Is Business Insurance Tax Deductible? Explained

Running a business often leads to rapid accumulation of expenses.

However, utilizing tax deductions can be a lifesaver for business owners.

Numerous business-related expenses are eligible for legal deduction.

If you’re pondering whether business insurance falls into this category, the answer is yes, but with some conditions.

Tax Deductible
Is business insurance tax deductible: Photo source (Insureon)

Keep reading to understand which types of insurance can be deducted on your taxes and the steps required to claim these deductions when filing your tax returns.

How do I know if my business insurance is deductible?

The IRS allows businesses to deduct insurance premiums that are considered “ordinary and necessary.”

“Ordinary” means coverage common in your industry, and “necessary” refers to insurance helpful and reasonable for your business, even if not legally required.

For instance, if you’re an Amazon seller with commercial property insurance or a fitness professional with professional liability insurance, these premiums meet IRS criteria for deduction.

What types of business insurance are deductible?

Many small business insurance premiums may be tax-deductible, including:

General Liability insurance

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.

Sole proprietor

If you’re a sole proprietor, you need to file Form 1040 and use Schedule C to list deductions, including your insurance premiums.

LLC

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.

Leave a Comment