Chapter 7 Review
Income taxation rules with respect to disability income insurance generally provide that premiums are not deductible, but benefits are received tax-free. An exception to the rule concerning non-deductibility of disability income insurance premiums applies to policy premiums paid by an employer on a policy owned by the employee. In such a case, the premiums are generally tax deductible to the employer and non-taxable to the employee. When received, however, benefits are taxable to the employee.
Disability Overhead Expense policy premiums are tax deductible to the premium payor. Benefits, however, are taxable. Disability Keyperson and Buyout policy premiums are not deductible to premium payors, but benefits are received tax-free.
Chapter 7 Review Questions
Premiums are not tax deductible
Benefits are received tax-free
*Both a and b
Neither a nor b
A proprietorship's payment of premiums on the proprietor's disability policy
A partnership's payment of premiums on the disability policy owned by a 10% partner
An S corporation's payment of premiums on the disability policy owned by a 15% stockholder
*A regular corporation's payment of premiums on the disability policy owned by its sole stockholder
If Williams Paint Company is a regular corporation
If Williams Paint Company is a sole proprietorship
If Williams Paint Company is a partnership
the form of business organization is irrelevant for tax deductability
Robert Wilson, M.D., a sole practitioner
Gorman & Winslow, a law partnership
Columbia Foods, Inc., a food distributor organized as a regular corporation
I & II only
I & III only
II & III only
*I, II & III
Premiums are tax deductible
Benefits are taxable when received
Both a and b
*Neither a nor b
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