Business Insurance Premiums are Tax Deductible

Your Business Insurance Premiums as Deductions

Tax form used by small businesses
Image courtesy of [Jonathan Nourok] / Getty Images.

Are the premiums you pay for business insurance policies tax deductible? The answer is generally yes. The Internal Revenue Service allows businesses to deduct the costs of doing business from their income when calculating federal taxes. Because insurance premiums are a cost of doing business, these costs can be deducted. This deduction can provide a business significant tax savings.

IRS Worksheets

IRS Form 1040 contains a worksheet that can help you calculate your insurance deduction.

A worksheet can also be found in IRS Publication 535, Business Expenses. Chapter 6 of this publication provides a good explanation of the types of insurance premiums that are tax deductible. Another useful resource is IRS Publication 334, Small Business Tax Guide. Both Pub. 535 and Pub. 334 are available at the IRS website (www.irs.gov).

Avoid Problems With the IRS

In recent years, the IRS has become aware of various tax avoidance schemes used by small businesses. The actions of tax cheaters have made the tax filing process more difficult for honest business owners. The process can be especially difficult for the types of businesses listed below. To avoid problems with the IRS, these businesses should seek a qualified tax professional to help them prepare their returns. A tax professional can ensure that premium deductions are legitimate, and that they have been calculated correctly.

  • A Single Person Limited Liability Company or S Corporation Shareholder Consult a tax professional who knows current IRS rulings and circulars.
  • Sole Proprietorship One of the benefits of operating a business as a sole proprietor is the ability to deduct health insurance premiums on your tax return. This deduction may be disallowed under certain circumstances. Review your deduction with a tax professional who understands your situation.
  • Separate Entities Some businesses create separate entities in order to reduce their liability risk. For instance, a company might establish a subsidiary that purchases vehicles and then leases them back to the parent company. Consult a tax professional before you create a new entity. Ask the professional to explain what insurance premiums you can deduct.

    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. Premiums paid for group insurance are generally deductible if the insurance benefits employees, managers and owners alike. The policy must be written in the name of the business. Premiums paid for insurance that benefits one person (typically the owner) are generally not deductible.

    The IRS lists (in Pub. 535) the following as generally accepted premium deductions:

    • 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
    • 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
    • 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
    • Auto insurance and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Note that you can deduct auto insurance premiums only if you use the actual cost method of figuring automobile expense. You cannot deduct auto premiums if you take the standard mileage rate deduction.
    • 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

    Some business insurance premiums are not deductible. IRS rules prohibit businesses from deducting the following:

    • Amounts paid to set up a self-insured reserve
    • Premiums paid on a sickness or disability policy that pays lost income in case of sickness

    This is a general list of deductions and exclusions published by the IRS. These deductions are subject to exceptions. Moreover, the fact that a deduction appears in an IRS publication does not mean that the IRS will necessarily approve it on your tax return.

    The IRS periodically issues advisory opinions and "circulars" that define specific deductions. It recently issued clarifications regarding premiums that benefit owners or shareholders individually. Consult a tax professional if you are considering deducting premiums for a long-term care policy, health insurance, or life insurance policy that benefits you as a business owner.

    Edited by Marianne Bonner