Are insurance premiums tax-deductible? How to write off business insurance

Are insurance premiums tax-deductible? How to write off business insurance

You can deduct many business-related expenses to lower your taxable income, but what about insurance costs? Are insurance premiums tax deductible? The short answer is yes, but it comes with many caveats. Read on as ERGO NEXT explains exactly what you can write off and how to do it.

Are insurance premiums tax deductible for your business?

Business insurance is an expense you pay as a self-employed individual. Similar to how you can deduct the self-employment tax you pay for Medicare and Social Security, you can utilize insurance premium expenses for tax deductions for your small business in many instances.

To get these tax benefits, “a business expense must be both ordinary and necessary,” according to the Internal Revenue Service.

So, can you deduct insurance premiums on your income taxes? It depends. Not all insurance is classified as ordinary and necessary by the IRS — but many are.

Ordinary deductions

Insurance coverage is ”ordinary” if other businesses in your industry typically have it.

Let’s say you’re an Amazon seller and you rent space to store your inventory. You maintain commercial property insurance to protect your business from losses due to theft and damage to your inventory.

Likely, you’re not alone. Many Amazon sellers and other online retailers have this type of coverage to protect their investment, so it likely meets the IRS’s “ordinary” requirement, resulting in a break for taxpayers.

Necessary deductions

But what about the “necessary” part of the definition?

When the IRS says you can deduct “necessary” premiums that you pay out-of-pocket, it doesn’t mean you can only deduct insurance that’s legally required to operate your business. It usually means insurance that’s helpful and reasonable for a company like yours to have.

So, let’s say you’re a fitness professional giving clients guidance about nutrition and exercise. If one of your clients gets injured following your advice, they may take legal action against you. If that happens, professional liability insurance could be helpful to cover the legal cost to defend yourself.

State law may not mandate you to have professional liability insurance to run your business, but it likely meets the IRS’s definition of “necessary” for a federal tax deduction.

Which insurance premiums are tax deductible as a business expense?

Common qualifying itemized deductions that could result in tax savings include:

General Liability insurance

General liability can help protect your business if you or an employee accidentally cause property damage to someone else’s property while working, or if a non-employee suffers an injury at your place of business.

Workers’ Compensation insurance

Workers’ comp is another type of business insurance that can help cover medical expenses, including necessary medical care and lost wages, if your employees get sick or injured on the job. Most states require this type of coverage for businesses with one or more employees. And business owners can also add themselves to this type of coverage for an additional fee.

Professional Liability insurance (E&O insurance)

Professional liability coverage, also called errors and omissions insurance or E&O in some professions, is a common business insurance for service professionals who sell their knowledge and advice, such as accountants, real estate agents or business consultants.

This type of coverage could help protect you against accusations of professional negligence or business errors that cost a client money — such as a financial miscalculation or missing a deadline. It can help pay for the cost of defending yourself or damages in a lawsuit.

If professional liability is a necessary business expense, it is also usually tax deductible.

Commercial Property insurance

Commercial property insurance could help protect your physical work space after theft, vandalism, fire and other covered perils. It can also cover your other business property, including inventory, computers, supplies and equipment you need to run your business.

Business income insurance (aka business interruption insurance), a part of property coverage, can help protect you from the loss of income if you have to close your business temporarily for repairs.

Commercial Auto insurance

Personal car insurance doesn’t typically cover business use of vehicles. If you use your car for business purposes, commercial auto may help. However, if you deduct your commercial auto insurance premium, you can’t usually deduct the standard mileage rate while driving for business purposes.

Self-employed health insurance

If you pay for healthcare, dental, or long-term care insurance for yourself, your spouse, or your dependents, you may be able to deduct the health insurance premiums if you meet specific requirements. However, if you receive a subsidy to help cover the cost, you can only deduct the amount you actually pay, not the full premium.

Additionally, some reimbursements for health insurance premiums may be tax-free, depending on the specifics of the arrangement. This allows you to reduce your out-of-pocket costs without impacting your taxable income.

What business insurance costs are not tax deductible?

While you can legally deduct business insurance premiums for many types of insurance, some premiums aren’t tax-deductible, including:

• Disability insurance: Disability insurance that helps pay your salary if you’re sick or injured isn’t usually tax-deductible.

• Insurance to secure a loan: If you buy a life insurance policy to get a business loan, the premium’s not usually deductible.

• Life insurance coverage: If you’re the direct or indirect beneficiary of a life insurance policy, you’re usually not allowed to write off the premium.

How to deduct business insurance premiums on your tax return

How you report your business expenses, including insurance premiums, can vary depending on your business structure.

How a sole proprietor can write off business insurance

If you’re a business of one, the tax filing process is relatively straightforward. You and your business are considered the same entity for tax purposes, so you’ll report everything on your personal tax return. Here’s how that might look:

• File your personal tax return: Income and expenses from a sole proprietorship flow through to your individual return. You’ll use Form 1040.

• Claim deductions: List your insurance premium deductions on Schedule C under “Insurance” (Line 15).

You can usually claim all business-related insurance costs, from liability coverage to property insurance. It helps to keep a simple spreadsheet or folder to log the total amount of your premium payments throughout the year. Come tax time, you’ll thank yourself for staying organized.

How LLCs can write off the cost of business insurance

If your company is a Limited Liability Company (LLC), the tax forms can vary depending on whether the IRS treats your business as a corporation, partnership or disregarded entity. A disregarded entity just means taxes get filed as part of the LLC owner’s return.

• Corporation: If your business is set up as an S-Corp, you’ll file Form 1120S. Each owner should report their share of corporate income, credits and deductions on Schedule K-1. If your business isn’t an S-Corp, you should use Form 1120.

• Partnership: If your LLC has at least two members, the IRS will automatically classify it as a partnership unless you choose to have it treated as a corporation. Partnerships should file Form 1065 and list their insurance premium deductions on Schedule K-1.

• Disregarded entity: If you’re a single-member LLC classified as a disregarded entity, you’ll file form 1040 as you would if you were a sole proprietor. You need to report your deductions on Schedule C, E or F, depending on the business type you have.

Get advice from your tax professional

The IRS maintains the latest guidelines for what is and isn’t tax-deductible, and there are updates every year. And what you can or can’t write off may depend on the unique circumstances of your business.

Since improper deductions can trigger an audit, you should always consult with a tax professional before filing your taxes.

This story was produced by ERGO NEXT and reviewed and distributed by Stacker.