[Whyme]

I can’t seem to figure out why they are adding back life insurance premium to taxable income in this example. Is it taxable?

ABC Co reported $200,000 of pretax Fin. Income. Included was $10,000 life ins prem. for policies on which the corp is the beneficiary and int. income on municipal bonds of $50,000.

$200,000

+10,000

-50,0000

= Pre tax income of 160,000

Just wondering why we add the premium. I am assuming it is taxable, while the muni int. is not.

Thanks.

AUD- 71, 73, 87 Done!!!!!
BEC- 75
FAR- 72, 77
REG- 77

[Anonymous]

You have to add it back because you cannot take the expense for the life insurance premium on the financial statements and then get the life insurance proceeds tax free. Remember you only get one shot at tax free. The premiums are a permanent timing difference. Does this explain it? Deferred taxes are the bane of my existence!

[Whyme]

Still confused haha. I know Muni Interest is not taxable so you would subtract that from the F/S Income. Are you saying that the Premiums are Taxable and must be included in Taxable income?

The thing that is confusing me is that it says that it is already included, why are we re-adding it?

AUD- 71, 73, 87 Done!!!!!
BEC- 75
FAR- 72, 77
REG- 77

[Anonymous]

Insurance premiums are subtracted as an expense to arrive at Net Income. But to arrive at taxable income you have to add them back to Net Income to compute the amount of Taxable Income and then the actual tax expense.

Example for Net Income:

Sales = 500,000

COGS = 300,000

Acct Expense = 20,000

Insurance Expense = 50,000

Salaries = 100,000

Net Income = 30,000

Taxable Income on same figures:

Sales = 500,000

COGS = 300,000

Acct Expense = 20,000

Salaries = 100,000

Taxable Income = 80,000

If you compute tax expense on Net Income, assuming 30% tax, you would get 9,000 in tax. When you compute tax expense on Taxable Income you would get 24,000. The Insurance Expense is added back to net income because you subtracted it to arrive at net income but you can't deduct it so you have to add it back.

Clear as mud?

[Anonymous]

One more thing, don't let the questions confuse you on insurance expense. Only life insurance premiums that are paid on policies where the company is the beneficiary are added back to net income.

[Whyme]

Yeah that helps a lot, thank you! Deferred Taxes suck :(. Hopefully there is nothing worse than this.

AUD- 71, 73, 87 Done!!!!!
BEC- 75
FAR- 72, 77
REG- 77

[LP2012yeah]

My understanding is that since the insurance proceeds are not taxble, so the insurance premium expenses are not deductable, so it should be added back.

[Author]

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