Physician disability payments and Sub S distributions

May 22, 2019

Question: If a corporation pays the disability premiums for a doctor and those premiums are recorded as Sub S distributions, will they be considered to be paid by the doctor personally and not the practice, thereby making any disability benefits non-taxable?

Answer: Distributions are being paid with after tax dollars and as such any disability benefits received would be non-taxable. See further hindsight below.

Income Tax—Disability Payments Excludable from Income: Disability income benefits paid by the employer generally are taxable, whereas benefits paid by the employee are not (as long as after-tax dollars were used to purchase the benefits). In a new memo decision, the Tax Court held that disability benefits were excludable from taxpayer’s income under IRC Sec. 104(a)(3) because he reimbursed his firm for the premiums by deducting the premium amounts from his shareholder loan account. From the inception of the policy until the premiums were waived, taxpayer treated the premiums as personal items and paid his share of the premiums through his loan account, and the firm never deducted them on Form 1120 . Richard Cotler , TC Memo 2007-283 (Tax Ct.).

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