Are premiums for workers' comp and business insurance tax deductible?
The number of tax deductions available for small businesses is staggering. So it’s no surprise that many entrepreneurs find themselves wondering, “is business insurance tax deductible?”
The answer is generally yes. The Internal Revenue Service views some insurance premiums as a cost of doing business and may accept them as tax deductions. So before filing your tax return, read our post below to learn which insurance premiums may be considered tax deductible.
Insurance premium tax deductions for small business owners
The IRS allows for “the ordinary and necessary” costs of insurance to be written off, as long as it’s being used for trade, business or professional reasons. An “ordinary” cost is an expense common for your particular industry, while a “necessary” cost is an expense considered helpful and appropriate for your business. Given these definitions, the following premiums are generally considered tax deductible:
Worker’s compensation insurance
Worker’s compensation insurance covers claims set by state law for injury or diseases employees get on the job.
Liability insurance helps protect you against claims resulting from property damage or injury. If you ever asked yourself, “is liability insurance tax deductible?” you can have peace of mind knowing that in most cases it is.
If your business accumulates bad debts, credit insurance can cover your losses and may be tax deductible.
Group hospitalization and medical insurance for employees
This also includes the cost of long-term care insurance. In most cases it is tax deductible.
In general, malpractice insurance — which is designed to cover personal liability for professional negligence that causes damage or injury to a client— is considered tax deductible.
Commercial property insurance
In the event of a fire, storm, theft or other event, your property damage can be covered.
This can pay for business overhead expenses caused by long periods of disability resulting from your injury or sickness, and is often tax deductible.
Commercial Auto insurance
When vehicles are being used to conduct business, auto insurance covers liability in damage when being used to conduct business. Just keep in mind that you can only do this if you use the actual cost method of figuring the expense of the automobile. You cannot deduct commercial auto insurance if you use the standard mileage rate deduction.
Business interruption insurance
If your business is shut down from a fire or other covered cause, business interruption insurance pays for lost profits, and can be written off as a tax deduction in most cases.
Contributions to State Unemployment Insurance Fund
The contributions to state unemployment insurance funds are considered deductible if they are considered taxes under specific state law.
Insurance premiums that can’t be deducted
While many kinds of business insurance are tax deductible, the IRS prohibits businesses from writing off the following premiums: Certain life insurance or annuity premiums paid on insurance to secure loans. Premiums paid for a policy that covers earnings lost due to sickness or disability. Amounts paid to set up a self-insured reserve. If you’re not sure which premiums are deductible, consult your tax advisor before filing your small business tax return.
Forms you’ll need to show expenses
Depending on the business you run, use the following forms to claim deductions. Sole proprietorships and single-member LLCs: Report these expenses in the “Expenses” section of Schedule C on Line 15.Partnerships and multi-member LLCs: Claim these expenses in the “Deductions” section on Form 1065.Corporations: See the “Deductions” section of Form 1120 to report these expenses.
Keep in mind that the IRS may alter these guidelines every year and that these deductions may not always apply to you. So, check with your tax advisor before claiming any deduction. But, in general, these rules can help small business owners get a feel for the tax deductions they may be qualified for.
You might also be able to save money by bundling insurance premiums together, depending on what your provider offers. A Business Owner’s Policy offers a standard combination of property and general liability insurance, plus business interruption coverage in many cases.
This material is for informational purposes only and is not legal or business advice. GFC Insurance llc does not represent or warrant that the information contained herein is appropriate or suitable for any specific business or legal purpose. Readers seeking resolution of specific questions should consult their business and/or legal advisors. Individual coverage may vary and may not be available in all states. In the event of a conflict with the material herein, the terms and conditions of any issued policy will control.