One of the downsides to the cost of business buy/sell or cross purchase plans is that the cost of the life insurance premium is not income tax deductible. All of us in business know that we really would like air to be deductible if it could be arranged.

Let me qualify what I am about to throw out by saying that I am not an attorney or a tax accountant. If this peaks your interest, check it out with your attorney and accountant before jumping on it.

Let me run a real life case by you.  It involves a company with two corporate shareholders.  They built a commodity trading business together. Now the business is worth several million dollars.  That value was substantiated by an outside third party offer to buy the enterprise for its fair market value.   The principals wanted to be certain that each of their respective interests was protected and solidified in the event of death.  They also were adamant that the business existed and continued to grow because of their unique talents and they did not want the other principal’s spouse involved in the business in any manner if death of the other principal occurred.  They insisted that a corporate income tax deduction be allowable for the life insurance premium used to fund the buy-sell agreement. They heard from one life insurance agent that this wasn’t possible.

After making sure they understood that any decisions should be based only on the advice of their independent tax and legal advisors, we provided sample Section 162 Bonus plan language  to the client’s attorney, together with appropriate sample buy-sell agreement language.  In this instance, a Cross-Purchase plan was proposed because the funds for the premium payments would come from the principal’s own assets as augmented by income from  the Section 162 Bonus plan.

Applications were obtained, individually signed by the principals, and submitted to Underwriting.  The Section 162 Bonus plan was started by the client’s attorney, in concurrence with their accountant.  Once the underwriting is completed and the offer from the carrier is received, bonus checks  to the principals will be made by the corporation under the authority of the Board Resolution prepared.   The executives will then issue checks to pay the premium.   The process of a Board Resolution, a bonus check being issued to each of the two shareholders, and then each shareholder writing a check for the respective insurance premium on the other principal will be followed each year.

Bottom line. I wouldn’t recommend that a business go through this process for a small policy, but when millions are on line and the premiums are substantial, you bet a business owner wants every deduction they can legally get.