Infinite Banking – Whole Life Investment

I was recently asked by a reader of this blog to explain how an S-Corp can get a tax deduction for purchasing a vehicle with funds from a whole life insurance plan.

Let me start by saying that I am not a licensed CPA or tax preparer. As always, for thorough tax information regarding your unique situation it’s best to consult your tax professional. In answering this question I will also eliminate its S-Corp specific nature and instead refer to it as a business. I am not qualified to speak about the tax subtleties regarding the various entity structures. The information that I will share with you below does come from certified public accountants. I have information from 3 separate CPA’s that supports the information below based on today’s Internal Revenue tax code.

First, let’s review what the IRS allows a business to deduct. There are 3 important IRC sections to review.

1. IRC Section 162 tells us that ordinary and necessary expenses incurred during the taxable year in carrying on trade or business can be deducted.
2. IRC Section 163(h) tells us that, other than 7 exceptions, no personal interest is tax deductible. Trade or business is one of the exceptions.
3. IRC Section 264(d)(4) tells us that policy loan interest is deductible for business purposes.

In claiming a tax deduction you will need to verify that the expense is indeed for a legitimate business use. If you are the lucky recipient of an IRS audit how will you prove this? The answer is: DOCUMENTATION. You will need to establish a paper trail. If you can’t prove it, it did not happen!!! Since every transaction can be different I won’t go into the detail of what documents are required. Your tax professional can assist with that.

Now let’s dive into the details.

1. We first start with the whole life insurance. Since there has to be an insured life, we will assume that the business owner is the insured as well as the policy owner. The business owner will take out a policy loan and lend it to the business.
2. The business will use the funds to purchase a vehicle. Again the vehicle must be used in the conduct of business in order to receive the deduction.
3. The business will make regular payments to the policyowner based on the terms of the promissory note.
4. The business owner will make regular payments back to his policy based on the terms of the policy loan.
5. At the end of the year the business willl have paid interest on the loan to the policyowner. The business, in this case an S-Corp, will claim this expense on form 1120S. The policyowner will have received investment income. The business owner will claim this income on Schedule A of his 1040. The interest expense and the interest income ultimately cancel each other out. In the end the net tax deduction comes from the interest that gets paid to the insurance company for the policy loan.

Let me summarize this business banking transaction. The business has purchased a vehicle with financing from the owner’s life insurance company. The principal and interest for this loan go back to the business owners whole life insurance policy. He has become his own banker and financed the car for his business. The owner receives the interest income and the tax advantaged growth of his policy. The business gets a vehicle and a tax deduction for the interest expense paid to the life insurance company.

This scenario can play out in a number of ways. That’s why it really is the Infinite Banking Concept. Whether for personal or business, policy loans can be used to serve an infinite number of needs. Go to my website and see some of the ideas we’ve posted under Banking for Businesses.

Keep the questions and scenarios coming!! If there is ever a question that I don’t have the answer to you can be sure that I will do my best to find it.

Scott Storace

I am blessed to receive an abundance of referrals from satisfied clients but I will always welcome more! So send your friends and family my way. I’ll be sure to treat them right. You have my word on that.

Tags: cash value, infinite banking, tax benefits, whole life

This entry was posted on Friday, January 29th, 2010 at 7:45 pm and is filed under Business Planning, Financial Strategy, Infinite Banking System, Whole Life Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.