Hello MD Taxes:

I have an S-Corp. Can I deduct my disability insurance as a business expense? If I do so and become disabled, will my disability benefits be taxed as income? If I don't deduct the disability insurance, will my disability income be tax free? How does the IRS know whether or not to tax me.

Thanks.

Zip Code: 02114

Great question.

If you are an owner of an S-Corp, the disability insurance premiums you pay are generally not tax deductible. So you would end up paying for this insurance with post-tax dollars whether the premiums are paid out of the S-Corp or paid personally.

When the DI premiums are not tax deductible, any benefits you receive are not taxable to you. Usually, the insurance company will prepare a W-2 reporting the taxable amount of the DI payments. I never thought about how they know whether the payments are taxable or not, so they must try to find this out at the time a person starts collecting.

If you want a deductible DI policy, you might want to look at Business Overhead insurance. This DI policy pays your S-Corp an amount of money each month while you are disabled to enable your corporation to pay its overhead expense. It's my understanding that these premiums are tax deductible, and any benefits received would be taxable.

Zip Code: 01801

Lucy-

While the premiums for a disability policy are income tax deductible by an S corporation owner, the premiums must be included in your personal taxable income (Rev. Ruling 91-26), so there is no real benefit to paying the premiums through your practice.

Andrew is correct that how you paid for your policy's premiums would be investigated at the time of claim.

Perhaps the biggest "tip" that I can provide you with is that, as a female, your policy should have a unisex rate and additional discount. This alone, can save you 40-60% off of the normal female rates which are substantially higher compared to rates for male physicians.

If you want to learn more or would like your policy reviewed, don't hesitate to contact me at (516) 677-6211 or send an email to lkeller@physicianfinancialservices.com.

Larry

Zip Code: 11797