Expenses can add up quickly when you're a business owner but taking advantage of tax deductions can help you save. You can legally deduct many business-related expenses, but you may be wondering “is business insurance tax-deductible?”
Some of it is! Read on to learn what types of insurance are and aren't tax-deductible and what you need to do to write them off when it's time to file your taxes.
How do I know if my business insurance is deductible?
The Internal Revenue Service (IRS) allows businesses to deduct insurance premiums that are "ordinary and necessary."
So, what does that mean?
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.
But what about the "necessary" part of the definition?
When the IRS says you can deduct premiums that are "necessary," 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 business like yours to have it.
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.
You may not be legally required to have professional liability insurance to run your business, but it still meets the IRS's definition of "necessary."
What types of business insurance are deductible?
Many small business insurance premiums may be tax-deductible, including:
General liability helps protect your business if you or an employee are responsible for bodily injuries to a third-party or property damage.
Workers' Compensation insurance
Workers' comp covers employee medical expenses and lost wages if they get sick or injured on the job. Most states require this type of coverage for businesses that have one or more employees.
Professional Liability insurance
Sometimes called errors & omissions, this type of coverage helps protect you against accusations of negligence, missed deadlines and business errors. It pays for the cost to defend you in a lawsuit and damages that may be awarded if you're found liable.
Malpractice insurance, a form of professional liability coverage, is also usually tax deductible.
Commercial Property insurance
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 Interruption insurance
We call this coverage business income insurance at NEXT. This coverage protects you from the loss of income your business may experience in the event of a disaster.
If the damage is so severe that you can't operate your business temporarily, business interruption insurance can help replace your income until you get your company up and running again.
Commercial Auto insurance
Personal auto insurance doesn't typically cover vehicles used for business purposes, but commercial auto does. However, if you deduct your commercial auto insurance premium, you can't deduct the mileage you accrue while driving for business purposes. So, you'll have to choose which deduction you want to take.
Self-employed health insurance
If you pay for health, 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.
What types of business insurance are not deductible?
While you can legally deduct premiums for many types of coverage, some insurance premiums aren't tax-deductible, including:
- Disability. Disability insurance that helps pay your salary if you're sick or injured isn't tax-deductible.
- Insurance to secure a loan. If you purchase a life insurance policy to get a business loan, the premium isn't deductible.
- Life insurance coverage. If you're the direct or indirect beneficiary of a life insurance policy, you can't write off the premium.
How to deduct insurance premiums on your tax return
When you file your taxes each year, you need to 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 set up your company as an LLC, the forms you need to file 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.
- Corporation. If your LLC is set up as an S-Corp, you'll need to file Form 1120S. Each owner should report their share of corporate income, credits and deductions on Schedule K-1. If your business isn't set up as an S-Corp, you should file Form 1120.
- Partnership. If your LLC has at least two members, the IRS will automatically classify it as a partnership unless you choose to have it treated as a corporation. Partnerships should file Form 1065 and list their insurance premium deductions on Schedule K-1.
- Disregarded entity. If you're a single-member LLC classified as a disregarded entity, you'll file form 1040 like you would if you were a sole proprietor. You need to report your deductions on schedule C, E or F, depending on the type of business you have.
Bringing in a professional
The IRS maintains the latest guidelines for what is and isn't tax-deductible. 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.
How NEXT helps small business owners
NEXT creates customized business insurance packages, which may be tax-deductible, for more than 1,100 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 started with a free quote today.