1120-US: Officer life insurance premiums and cash surrender value and the OAA (FAQ)

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Question

Should officer life insurance premiums and cash surrender value affect the OAA?

Answer

Per Rev. Rul. 2008-42, premiums paid by the S Corporation on an employer-owned life insurance contract which the corporation owns and is a beneficiary of, do not reduce the S Corporation's Accumulated Adjustment Account. Similarly, the life insurance proceeds received by an S Corporation on the death of an individual who was employed by the S Corporation within the last 12 months or who is a director or highly compensated employee, do not increase its Accumulated Adjustment Account.

Although the Revenue Ruling does not explain this reasoning, it would seem that even though no deduction is allowed for premiums paid on any life insurance policy where the taxpayer is directly or indirectly the beneficiary, the nondeductible expense does not reduce the S Corporation's Accumulated Adjustment Account because the expense is related to tax-exempt income.

Therefore, UltraTax CS assumes amounts entered in the Officer life insurance premiums field in Screen Ms should transfer to Schedule M-2, Other Adjustments Account - Other reductions. Also, amounts entered in the Cash surrender value-officer life field in Screen Ms should transfer to Schedule M-2, Other Adjustments Account - Other additions.

If you want UltraTax CS to transfer amounts entered in the Officer life insurance premiums field to Schedule M-2, Accumulated Adjustments Account - Other reductions, enter code A in the Schedule M-2 code field. Also, if you want UltraTax CS to transfer amounts entered in the Cash surrender value-officer life field to Schedule M-2, Accumulated Adjustments Account - Other additions, enter code A in the Schedule M-2 code field.

If you do not want UltraTax CS to automatically transfer these amounts to Schedule M-2, do not enter amounts in the Officer life insurance premiums and Cash surrender value-officer life fields in Screen Ms. Instead, enter the amounts in the Book expenses not deducted and Income on books not on return statement dialogs in Screen Ms, respectively. Also, do not enter a Schedule M-2 code for the amounts in the statement dialog.

Related topic: 1120-US: Form 1120S - common FAQs

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