In this post, we'll try to make tax season a little less stressful by helping you make sense of what you can and can't deduct when it comes to business insurance and related expenses.
If you own a for-profit business, ordinary and necessary business expenses can be deducted from your taxes, and that includes the cost of insurance. An ordinary business expense in this context is one that is common within your industry. A necessary business expense, as defined by the IRS, is both “helpful and appropriate” for running the business.
How Business Insurance Factors Into the Tax Deduction Equation
According to the IRS, you can deduct the ordinary and necessary cost of insurance as a business expense. This also includes insurance-related expenses like premium financing costs, but only if the insurance policy is for your business. Most businesses are required to carry various types of insurance because of industry requirements, contractual obligations, and state laws. As an example, businesses with employees must have workers compensation insurance and, in many states, also provide disability benefits to workers. Because this would classify as both “ordinary and necessary” the premiums for these insurance policies would fall under the ordinary and necessary rule by the IRS and are deductible.
What You Likely Can Deduct
Below are some common types of commercial insurance that would most likely be considered deductible on a corporate tax return for the purposes of operating a business.
security General Liability Insurance
One of the more common business insurance policies, the GL policy typically covers the business for claims involving bodily injury and property damage resulting from products, services or operations of the company.
security Professional Liability Insurance
Commonly called errors and omissions (E&O) insurance, the professional liability policy protects a company against liability incurred as a result of negligence in performing its professional services. Lawyers, engineering firms and insurance brokers are examples of businesses that generally require professional liability.
security Property Insurance Insurance
This coverage reimburses the owner of a business for the cost of repairing or replacing damaged or lost business property, like a warehouse or inventory, due to a covered cause of loss such as fire, windstorm, and more.
security Business Interruption Insurance
Also called business income and extra expense insurance, this is usually part of another policy like the general liability or property policy. It covers the business for things like lost profits, operating expenses, relocation costs, and payroll, among other things, when the business cannot function normally because of a covered cause of loss.
security Cyber Liability Insurance
Cyber liability policies cover legal fees and losses when a business is responsible for someone else’s (a customer, for example) data breach and resulting losses. First-party cyber liability can cover recovery costs associated with losses for the business carrying the policy.
security Pollution Insurance
Often required for contractors working on remedial clean-up projects, pollution liability insurance covers the legal fees and clean-up costs for pollution-related expenses. As an ordinary and necessary business expense, the premiums for this policy would be deductible.
security Workers’ Compensation Insurance
Most states mandate that employers carry worker’s comp coverage for their employees. And the states that don’t make it prohibitively expensive not to carry it. Workers compensation pays an employees’ lost earnings and medical expenses when they become injured on the job. These premiums are deductible as business expenses.
security Commercial Auto Insurance
As the name suggests, this insurance policy covers liability and property damages resulting from accidents in business-owned vehicles. Important: if you deduct your auto insurance premium, then you can’t take the standard mileage deduction on your taxes. If a vehicle is used partly for business purposes and partly for personal use, you can only deduct that percentage of the premium applicable to the business use of the vehicle.
security Unemployment Insurance
You can usually deduct the amount you contribute to a state disability benefit fund or to a state unemployment compensation fund.
security Credit Insurance
Credit insurance is an important tool for some businesses that helps to protect accounts receivable from the devastating balance sheet effects of loss caused by bad debts.
gavel Surety Bonds
Often used to guarantee the completion of publicly funded construction projects, the premiums paid for these bonds are deductible as a business expense.
local_hospital Health Insurance
If the business you own has employees and you pay some portion of their health insurance premiums; these amounts can then be deducted as employee benefit program expenses. As an example, if you have a sole proprietorship, you can deduct insurance premiums paid to provide employee health coverage on Schedule C, line 14.
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What You Likely Can’t Deduct
security Certain Disability Insurance
Insurance premiums for a disability policy that covers lost earnings due to sickness or disability cannot be deducted.
security Loan Protection Insurance
Also, insurance premiums for loan protection-related policies cannot be deducted. As a business owner, if you purchase an insurance policy on your own life, or on the life of someone else, to guarantee a business loan, the premiums can’t be deducted. Likewise, a business owner cannot deduct insurance premiums designed to guarantee interest or financing expenses on loans.
account_balance Self-Insured Reserves
Self-insured reserve amounts generally cannot be deducted. Usually the purview of large businesses, self-insured reserves are amounts set aside by a business to pay claims in lieu of, or in combination with, an actual insurance policy. These reserve amounts cannot be deducted. This rule applies even if insurance for a specific risk cannot be obtained elsewhere. Actual losses paid by the self-insured reserve, however, may be tax deductible. Also, the cost of a surety bond required to guarantee the availability of self-insured reserves is likely also deductible as a business expense.
Find a Qualified Accountant or Tax Professional
While the above can be used as a general guide for tax preparation purposes, it should not be considered formal tax advice. Even though there are a variety of insurance policies that can be deducted as legitimate business expenses, you should always seek the help of a qualified tax professional at tax time. Working with an experienced professional can remove much of the guesswork (and some of the liability, frankly) when it comes to determining exactly which types of insurances can be deducted for business purposes. A good tax professional can help you navigate through that process. When it’s time to evaluate your financial situation each year, an experienced tax professional can be a genuine difference-maker for adequately itemizing deductions—including insurance premiums.
For additional information on business-related deductions, consult IRS Publication 334 for small businesses or IRS Pubication 335 for general business expenses, including those related to insurance premiums.