Tax Facts for S Corporations

For fringe benefit purposes, a 2-percent shareholder of an S corporation is treated like a partner in a partnership. Therefore, an S corporation can deduct the premiums it pays in consideration for services rendered by the insured shareholder, and the shareholder must include the full premium in his or her gross income. However, shareholders can deduct "eligible" premium.

The amount that can be used in calculating the expense deduction is limited to the lesser of actual premium paid, or "eligible long term care premium." defined as follows:

A 2-percent shareholder is defined in IRC Section 1372 as "...any person who owns (or is considered as owning within the meaning of Section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation." IRC Section 318 provides rules for the constructive ownership of stock (the attribution rules). Under these rules, an individual is deemed (i.e., considered) to own stock owned directly or indirectly by his parents, spouse, children and grandchildren.

The S Corporation can generally deduct all premiums paid for policies covering non shareholder employees, their spouses and dependents, retirees’, and retirees’ spouses.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.