Owners of closely held businesses are generally familiar with the benefits of company owned life insurance. Small business owners often use life insurance to reimburse the business for the financial loss caused by the death of a key employee, or to repay outstanding debt when a business owner unexpectedly dies. In addition, small businesses utilizing buy-sell agreements, which provide that an owner’s shares will be redeemed by the company for a cash payment upon the owner’s death, commonly use life insurance to make the cash payment. However, many small business owners do not realize that they must now report to the IRS all life insurance policies which are owned by the business and which insure the lives of its employees.
For years ending after November 13, 2007, employers who own life insurance policies on their employees which were issued after August 17, 2006, must report the following to the IRS on Form 8925:
• Number of employees the business had at the end of the year
• Number of employees who were insured at the end of the year under an employer-owned life insurance contract
• The total amount of employer-owned life insurance in force at the end of the year on employees insured under an employer-owned life insurance contract
• Verification that the employees consented to the employer-owned life insurance policies (or the number of employees for which the employer does not have a valid consent)
If your business has recently purchased a key person life insurance policy, it will need to comply with this new reporting requirement when your business files its 2007 tax return. Members of the McGrath North Tax Group can help you if you have any questions about the reporting requirement.