Learn about loans,insurance and small business (Part 11)

Presented by Paystrubmakr.com      By John Wolf and Tom Cullen CPA

Paystub maker keeps informing you, this time about taking a loan from your payroll insurance payments.

Interest Limitation on Policy Loans – §264A

The small business myth

Small-Business Loans

Dis-allowance of Interest Deduction.

Borrowing more than $50,000 on a life insurance policy will in many instances result in disallowance of interest deduction for the portion of the loan exceeding $50,000. This is so even though the loan proceeds are used for business purposes. For interest paid or accrued after October 13, 1995, the Health Reform Act of 1996 expanded this dis-allowance to cover the interest on annuity and endowment contracts. Also, with exceptions for a limited number of “key person” policies and subject to a phase-in rule, no deduction is allowed for interest paid or accrued on any loan on one or more life insurance policies, annuity, or endowment contracts owned by the taxpayer covering an individual who is:

(1) An officer or employee of, or

(2) Financially interested in any trade or business carried on by the taxpayer.

Psychological health for small business


This dis-allowance rule has a widespread impact on both the policy purchasers and the life insurance industry. It is common practice for policies to be bought with the understanding and intention of borrowing against cash values. For example, a corporation may buy life insurance on key employees, or life insurance to fund a future redemption from a stockholder-officer, or life insurance to fund a deferred compensation agreement, etc. Or a partnership may buy life insurance to cover a buyout agreement. Or a sole proprietor may simply buy insurance on his own life. In each of those situations, the purchase may have been encouraged by the possibilities of borrowing on the policies. Under the over $50,000 dis-allowance rule, if such policies are purchased after June 20, 1986, the interest on any portion of a loan over $50,000 is disallowed. This may reduce the attractiveness of some purchases (§264(b)(4)). Limit on Deductibility of Premiums & Interest.

Factors related to successful and failure of a small business   

Tax Deductions

Under the TRA ‘97, the present-law premium deduction limitation concerning life insurance contracts is modified to provide that no deduction is permitted for premiums paid on any life insurance, annuity, or endowment contract if the taxpayer is directly or indirectly a beneficiary under the contract.

Work in the 21st Century: Understanding the Needs of Small Businesses

Besides, generally, no deduction is allowed for interest paid or accrued on any indebtedness concerning a life insurance policy, or endowment or annuity contract, covering the life of any individual.

Also, in the case of a taxpayer other than a natural person, no deduction is allowed for the portion of the taxpayer’s interest expense that is allocable to borrowed policy cash surrender values concerning any life insurance policy or annuity or endowment contract issued after June 8, 1997. The provisions generally apply concerning contracts issued after June 8, 1997.

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Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice.  We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action.  The information presented on this website is offered as a general guide only.