Disability Taxation Guide

DISABILITY TAXATION GUIDE

Self Employed Tax Chart

Summary of Disability Income Tax Aspects

Premium Paid By	Benefits Paid to	Policyowner	Tax Treatment
Premium Paid By	Benefits Paid to	Policyowner	Premiums	Benefits
Individual (Including a sole proprietor)	Individual	Individual	Nondeductible (IRC Sec. 213 & 262)
Employer (Key person coverage or business reducing term	Employer	Employer	Nondeductible (IRC Sec. 265)	Tax-Free (IRC Sec. 104)
Employer (under a QSPP)	Employee (Including C-corp. owners)	Employee	Deductible by employer (ICR Sec. 162). Employer-paid premium excluded from employee's taxable income (IRC Sec. 106)	Reported as Income (IRC Sec. 105)
Partnership, S-corporation (under a QSPP)	Partner, S-corp. owner	Partner, S-corp. owner	Deductible by partnership or S-corp. Included in partner's or S-corp. owner's personal taxable income (Rev. Ruling 91-26)	Tax-Free (Rev. Ruling 91-26)
Employee (under an Executive Bonus Plan)	Employee	Employee	Bonus paid to cover premium by employer is deductible. Bonus is included in employee's taxable income (IRC Sec. 162)	Tax-Free (IRC Sec. 104)

Overhead Expense

Premium
Paid by

Benefits
Paid to

Policy owner

Tax Treatment

Premiums

Benefits

Business or
Owner

Tax Deductible

Revenue Ruling
55-265

*Reportable as Income,
Revenue Ruling 55-265

Disability Buy-Out

Premium Paid by	Benefits Paid to	Policy owner	Tax Treatments
			Premiums	Benefits
Partnership of Corporation (under Entity Purchase Agreement)	Partnership or Corporation	Partnership or Corporation	Nondeductible IRC Sec. 265	Tax-free* IRC Sec.104
Partnership or Corporation (under a Cross Purchase Agreement)	Insured's Partner or Fellow Shareholder	Insured's Partner or Fellow Shareholder

*Benefits are paid to reimburse amounts paid to purchase disabled owner's business interest. The disabled owner may be subject to capital gains tax.