Insurance and Your Taxes — What Business Owners Need to Know
We can insure just about anything we choose: our cars, houses, businesses, ability to work – even our lives. While carrying insurance may be expensive, we’re paying for peace of mind. It seems like the only thing more expensive than insurance is not having it when something bad happens.
Fortunately, insurance premiums are often deductible business expenses.
Here are some common situations that could mean tax deductions for insurance expenses related to your business.
Insurance premiums paid in your business
You can typically deduct business-related insurance premiums along with your other business expenses. This reduces your self-employment tax as well as your taxable income.
Deduct your premiums for these types of business insurance:
- Fire, flood, storm, crop, theft, liability and other insurance on business assets.
- Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.
- State unemployment insurance on employees (deduct as taxes if your state considers the premiums to be taxes).
- Credit insurance against bad business debts.
- Health insurance premiums for employees, including long-term care insurance premiums.
- Malpractice insurance.
- Overhead insurance that pays business overhead expenses when you are disabled.
- Business vehicle insurance. You must allocate the premiums and other vehicle expenses if you use the vehicle for business and personal use. Note: If you use the standard mileage rate, do not deduct vehicle insurance separately.
Life insurance for employees, if you are not a beneficiary. Do not deduct amounts you put in a reserve set up for self-insurance, premiums for disability insurance, certain life insurance and annuities or insurance you pay to secure a loan.
If you pay insurance as part of a manufacturing process, include the cost of insurance with other expenses in Cost of Goods Sold.
If you have rental property, deduct any insurance related to the rental on Schedule E with other rental expenses.
If you prepay insurance premiums, enter them in the year to which they apply, regardless of whether you are on the cash or accrual method. For example, you pay for insurance premiums that cover this year and next year.
You can only deduct the premiums that cover this year on your current tax return. You can deduct the amount that applies to next year with next year’s return.
Health insurance premiums you pay as a self-employed person
If you are self-employed, you may be able to take an adjustment for self-employed health insurance premiums. You can take this deduction even if you do not itemize deductions.
As an “above the line” adjustment, this expense reduces your adjusted gross income and can possibly help you qualify for other tax benefits.
If you qualify, you may also be able to include medical, dental, and qualified long-term care insurance for yourself, your spouse, your dependents, and your child who was under age 27 at the end of the year, even if the child was not your dependent.
To qualify for adjustment for self-employed health insurance premiums, you must be self-employed and have a net profit for the year. This could be as a sole proprietor, as a partner with net earnings from self-employment, or as an employee who received wages from an S corporation in which you were a more-than-2 percent shareholder.
If you were an employee of an S Corporation, your related Form W-2 must show your health insurance premiums paid or reimbursed by the S corporation.
You cannot take the self-employed health insurance deduction for any month during which you were eligible to participate in a subsidized health plan maintained by your employer or that of your spouse, even if you did not participate.
Health insurance premiums as an itemized deduction
You may be able to take an itemized deduction for your health insurance premiums if you cannot take a self-employed health insurance premium deduction.
Your premiums, combined with other deductible medical expenses, must be significant before you start receiving a tax benefit from them. Your total medical expenses, including health insurance premiums, must exceed 10 percent of your adjusted gross income before you can include the amount that exceeds the floor in your itemized deductions.
(For taxpayers age 65 or older total medical expenses are deductible to the extent they exceed 7.5 percent of their adjusted gross income, through 2016. If you file jointly, only one of you must be age 65 or older to use the 7.5 percent floor.)
Long-term care insurance
The IRS limits your deduction for qualified long-term care insurance premiums based on your age. Qualified long-term care insurance is an insurance contract that provides coverage of necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services. This care can be provided in a care center or your home, depending on your contract.
TaxAct calculates your allowable deduction when you enter the amount you pay for long-term care insurance.
Types of nondeductible insurance
While you generally can deduct the ordinary and necessary cost of insurance as a business expense, there are certain types of insurance that you can’t write off.
For example, you generally can’t deduct your homeowner’s insurance for the house you live in. In addition, auto insurance for a car generally shouldn’t be deducted unless you use it in a business.