Discussion:Life Insurance Interest Expense

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Discussion Forum Index --> Tax Questions --> Life Insurance Interest Expense


Johnthecpa (talk|edits) said:

12 February 2007
A client borrowed $100,000 against the cash value of a key man life insurance policy owned by the company, and an additional $75,000 against the cash value (company portion) of a split-dollar life insurance policy. Both policies were originally issued over 20 years ago. Is any of the interest expense paid on these loans deductible. All loan proceeds were used to finance business operations.

Thank you for your help.

Pegoo (talk|edits) said:

12 February 2007
How did your client document the transactions? My answer is, "it depends" :P I think we need more info.

Riley2 (talk|edits) said:

12 February 2007
A portion of the interest would be deductble (first $50,000 of debt rule, but limited to the Moody’s rate) and traceable to the business if the insured is either a 20% owner of officer. See Sec. 264(e)(1) and Reg § 1.163-8T(m)(1)(ii). The $50,000 limit does not apply to contracts purchased on or before 6/20/86.

Johnthecpa (talk|edits) said:

12 February 2007
In each case, the insurance company wrote a check to the client (a "C" Corporation). The client deposited into the corporate account and used the funds for operations.

WesR (talk|edits) said:

12 February 2007
Hi without looking at rileys cites I would have deducted all interest expense on the corporate books. If the policies are owned by the corp I dont see any distinction from having the corp borrowing form the bank versus the insurance company. I know we have done this in the past. But I havent time to review rileys answer which does look "interesting". bye

Riley2 (talk|edits) said:

12 February 2007
WesR, on pre TRA-86 policies, I would agree that your approach will give a close approximation of the proper deduction. However on post TRA-86 policies, the tracing rules prohibit tracing to a debt that is classified as "disallowed" under Sec. 264.

WesR (talk|edits) said:

12 February 2007
thanks, just took a quick look at 264

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