Under current tax law, businesses have to reduce their interest expense deduction to the extent it’s attributable to the cost of life insurance, using a pro-rated formula. Policies for officers, directors, employees and 20% owners are generally exempt from this disallowance.
The Obama budget proposals would repeal the exemption for everyone except 20% owners for contracts entered into after the disallowance is enacted.
This effective date is likely to set off a frenzy of life insurance sales activity. Be aware of the special consent and information reporting rules that already apply to life insurance on employees.
