Costs your company incurs to carry on a trade or business are generally tax-deductible under guidelines published by the Internal Revenue Service . Because premiums your company pays for business insurance are a cost of conducting a trade or business, they are a deductible expense on your federal tax return.
A deduction for business insurance premiums may provide your business with significant savings on your federal income taxes.
You can learn about the deductibility of insurance premiums by reading Chapter Six of IRS Publication 535, Business Expenses. It explains the types of premiums that are deductible as well as those that are nondeductible or must be capitalized.
Two other useful resources are IRS Publication 334, Tax Guide for Small Business, and IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits. Publication 334 is directed at individuals who are either self-employed or statutory employees. Publication 15-B is designed to educate employers on the tax treatment of fringe benefits.
Premiums You Can Deduct
The IRS permits the deduction of a business expense that is both "ordinary and necessary." An expense is "ordinary" if it is common and accepted in your type of business. An expense is "necessary" if it is helpful and appropriate (but not necessarily indispensable) for your trade or business. According to Publication 535, you can take a deduction for premiums you paid the following types of insurance:
- Insurance covering fire, storm, theft, accidents or similar losses. An example is commercial property insurance.
- Credit insurance that covers losses from business bad debts
- Group hospitalization and medical insurance for employees, including long-term care insurance
- Liability insurance
- Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. An example is medical malpractice insurance.
- Workers' compensation insurance set by state law that covers claims for bodily injuries or occupational diseases suffered by employees in your business, regardless of fault.
- Contributions to a state unemployment insurance fund if they are considered taxes under state law
- Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness
- Insurance covering vehicles used in your business for auto liability, physical damage, and other losses.
- Life insurance covering your officers and employees if you are not directly or indirectly a beneficiary under the contract
- Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause
Note that workers compensation premiums paid by a partnership to insure its partners are deductible as guaranteed payments to partners. Likewise, premiums paid by S corporations for their more-than-2% shareholder-employees are deductible if the premiums are included in the shareholders' wages.
Premiums You Can't Deduct
The IRS generally prohibits businesses from deducting premiums for the types of insurance listed below :
- A self-insured reserve fund. While you can't deduct payments you made to the fund, you can deduct your losses.
- A policy that pays for earnings lost due to sickness or disability
- Certain types of annuities and life insurance, such as corporate-owned life insurance and key person insurance
- Premiums paid on insurance to secure a loan, such as life insurance you purchased as a condition of obtaining a mortgage
When to Deduct Premiums
Premiums should generally be deducted in the tax year to which they apply. You cannot deduct premiums you paid in advance. For example, suppose you purchase a three-year property policy. You cannot deduct the entire premium during the first year the policy is in effect. Rather, you must deduct one-third of the premium in each of the three years.
Tax deductions permitted by the IRS change from year to year. The fact that a deduction is described in an IRS publication does not mean it applies to you.
Deductions for the Self-Employed
If you are a self-employed individual, you may be able to deduct the premiums you paid for medical, dental, and long-term care insurance for yourself, your dependents, and children under age 27. You can take these deductions only if you meet specific requirements outlined in Publication 535 .
You cannot take a deduction in any month in which you were eligible for health insurance subsidized by your spouse's employer (or the employer of a dependent) whether or not you participated in that plan. For example, suppose you had access to health insurance in 2019 through a plan sponsored by your spouse's employer. Your spouse enrolled in that plan but you purchased your own health insurance instead.
You can't deduct the premiums you paid for your health insurance in 2019 on your 2019 tax return. The deduction is prohibited because coverage was available to you through your spouse's employer even though you didn't participate in it.
Edited by Marianne Bonner