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 to learn exactly what you can write off and how to do it properly.
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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 (IRS).
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.
Insurance coverage is “ordinary” if other businesses in your industry typically have it.
Let’s say you’re a third-party 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 have this type of coverage to protect their investment, so it meets the IRS’s “ordinary” requirement, resulting in tax breaks for you as a taxpayer.
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 just 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 sick or injured while working with you, they could sue you for providing bad advice. If that happens, it would be helpful for you to have professional liability insurance to cover the cost to defend yourself in the lawsuit.
State law may not mandate you to have professional liability insurance to run your business, but it still meets the IRS’s definition of “necessary” for a federal tax deduction in any given tax year.
An insurance company can offer various types of coverage to protect your business, and many of these small business insurance premiums may be tax-deductible. Common qualifying itemized deductions that can result in tax savings include:
General liability helps protect your business if you or an employee are responsible for bodily injuries to a third party or property damage.
Workers’ comp covers employee medical expenses, including necessary medical care and lost wages, if they get sick or injured on the job. It also helps cover medical costs associated with the injury or illness. Most states require this type of coverage for businesses with one or more employees.
Sometimes called errors & omissions, professional liability coverage helps protect you against accusations of negligence, missed deadlines, and business errors. It can help pay for the cost of defending you in a lawsuit and damages that a court may order if you’re found liable.
Malpractice insurance, a form of professional liability coverage, is also usually tax deductible.
Commercial property insurance helps protect your storefront or office space from damage due to theft, vandalism, fire, and other covered perils. It also covers other business property, including inventory, supplies and equipment you need to run your business.
Business income insurance (aka business interruption insurance) also falls under property coverage. This insurance protects you from the loss of income your business may experience during a disaster. If the damage is so severe that you can’t operate your business temporarily, it can help replace your income until you get your company up and running again.
Personal car insurance doesn’t typically cover business use of vehicles. If you use your car for business purposes, commercial auto can help. However, if you deduct your commercial auto insurance premium, you can’t deduct the standard mileage rate while driving for business purposes. So, you’ll have to choose which car expense deduction you want to take.
If you pay for health care, 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.
While you can legally deduct business insurance premiums for many types of insurance, some premiums aren’t tax-deductible, including:
When you file your taxes each year, you’ll report your earnings and expenses to the IRS. How you report your business expenses, including insurance premiums, varies depending on your business structure.
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:
You can 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.
If you set up your company as a limited liability company (LLC), the 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.
The IRS maintains the latest guidelines for what is and isn’t tax-deductible for tax preparation. However, tax laws change frequently, and whether you can or can’t write off a particular expense may depend on the unique circumstances of your business.
Since improper deductions can trigger an audit, you may want to consult a tax professional before filing your taxes. For instance, you don’t want to confuse a tax credit with a tax deduction. What’s the difference? A tax credit directly reduces the amount of tax you owe, while a tax deduction lowers the amount of income that is taxed.
NEXT creates customized business insurance packages, which may be tax-deductible, for more than 1,300 types of small businesses.
With our online application, you can apply, review policy options, purchase coverage and get your certificate of insurance — all in less than 10 minutes.
If you need help throughout the process, our licensed, U.S.-based insurance professionals are available to help.
Get an instant quote online today.
NEXT does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.
Kim Mercado is a content editor at NEXT. She writes and edits content for small business owners, and enjoys helping entrepreneurs solve their business challenges and learn about insurance. Kim has contributed to Salesforce, Samsara and Google.
You can find Kim trying new recipes and cheering the 49ers.
