Can You Write Off Business Insurance?

Business insurance premiums are tax-deductible, provided they meet the Internal Revenue Service (IRS) standard of being both “ordinary and necessary.” An ordinary expense is one that is common and accepted within your specific trade or industry. A necessary expense is one that is helpful and appropriate for your business operations. It does not mean the insurance is indispensable, but rather that it is a reasonable expense to incur in the course of your business activities.

Qualifying Business Insurance Premiums

A variety of insurance policies are considered deductible because they serve a direct business purpose. Deductible policies include:

• General liability insurance, which covers your business against claims of bodily injury or property damage.
• Professional liability insurance, often called errors and omissions (E&O) coverage, protects service-based businesses from claims of negligence or inadequate work.
• Property insurance for buildings, equipment, and inventory is also a standard deductible premium, protecting your physical assets from events like fire or theft.
• Commercial auto insurance premiums are deductible for vehicles used for business, covering liability and damage.
• Workers’ compensation is another deductible insurance, often required by state law, that covers medical costs and lost wages for employees injured on the job.
• Business interruption insurance, which is frequently included as part of a property insurance policy, is also deductible and replaces lost income during a temporary shutdown.
• Cyber liability insurance has become a common deductible expense that helps cover costs associated with data breaches.
• Premiums for employee-related insurance plans, such as group health, dental, and life insurance, are also deductible, provided the business is not the beneficiary.

Non-Deductible Premiums and Key Limitations

Premiums for life insurance policies where the business is the direct or indirect beneficiary are not deductible. This rule prevents a business from getting a tax deduction on a policy that will ultimately provide it with a tax-free payout. Similarly, premiums paid for disability insurance that covers a business owner’s own lost earnings are considered personal expenses and cannot be written off as a business expense.

Another limitation involves funds set aside for self-insurance. Allocating money into a reserve fund to cover potential future losses does not qualify as a deductible insurance expense. The IRS requires that deductible premiums be paid to a separate, third-party insurance company for the transfer of risk.

The timing of your deduction is also subject to specific rules. If you prepay for an insurance policy that extends substantially beyond the end of the tax year, you must capitalize the cost and deduct it over the life of the policy. However, the “12-month rule” allows for a current-year deduction for prepaid expenses. Under this rule, you can deduct a premium in the year you pay it as long as the policy’s benefit does not extend beyond the earlier of 12 months or the end of the tax year after the one in which you made the payment.

How to Report Insurance Deductions on Your Tax Return

The method for reporting deductible insurance premiums depends on your business’s legal structure. For sole proprietors and single-member LLCs who file a Schedule C (Form 1040), most insurance premiums are reported on Line 15, for “Insurance (other than health).” This is distinct from health insurance premiums for the self-employed, which is an “above-the-line” deduction taken on Schedule 1 of Form 1040 that reduces your adjusted gross income.

Partnerships and multi-member LLCs report their insurance expenses on Form 1065, the U.S. Return of Partnership Income. These deductions are taken before the net income is calculated and passed through to the individual partners. S corporations report these expenses on Form 1120-S, and the deductions are factored into the corporation’s ordinary business income, which is then distributed to shareholders.

C corporations, which are taxed as separate legal entities, report their insurance deductions on Form 1120, the U.S. Corporation Income Tax Return. The insurance costs are listed as part of the corporation’s total deductions. You must keep copies of insurance policies, statements, and proof of premium payments to substantiate your deductions in the event of an IRS inquiry.