Businesses are allowed to deduct the costs of doing business from their income for the determination of federal taxes. Premiums paid for most business insurance are deductible. Both IRS Form 1040 and IRS Publication 535 include worksheets designed by the IRS to guide the business owner in calculating the deduction. Both IRS Publication 535 - Business Expenses and IRS Publication 334 - Small Business Tax Guide, are online and an excellent resource for business owners. Specifically, Chapter 6 of Pub. 535, provides some solid starting information on the deductibility of business insurance premiums.
Certain types of business entities should be wary and make sure to get qualified tax assistance in preparing their returns and listing premium deductions. This is because over the years the IRS has caught on to different types of tax avoidance schemes for insurance premium deductions. And, those bad apples have made it difficult for the rest of us.
- If you are a single person limited liability company or S corporation shareholder, then you will want to consult a tax professional who is up-to-date on all IRS rulings and circulars.
- For the self-employed sole proprietorship, the deduction for health insurance premiums can be a critical deduction and can be disallowed under certain circumstances that you will want to review with a tax professional knowledgeable about your situation and,if married and filing jointly, your spouse's information.
- If your business sets up separate entities to reduce liability risk (e.g., leased vehicles, property management companies, etc.) you will need to consult a tax professional to discuss premium deductibility.
There are two general rules that apply to the deductibility of premiums.
- The insurance premium must be to the benefit of the business for a business purpose.
- Broadly speaking, "group" insurance benefitting employees, managers and owners alike and identifying the business, are "good." Those premiums paid for the benefit of one - typically the owner, are "bad."
The IRS lists (in Pub. 535) the following as generally accepted premium deductions:
- Credit insurance that covers losses from business bad debts.
- Group hospitalization and medical insurance for employees, including long-term care insurance.
- Liability insurance.
- Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients.
- Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault.
- Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law.
- Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.
- Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. NOTE: Only if you use the actual cost method of figuring automobile expense - if you take the mileage deduction this is not applicable.
- Life insurance covering your officers and employees if you are not directly or indirectly a beneficiary under the contract.
- Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.
You cannot deduct:
- Amounts paid to set up a self-insured reserve.
- Premiums paid on a sickness or disability policy that pays lost income in case of sickness.
- Certain life insurance and annuity premiums.
- Premiums paid on insurance to secure a loan.
These premium deductions and exclusions can be subject to any number of exceptions and this is a general list put out by the IRS. But, just because the IRS says it is so, even in a publication, does not make it so - just more likely that your deduction will not be challenged at audit. The IRS will also issue advisory opinions and "circulars" that define specific deductions and, in recent years, premiums benefiting owners or shareholders individually have been the target of such clarifications. If you are considering deducting premiums for a long-term care policy, health insurance, life insurance policy that benefits you as a business owner, be careful and get the guidance of a tax professional.
But, in most cases, these premiums will be considered a cost of business and can lead to significant tax savings.