Tax time is always stressful for small businesses. As you gather your receipts and paid invoices, you may not have time to research the tax code to maximize your deductions and minimize your tax burden. You may know the standard deductions you usually claim, but you could be missing out on others. You don’t want to leave deductions on the table because the more deductions you can claim, the less you’ll shell out in taxes.
Insurance may be one of those expenses that you have not deducted. As a general rule, corporate expenses that are necessary to operate a trade or business are tax-deductible under guidelines published by the Internal Revenue Service.1 That rule would apply to your company’s insurance premiums because they are vital expenditures for running a trade or business.
Tax-deductible business insurance
You may be wondering which insurance expenses qualify for deductions. After all, your business may have several insurance policies and you may be wondering which premiums can be deducted. Here’s an overview of everything you can expense out.”
IRS publication 535 lists several types of insurance whose premiums you can deduct:
Commercial property insurance
Commercial property insurance protects your company from losses to your property because of fire, storm, theft, accidents or similar perils.
Trade credit insurance
Credit insurance safeguards a business that provides goods or services on credit from the risk of bad debts. Customers may be in arrears on their accounts due to bankruptcy, insolvency or lack of funds. Thus, purchasing credit insurance reduces the risk of uncollectible debts.
Group hospitalization and medical insurance
Group hospitalization and medical insurance for your employees, including long-term care insurance, is a type of insurance that will help pay the costs of care when an employee has a chronic medical condition, a disability or a disorder such as Alzheimer’s disease.
Errors and omissions insurance (also known as professional liability insurance)
Errors and Omissions insurance (E&O) guards your company against lawsuits brought by business associates, customers, clients and other third parties because your professional services have resulted in a financial loss to them. Malpractice insurance is one such type of E&O. Lawsuits like these can have disruptive consequences for a company.
Cyber liability insurance
In the new digital age, you can also deduct cyber liability policies. Third-party cyber liability policies will provide investigation defense and settlement for claims if it is alleged that your company is responsible for someone else’s data breach.
Workers compensation insurance
Established by state law, workers’ comp covers claims for physical injuries or occupational disease experienced by employees while on the clock, regardless of fault.
State unemployment fund
Contributions to a state unemployment fund are deductible if your state considers them to be taxes.
Overhead insurance, or business expense insurance
Overhead insurance pays for expenses of operating your business if you are unable to work due to injury or illness.
Auto liability insurance
Auto liability insurance for vehicles solely used to conduct business.
Life insurance
Life insurance that you set up for executives and employees. However, the business owner can not be a direct or indirect beneficiary under the contract.
Business interruption insurance
Business interruption insurance is a type of coverage that reimburses the owner for lost business income if your business is shut down or damaged due to a fire, natural disasters or other causes.
Premiums that are not tax-deductible
As discussed earlier, the IRS’s general rule of thumb is that you can deduct premiums for insurance policies that are common and necessary for your business. Nevertheless, the tax rules can be somewhat complex and there are types of insurance coverage that do not meet the IRS criteria of “common and necessary.” For example, premiums paid for an insurance policy to protect your company from lost revenues if you become ill or disabled, which is different than group hospitalization and medical insurance. Here are a few more examples:3
- A self-insured reserve fund. This is a tax-free trust fund or account designed for a self-insured company to set aside money to cover claims. You can’t deduct the money you deposited in the fund, but you can deduct your losses.
- Some annuities and life insurance policies. Some annuities and life insurance policies, such as corporate-owned life insurance or key person insurance purchased by a business on employees’ lives. These policies typically protect a company from deaths of executives who are vital for a company’s day-to-day operations and continuity.
- Premiums paid on insurance policies to obtain a loan. Premiums you paid on insurance policies to obtain a loan, such as life insurance you bought to secure a mortgage.
Forms required to show business insurance expenses
Depending on your business or enterprise, you must submit the following forms to claim deductions for your insurance premiums.
For sole proprietorships and LLCs: Schedule C
Premium expenses must be reported in the “Expenses” section of Schedule C on Line 15.4
For partnerships and multi-member LLCs: Form 1065
Sole proprietorships and single-member LLCs:Partnerships and multi-member LLCs: These expenses can be claimed in the “Deductions” section on Form 1065.5
For Corporations
Premiums can be reported in the “Deductions” section of Form 1120.6
It is important to note that you must deduct your premium expenses in the tax year that they apply. You can’t deduct all the premiums in one annual return if you paid for several years worth with one payment. For example, if you obtained a three-year property policy and paid for the entire policy in one check, you are not allowed to deduct the whole three years on April 15. Instead, you must deduct your payments in installments over the three years.
Should you hire a tax professional for your small business?
Overall, you can deduct many types of insurance premiums if the policies benefit the business and have a clear business purpose. Nevertheless, there could be some complications about determining deductibility if you are a sole proprietor and desire to deduct health insurance premiums. You may not be able to do so in all cases.
That’s when working with a tax professional can be beneficial. They’re experts in the details of the rules about deducting premiums, which the IRS can alter from year to year. It’s crucial to claim deductions properly according to IRS rules to avoid audits.
The bottom line
As a small business owner, keeping track of your expenses is key. You’ve probably heard the saying “you have to spend money to make money,” and during tax season, this old phrase seems to be true. The more you’ve spent on deductible business expenses, the less you’ll owe to the IRS. According to the IRS, many types of insurance premiums can be deducted from your taxes as long as they are ordinary and necessary payments. It is important to carefully research which premiums can be deducted and which cannot.
If you’re looking for a way to maximize your deductions while keeping your business safe, remember that general liability and professional liability insurance via Thimble are the best way to protect your business and your bottom line.
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More information
IRS Guides
For chapter and verse on information about insurance premiums that can be deducted, the best place to start is chapter six of IRS Publication 535.7 The resource lists the types of premiums that are deductible, those that are not deductible, or those that must be capitalized, i.e., a cost or expense that must be recorded on the balance sheet to delay complete recognition of the expense.2 Two other helpful guidebooks are IRS Publication 334, Tax Guide for Small Business, and IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.8,9 Publication 334’s focus is self-employed individuals or statutory employees, while publication 15-B teaches employers about the tax treatment of fringe benefits.
Health Insurance Information
For information about the tax deductibility of health insurance, an excellent resource is HealthCoverageGuide.com.10 This site provides in-depth information for employers about health insurance expenses for employees or for dependents that can be deducted and expenses that are not eligible.
Sources:
- Internal Revenue Service. Deducting Business Expenses.
- IRS Publication 535, page 20.
- IRS Publication 535, page 23
- IRS Schedule C, line 15.
- IRS Form 1065, Deductions section.
- IRS Form 1020, Deductions section.
- IRS Publication 535, Chapter six.
- IRS Publication 334, Tax Guide for Small Business.
- IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits
- Tax Implications: HealthCoverageGuide.com.
