Can You Write Off Business Insurance on Taxes?

Business insurance premiums are deductible from taxable income, reducing a business’s tax liability. This helps businesses manage operational costs and maintain protection against risks. Understanding these rules is important for business owners.

General Rules for Deductibility

The Internal Revenue Service (IRS) permits businesses to deduct expenses that are “ordinary and necessary” for their operations. An expense is “ordinary” if it is common and accepted within a particular industry or type of business.

An expense is “necessary” if it is helpful and appropriate for the business. This criterion ensures the expense serves a legitimate business purpose and is directly related to business activities, not personal expense. Insurance premiums qualify under this rule as they protect against financial risks.

Common Deductible Business Insurance Types

Many types of business insurance premiums are deductible under the “ordinary and necessary” rule. These include:
General Liability Insurance: Covers legal expenses from third-party bodily injuries, property damage, or advertising injuries. This coverage is a fundamental cost of doing business.
Professional Liability Insurance (Errors & Omissions or malpractice insurance): Protects businesses from claims of negligence, mistakes, or omissions in professional services. Premiums are deductible as a business expense.
Commercial Property Insurance: Compensates for the repair or replacement of damaged or lost business property like real estate, equipment, or inventory.
Business Interruption Insurance: Often part of a property insurance policy, it covers lost profits and operating expenses when a business is forced to shut down due to a covered event. Premiums for this coverage are deductible.
Workers’ Compensation Insurance: Mandated in most states for employers, it provides financial support for employees’ work-related injuries or illnesses. Its premiums are tax-deductible.
Commercial Auto Insurance: Covers liability and property damage for business-owned vehicles. If a vehicle is used for both business and personal purposes, only the business-use portion of the premium is deductible. If premiums are deducted, the standard mileage rate cannot be claimed for the same vehicle.
Cyber Liability Insurance: Protects against cyber threats like data breaches and cyberattacks. Its premiums are deductible.

Health insurance premiums for self-employed individuals, including sole proprietors, partners, and S-corporation shareholders owning more than 2% of stock, can be deducted for themselves, their spouse, and dependents. This includes medical, dental, and qualifying long-term care coverage. This is an “above-the-line” deduction, claimed as an adjustment to gross income on Schedule 1 (Form 1040). The deduction cannot exceed the net profit from the business and is not available for months when the individual or their spouse was eligible for an employer-subsidized health plan.

Non-Deductible Insurance Expenses

While many business insurance premiums are deductible, certain types are not. Premiums paid for life insurance policies where the business is the direct or indirect beneficiary are not tax-deductible. This includes “key person” insurance, where the business owns the policy and receives the death benefit. The rationale is that death benefits are usually tax-free, and the IRS prevents a double tax benefit.

Insurance that reimburses personal expenses or is not “ordinary and necessary” for the business is also non-deductible. For instance, if a policy covers earnings lost due to sickness or disability for the business owner, premiums are not deductible. Payments into a self-insured reserve fund, rather than to an external insurer, are not deductible. If a life insurance policy is purchased to secure a business loan, its premiums are also not deductible.

Claiming Your Business Insurance Deductions

The method for claiming business insurance deductions depends on the business structure. Sole proprietors and single-member LLCs, whose business income and expenses are reported on their personal tax returns, claim these deductions on Schedule C (Form 1040). Insurance premiums (other than health insurance) are listed on Line 15 of Schedule C.

Partnerships and multi-member LLCs file Form 1065, reporting insurance premiums in the “Deductions” section. S-corporations file Form 1120-S, and C-corporations file Form 1120, reporting insurance expenses in their deduction sections. Each owner in an S-corporation reports their share of corporate income, credits, and deductions on Schedule K-1.

Maintaining accurate records is crucial for substantiating all business deductions. Businesses should keep detailed records of policies, premium payments, and invoices. This documentation provides evidence of expenses in case of an IRS inquiry or audit. Organizing these records can streamline tax preparation and ensure compliance.