Corporate Tax Guide Information
| C-Corporations |
| Contributory Employers |
| Limited Liability Companies/ Partnerships/ S-Corporations |
| Self-Employed Individuals |
Premiums
A C-Corporation can generally deducts as a reasonable business expense all qualified LTC
premiums paid for employees, their spouses and dependents, retirees and their spouses. In addition, an employer’s contributions toward the cost of
premium are not included as imputed income for the individual. NOTE: Because there are no discrimination rules for employer-provided LTC coverage.
C-Corporations can offer the plan to a select group of employees without jeopardizing the exclusion from income.
As an example, assume that a C-Corporation purchases a qualified LTC policy with an annual
premium of $2,500 for a 62-year old employee. The company may deduct the entire $2,500 premium as a business expense does not have to include the
$2,500 in his taxable income.
For tax purposes, benefits paid to employees of a C-Corporation are treated the
same as those paid to individual taxpayers.
As an example, assume an employee receives LTC benefits of $250 a day. In tax your 2002, the
tax-free cap allows the employee to exclude $210 of the daily benefit from taxable income, leaving $40 a day as taxable income. If the individual can
demonstrate that he incurred LTC expenses in excess of $210 a day, and there are no other reimbursements, the employee may be able to exclude the
benefits up to the incurred expense, even though they exceed the tax-fee cap.
In the cases where the employer and the employees share the cost of premiums, the company may
generally deduct all premiums it contributes for qualified LTC plans as a business expense. Premiums paid for spouses and dependents of employees,
retirees and their spouses are treated similarly.
For Federal Income Tax purposes, the employee’s portion of the premium is treated as if paid by an individual, and should be deductible – subject
to the age-based limits noted previously for individual taxpayers – to the extent the employee’s total unreimbursed medial expense, including LTC
expenses, exceed 7.5% of the employee’s adjusted gross income.
As an
example, assume that an employer purchases a qualified LTC policy with and annual premium of $2,500 for a 62-year old employee who has an adjusted
gross income of $50,000. The employer and the employee share the cost of the premium equally , with each paying $1,250. In general, the company may
deduct the $1,250 it pays toward the premium as a business expense, and the employee can exclude the $1,250 paid by the employer from her taxable
income.
The employee’s portion of the premium is treated as paid by and individual taxpayer. As an
individual who itemizes deductions on her federal income tax return, she may deduct medical expenses to the extent that they exceed 7.5% of her
adjusted gross income, or $3,750 (.075 x $50,000). She has $5,000 in unreimbursed medical expenses, plus $1,250 in long term care premium expenses.
For tax year 2002, a 62-year old individual can deduct up to $2,390 in qualified LTC premiums. Therefore, her total “medical expenses” equal
$6,250 ($5,000 + $1,250).
NOTE: Because there is some uncertainty
regarding the treatment of premiums in a split payment situation, a tax professional should be consulted. See also the special rules applicable to
self-employed individuals, partners, members and certain S-Corporation shareholders.
Benefits
For tax purposes,
benefits paid to employees in a contributory arrangement are treated the same as those paid to individual taxpayers.
As an
example, assume an employee receives LTC benefits of $250 a day. In tax year 2002, the tax-free cap allows the employee to exclude $210 of the daily
benefit from taxable income, leaving $40 a day as taxable income. If the individual can demonstrate that she incurred LTC expenses in excess of $210 a
day, and there are no other reimbursements, the employee may be able to exclude the benefits up to the incurred expenses, even though they exceed the
tax-free cap.
Premiums
When the employer is a Limited Liability Company, Partnership or S-Corporation and pays the
premium for non-owner (including share holders owning 2% or less of the stock) coverage, the business may generally deduct as a business expense all
premiums paid for qualified generally deduct as a business expense all premiums paid for qualified LTC plans covering employees, retirees, their
spouses and their dependents.
For employees who are not partners, members, or own 2% or less interest in the S-Corporation,
employer-paid premiums are excluded from income. However, employees who are also partners, members, or own more than 2% or less interest in the
business, the S-Corporation are subject to the tax rules for self-employed individuals as noted previously.
As an example, assume that an S-Corporation, purchases a qualified LTC policy with an annual
premium of $2,500 for a 62-year old employee. If the employee owns 2% or less interest in the business, the S-Corporation may deduct the entire $2,500
as a business expense, and the $2,500 will not be included in his taxable income.
If the employee owns more than 2% interest in the S-Corporation, he is considered to be
self-employed individual, for tax purposes. In tax year 2002, the employer-paid premium is deemed distributable income to that individual, who in turn
may deduct 70% of the eligible premium, up to an amount no tin excess of the individual’s earned income from the S-Corporation. Since the eligible
premium limit for 2002 for a 62-year-old is $2390, the employee may deduct $1,673 as a health insurance cost. (.70 x $2,390).
In addition, the self-employed individual may apply the remaining eligible premium towards his
own personal medical expenses, In this scenario, the self-employed person has $5,000 in unreimbursed medical expenses, plus long term care insurance
expenses. He may add the remaining eligible premium of $717 ($2,390 - $1,673) to his unreimbursed medial expenses, bringing his total “medical
expenses” to $5,717 ($5,000 + $717).
He may personally deduct his medical expenses, to the extent that they exceed 7.5% of his
adjusted gross income, or $3,750 (.075 x $50,000).
Benefits
For tax purposes, benefits paid to all employees of a Limited Liability Company, Partnership or
S-Corporation (including partners, members and employees owning more than 2% of the S-Corporation stock) are treated the same as those paid to
individual taxpayers.
As an example, assume and employee receives LTC benefits of $250. In tax year 2002, the tax-free
cap allows the employee to exclude $210 of the daily benefit from taxable income, leaving $40 a day as taxable income. If the individual can
demonstrate that he incurred LTC expenses in excess of $210 a day, and there are no other reimbursements, the employee may be able to exclude the
benefits up to the incurred expenses, even though they exceed the tax-free cap.
Premiums
Self-employed individuals –
including sole proprietors, partners, and more than 2% shareholders of an S-Corporation as discussed below – can deduct a percentage of eligible
premiums paid for qualified LTC plans as a health insurance cost. The percentage is subject to the age-based limits for individuals (shown below)and
will increase over time:
NOTE: A deduction is allowed only to the
extent the self-employed individual had “earned income” from the trade or business under which the plan is established.
In addition, self-employed individuals may include the remaining percentage of eligible premium
as medical expenses on their personal federal income tax return. LTC premiums up to the age-based caps noted previously are deductible as medical
expenses to the extent they exceed 7.5% of an individual’s adjusted gross income. Premiums paid for spouses and dependents are treated in a similar
fashion.
As an example, assume that a 62-year-old, self-employed individual has an adjusted gross income
of $50,000. The business purchases a qualified LTC policy for her with an annual premium of $2,500. In tax year 2002, the business is deemed to have
made a distribution to the owner who may then deduct 70% of the eligible premium paid for the policy (subject to the age-based limits). Since the
eligible premium limit for 2002 for a 62-year-old is $2,390, the owner may deduct $1,673 ($2,390 x .70). NOTE: If the premium paid is less than the
premium deduction limit ($2,390), the owner may deduct 70% of the premium paid. If the premium paid was $1,500, in tax year 2002, the owner may deduct
$1,050 ($1,500 x .70).
In addition, a self-employed individual may apply the remaining eligible premium towards her own
personal itemized medical expenses. In this scenario, the self-employed person has $5,000 in unreimbursed medial expenses, including unreimbursed long
term care expenses. She may add the remaining eligible premium of $717 in the first example ($2,390 - $1,673) to her unreimbursed medical expenses,
brining her total “medical expenses” to $5,717 ($5,000 + $717).
She may
personally deduct her medical expenses, to the extent that they exceed 7.5% of her adjusted gross income, or $3,750 (.075 x $50,000).
Benefits
For tax purposes,
benefits paid to self-employed individuals are treated the same as those paid to individual taxpayers.
As an example, assume a self-employed individual receives LTC benefits of $250 a day. In tax year 2002, the
tax-free cap allows the individual to exclude $210 of the daily benefit from taxable income, leaving $40 a day as taxable income. If the individual can demonstrate that her LTC expenses are in excess of $210 a day, and there are no other
reimbursements, the self-employed individual may be able to exclude the benefits up to the incurred expenses, even though they exceed the tax-free
cap.