Guide to Deductible Business Expenses | Part 4: Insurance Premiums
To read the first three posts in our ongoing blog series on tax-deductible business expenses, check out the links below:
What types of insurance can I deduct on my tax return?
If you are self-employed, you may be eligible to deduct certain insurance premiums on your tax return. Business owners can generally deduct premiums paid for the following types of insurance:
Fire, Theft, and Flood
Premiums for business property insurance covering fire, theft, flood, or similar coverage are generally considered tax-deductible as a business expense.
Credit insurance covers losses from bad business debts, which are also tax-deductible.
Group Hospitalization and Medical Insurance
Most businesses may deduct the cost of insurance premiums for hospitalization and medical insurance for employees. This includes long-term care insurance.
If you own an S-corp, however, your business must abide by some specific rules. Health insurance premiums paid for non-owner employees may be deducted as a business expense, but shareholders owning more than two percent of stock must report the cost of premiums paid by the business as taxable income. This means that the S-corp cannot deduct the cost of those premiums as a business expense. Instead, the premium cost is added to the greater-than-2% shareholders' box 1 wages and is deducted on their personal tax returns.
Liability insurance protects your business against claims resulting from injuries or damage to individuals or property, covering legal costs and any payouts required if your business is found legally liable for the damage.
Malpractice insurance protects you from personal liability for professional negligence resulting in injury or damage to patients or clients.
Workers’ Compensation Insurance
Requirements for workers’ compensation insurance is determined by state law and covers claims for bodily injuries suffered by employees on the job.
Contributions to State Unemployment Insurance (UI)
Typically, employers contribute toward unemployment insurance through state taxes, which are tax deductible.
Disability Overhead Insurance
Should you become disabled and unable to work, disability overhead insurance can keep your business running. It covers business overhead expenses incurred during long periods of disability caused by your injury or sickness.
Insurance for a car or other vehicle used in the course of your business is generally tax-deductible, but only if you claim the actual expenses associated with using the vehicle. If you deduct your car expenses using the standard mileage rate, you may not deduct any car insurance premiums.
Premiums for life insurance covering your employees is generally tax-deductible unless you are directly or indirectly the beneficiary under the contract.
However, for policies over $50,000, the premiums paid for the amount exceeding $50,000 are considered taxable income for the employee and therefore cannot be deducted as a business expense.
Business Interruption Insurance
Business interruption insurance replaces the income lost in the event that your business is temporarily shut down due to a fire, natural disaster, or other eligible cause.
What types of insurance premiums are non-deductible?
Although many insurance premiums may be deducted as business expenses, some insurance premiums are not eligible for deduction. Premiums for the following types of insurance are nondeductible:
Self-Insurance Reserve Funds
If your business opts to set aside a pool of funds in case of certain losses rather than buying a third-party insurance policy, those funds are not considered tax-deductible. However, actual losses may be deductible as casualties, disasters, or thefts.
Loss of Earnings
Premiums for a policy that pays for lost earnings due to sickness or disability cannot be deducted.
Certain Life Insurance Policies and Annuities
If you are directly or indirectly a beneficiary of a life insurance policy or annuity contract, you may not deduct any of the associated premiums or contributions.
Insurance to Secure or Protect a Loan
You may not deduct the cost of loan protection insurance or any insurance policy used to secure a loan.
Can I deduct my health insurance premiums?
As a self-employed taxpayer, you may be eligible to deduct medical and dental insurance premiums for yourself and your family, including qualified long-term care insurance.
Because this deduction is considered an above-the-line deduction, eligible taxpayers may claim it regardless of whether they itemize or take the standard deduction. However, eligibility for this deduction is subject to certain restrictions.
You may only deduct health insurance premiums for months in which neither you nor your spouse were eligible to participate in an employer-subsidized health plan. If you are self-employed but your spouse is eligible for health insurance through their workplace, you may not deduct the cost of your own health insurance premiums even if your spouse chooses not to enroll in the employer-provided plan.
In addition, the amount of health insurance premiums you deduct cannot exceed the income you collect from your business. Accordingly, business owners who operated at a loss for the tax year may not deduct the cost of their health insurance premiums.
Deductions for long-term care insurance premiums are subject to limitations based on your age.
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