Corporations.

If this is the situation, here are tax guidelines:

Owners/Members are treated as Partners (and are self employed) for 2001*. The premium paid by the Partnership for the owners, spouses and dependents are included in the owner's income.

The business owner will also be eligible for a deduction. If the Partnership purchases qualified LTC insurance on behalf of a Partner of a partnership, the same rules that apply to a self employed individual. For 2001, the Partner may deduct 60%* of his or her out of pocket health insurance premiums (not 60% of out of pocket LTC/medical expenses). This is an “above the line deduction” resulting in a lower adjusted gross income. The premiums in excess of the limits above may qualify as a personal miscellaneous deduction for all medical expenses that exceed 7.5% of AGI.

All Long Term Care benefits received under a Tax Qualified policy would be income tax free to the policyholder.

These same rules should apply for all limited pay options, such as 10 pay and single pay premiums.

* Please note that in year 2002, the deductible percentage will be 70% and in years 2003 and on, the deductible percentage will be 100%.

Jennifer White
Long Term Care Case Consultant
Ext: 9540
E-mail: jwhite@commonwealth.com

Reply #2:
Herein lies a tremendous marketing opportunity to (1) stand out with your client, and (2) get tighter with the PC's accountant.

In a recent case I looked into, the CPA was not familiar with the tax advantages of LTC contracts, but was the person to talk to about how the corporation was set up.

The CPA said a PC was treated as a regular corporation and wanted data substantiating deductibility of premiums for further review.

Richard N. Seery, MBA, CLU,ChFC

 
* The foregoing is for broker/agent use only, and is intended solely for informational purposes. Nothing contained herein should be construed as legal or tax advice, and should not be relied upon for such. Legal and tax advice should only be obtained from your attorney or qualified tax professional.

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