Can an S Corp Deduct Life Insurance Premiums?

An S corporation generally cannot deduct life insurance premiums when the corporation is the policy's owner and the insured is an employee‑shareholder, because the premiums are considered a nondeductible personal expense. However, deductions are allowed if the corporation is not the beneficiary, such as for key‑person policies or when the insured is not a shareholder.

Why premiums are nondeductible for shareholder‑insured policies

The IRS treats premiums paid on policies where the S corp is both owner and beneficiary as a form of compensation to the shareholder. That amount must be included in the shareholder's W‑2 wages and is subject to payroll taxes, so the corporation cannot claim a deduction.

When deductions are permitted

If the S corp purchases a policy on a non‑shareholder employee or a key‑person whose death would materially affect the business, the premiums are ordinary and necessary business expenses and are deductible. The corporation must also be the beneficiary of the death benefit for the deduction to apply.

Key‑person insurance example

John, a sole owner of an S corp, wants to protect the company against the loss of his CFO, Maria, who owns no shares. The corporation can buy a life insurance policy on Maria, name the corporation as the beneficiary, and deduct the premiums as a business expense.

Reporting requirements

Deductible premiums are reported on the corporation's Form 1120‑S, line 21 (Other Deductions). Nondeductible premiums that are treated as compensation must be added to the shareholder's wages on Form W‑2.

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