When your business owns an annuity, you'll pay taxes on the amount of money that is distributed from the policy. But, these taxes may be offset through deduction under certain situations. How and when you pay taxes on a business owned annuity depends on how the contributions are made and what the annuity is used for. In many cases, a business can avoid paying taxes altogether.
A group annuity is a retirement plan similar to a 401k. A group annuity allows employers and employees to contribute to a retirement account. When an employee retires, he takes his share of the annuity with him. Contributions to a group annuity are, therefore, tax deductible to the employer as a business expense.
Deferred compensation is an arrangement where the employer defers an employee's compensation and later pays out this money to him at retirement. Deferred compensation is not deducted in the year of the deferment. Taxes are paid on all deferred money as income to the corporation. Instead, the tax deduction is taken when the annuity distributes the funds to the employee. This money is distributed as income and written off by the business as such.
An executive bonus is a non-qualified benefits package made for top level executives in a company. The business might initially own the annuity but eventually turns the annuity over to the executive. Alternatively, the annuity may start out as being owned by the executive, but with a special agreement between the company and the executive giving the company partial ownership over the annuity. Contributions are made to the annuity on behalf of the employee. These contributions are deductible since they are treated as bonus income to the employee in the year that the contribution is made.
A pension is a retirement plan set up by the employer for the benefit of the employee. The employer makes all of the contributions to the plan, as is the case in a 412i plan. Contributions are fully tax deductible to the employer in the year that contributions are made.
- "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004
- "Life Insurance"; Kenneth Black, Jr., et al.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, et al.; 2007
- IRS. "IRA FAQs - Contributions." Accessed Oct. 30, 2020.
- Internal Revenue Service. "When Can a Retirement Plan Distribute Benefits?" Accessed Oct. 30, 2020.
- Annuity.org. "Deferred Annuities." Accessed Oct. 30, 2020.
I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.