What Insurance Policies are Deductible?
As a small business entrepreneur, you probably have a variety of forms of insurance related to your business. With some of these policies, you are able to deduct the cost of the premiums you pay from your taxes, while with others you are not able to deduct the premiums. For still others, you can deduct a percentage of the premiums. Also, the legal business structure (sole proprietor, corporation, etc.) can impact certain business insurance deductions; however, this article will help you determine which of your policies are deductible, and which policies are non-deductible.
With many insurance policies related to your business, you are able to deduct the premiums you pay. The following are premiums you can deduct:
- Fire, theft, flood, and other similar insurance plans for disasters.
- Credit insurance on losses from unpaid debts.
- Medical insurance for employees and group hospitalization insurance. This includes insurance for long-term care.
- Liability insurance.
- Workers’ compensation insurance that state law requires, covering claims for bodily injuries or diseases suffered by employees related to the job.
- Malpractice insurance for professionals, covering personal liability for negligence that causes injury or damage to patients or clients.
- State unemployment insurance fund contributions, which you deduct as taxes if state law considers them taxes.
- Overhead insurance, which pays for overhead expenses during any long period of time while you are disabled due to injury or illness.
- Vehicle insurance for vehicles used in your business—if you don’t use the standard mileage rate to determine automobile expenses.
- Life insurance for your employees, if you are not the beneficiary of the contract either directly or indirectly.
- Use and occupancy and business interruption insurance, paying you for any lost profits if your business has to shut down for a fire or similar cause. Just report the proceeds as ordinary income.
Related: Business Liability Insurance 101
Other insurance policies do not allow you to deduct any of the premiums. Here are a few:
- Self-insurance reserve funds: If you set up a reserve for self-insurance, you cannot deduct any amounts credited, even if you aren’t able to get certain forms of business insurance coverage. Be aware, though, that any actual losses might be deductible.
- Loss of earnings: If you have a policy that pays for lost earnings due to sickness or disability, you cannot deduct premiums. As noted above, however, you can deduct overhead insurance that covers overhead expenses during periods of illness or disability.
- Insurance to secure a loan: You cannot deduct the premiums for any policy that you take out on your life, or on the life of someone else with a financial stake in your company, in order to get or protect a business loan. The premiums cannot be deducted as interest or an expense of financing your loans, either.
Related: 6 Steps to Proper Risk Management
Partially Deductible Policies
With other policies, you are allowed to deduct a portion of your premiums, but not the entirety. One example is cash or accrual method prepayments. If you take out an insurance policy that covers more than one tax year, you can’t deduct the entire premium just in the year you make the payment. You can deduct only the portion of the premium that accounts for that year, and the same rules apply for future years. You deduct the portion of the premium covering any given year in that year.