The Business Owner
Tax Strategy Guide

A Section 162 Executive Bonus Plan uses the IRS rule that allows businesses to deduct reasonable compensation paid to employees. The business pays a bonus — deducted as ordinary compensation — and the executive uses that money to fund a permanent life insurance policy they personally own. The business gets the tax deduction. The executive gets a tax-advantaged asset that grows without annual taxes and transfers income-tax-free to their family. No IRS approval is required.

The U.S. Supreme Court ruled in Connelly v. United States (2024) that in an entity redemption buy-sell agreement, life insurance proceeds increase the business fair market value for estate tax purposes — even when those proceeds are committed to fund a shareholder redemption. This may have created unexpected estate tax exposure for business owners with existing entity redemption structures. Cross-purchase arrangements are now more favorable in many situations. Any existing buy-sell agreement should be reviewed with an attorney.

IRC Section 7702 defines the legal requirements for a life insurance contract to receive favorable tax treatment. When a policy qualifies under Section 7702, cash value grows tax-deferred, can be accessed via policy loans without triggering income tax, and transfers as a death benefit completely income-tax-free. For business owners — especially those disqualified from Roth IRA contributions due to income — a properly structured IUL or Whole Life policy provides equivalent tax-free income benefits with no contribution caps and no required minimum distributions.

Non-qualified deferred compensation plans are primarily used by C-corporations and larger businesses for highly compensated executives. Unlike 401(k) plans, there are no contribution limits or non-discrimination requirements — the plan can be offered selectively to specific individuals. The plan must comply with IRC Section 409A. A qualified attorney must be involved in plan design and documentation. Violations trigger immediate income tax on all deferred amounts plus a 20% excise tax.

An Irrevocable Life Insurance Trust becomes the owner of the life insurance policy from inception. Because the insured person never personally owned the policy, it does not count as part of their taxable estate. When the insured dies, the trust receives the death benefit — which passes to heirs income and estate tax-free, outside the probate process. The trade-off is permanence: the arrangement is irrevocable, and the insured gives up personal control over the policy. This strategy requires coordination with an attorney and a CPA.

No. Premiums paid on a business-owned life insurance policy where the business is the beneficiary are generally not tax-deductible. However, the death benefit is received income-tax-free by the business — provided the IRS notice and consent requirements were satisfied before the policy was issued. Annual IRS reporting via Form 8925 is required for business-owned life insurance policies.

Yes. The Business Owner Tax Strategy Guide is a complimentary educational resource. There is no purchase, subscription, or obligation associated with accessing it.