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Business Overhead

BUSINESS OVERHEAD EXPENSE

A business overhead expense plan helps protect a company or owner-operator from the financial difficulties associated with a disability. Fixed overhead expenses can constitute a major portion of a company's operating budget. If a certain individual's on-the-job performance is critical to the operation of a business, their disability can be devastating. Fortunately, the IRS recognizes the significant difficulties a disability can impose on a company and provides for a tax-advantaged plan to minimize the financial repercussions.

A specific type of contract known as an "Overhead Expense Disability Policy" reimburses the company or individual for the overhead expenses actually incurred with a set maximum during a covered disability. If this type of contract is used, the premiums paid are deductible as a business expense. When proceeds are paid out during a disability they are taxable as income. Then, when the business overhead expenses are paid they are typically tax-deductible.

If a standard disability contract is used instead of an Overhead Expense Disability Policy, the premiums are not tax deductible. However, during a period of disability the proceeds that are received are not taxed as income. Even if the proceeds are used to pay the business overhead expenses, the premiums are not tax deductible and the proceeds are tax-exempt if a standard disability contract is used. The set amount of the benefits is not dependent on the amount of business overhead expenses.

When developing a business overhead expense plan, a company or owner-operator should carefully consider the tax ramifications of the different types of insurance policies. They must decide whether current tax deductions for premiums paid or tax-exempt proceeds are most important.