An employer pays premiums on a life insurance policy owned by the employee, with the employee designating the beneficiary. If the payments are reasonable compensation for services, the premiums are:
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Why D is correct
When an employer pays premiums on a policy owned by the employee (the employee chooses the beneficiary and owns the policy), the premiums are treated as additional compensation. As reasonable compensation for services, they are deductible by the employer as a business expense under IRC §162, and the employee may be taxed on the value as compensation income depending on the circumstances. The key distinction from key-person coverage is ownership: because the employee owns the policy, the employer is not the beneficiary, and the §264 bar on deducting premiums does not apply.
Why the other options are wrong
- A) The employee cannot deduct the premiums personally; the deduction belongs to the employer, which pays the premiums as compensation for services. Deduction follows the party that pays. The employee merely receives the benefit.
- B) The premiums are compensation income to the employee in many cases, not taxable income to the employer, who is the party making the payment. The employer receives no income here.
- C) If the employer were the beneficiary, the premiums would generally not be deductible under §264; deductibility here rests on employee ownership of the policy. Ownership decides the outcome. That is the controlling factor.
Memory hook
Pay the employee's premium as their salary perk — deductible to the boss, owned by the worker.