Business Insurance Premiums are Tax Deductible
Your Business Insurance Premiums as Tax Deductions
Under guidelines published by the Internal Revenue Service, costs a company incurs to carry on a trade or business are generally deductible for federal tax purposes. Premiums your company pays for business insurance are a cost of conducting a trade or business. Consequently, they are a deductible expense on your federal tax return. This deduction may provide your business significant tax savings.
You can learn about the deductibility of business expenses by reading IRS Publication 535, Business Expenses. Chapter 6 of this publication focuses on insurance. It explains the types of insurance premiums that are deductible and what restrictions may apply.
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 the "ordinary and necessary cost of insurance" as a business expense as long as the expense is for a trade, business or profession. An "ordinary expense" is one that 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 business. Publication 535 lists the following as generally accepted premium deductions:
- Insurance that covers 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. Examples are errors and omissions and medical malpractice insurance.
- Workers' compensation insurance set by state law that covers any claims for bodily injuries or occupational diseases suffered by employees in your business, regardless of fault. If a partnership pays premiums to insure its partners for workers compensation, it can deduct those premiums as guaranteed payments to partners. A similar provision applies to premiums paid by S corporations for their more-than-2% shareholder-employees (if the premiums are included in the shareholders' wages).
- 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. If you use a vehicle partly for personal use, you can deduct only that portion of the premium that applies to your business use. You cannot deduct any auto insurance premiums if you use the standard mileage rate to calculate your car expenses.
- 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
Premiums You Can't Deduct
IRS rules generally prohibit businesses from deducting premiums for the types of insurance listed below:
- A self-insured reserve fund (although your actual losses may be deductible)
- A policy that pays for earnings lost due to sickness or disability
- Annuities and certain types of life insurance such as corporate-owned life insurance and key person insurance
- Premiums paid on insurance to secure a loan. For example, if you purchase life insurance as a condition of obtaining a mortgage, the life insurance premium is not a deductible expense.
The deductions permitted by the IRS may change from year to year. Some deductions are subject to exceptions. Moreover, the fact that a deduction is described in an IRS publication does not mean that it applies to you.
Premiums are generally deducted in the tax year to which they apply. You cannot deduct premiums you paid in advance. For example, suppose that you purchased a property policy that applies for a three-year term. You cannot deduct the entire premium during the first year the policy is in effect. Rather, you can deduct one-third of the premium in each of the three years.
Deductions For Sole Proprietors
One of the benefits of operating a business as a sole proprietorship is the ability to deduct health insurance premiums on your tax return. If you are a self-employed individual, IRS rules permit you to deduct the premiums you paid for medical, dental, and "qualified" long-term care insurance for yourself and your dependents, including children under age 27. Publication 535 contains a worksheet you can use to calculate these deductions.
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 that in 2018 you had access to health insurance through a plan sponsored by your spouse's employer. Your spouse enrolled in that plan but you did not. Instead, you purchased your own health insurance.
Because you were eligible for coverage under the plan offered by your spouse's employer in 2018, you can't deduct the premiums you paid for your health insurance in that year. The deduction is prohibited because coverage was available to you through your spouse's employer even though you didn't participate in the plan.
Edited by Marianne Bonner