Small business owners can typically deduct the cost of business insurance from their taxable income.
How to write off your business insurance premiums
Since the IRS considers business insurance a cost of doing business, your policy premiums can be deducted from your taxable income. You'll have to fill out some forms to take advantage of the deduction. A tax professional can ensure you fill out the proper paperwork so that you don't pay too much in taxes or end up with fines for not paying enough.
You can deduct insurance premiums that benefit your business
Generally speaking, you can deduct your insurance premiums if those policies benefit the business and serve a business purpose. However, you may run into a gray area if you are a sole proprietor who wants to deduct health insurance premiums. In some situations, you may not be able to.
That's why we recommend that you work with a tax professional. They know all the conditions that must be met when you file your taxes. Miscalculated deductions are usually a red flag for audits, which is why it's important to get it right the first time.
For worksheets that help you calculate deductions, you can turn to:
Which premiums can be deducted?
According to the IRS Business Expenses guide, you can deduct the ordinary and necessary cost of insurance as a business expense. That could include:
General liability insurance. This policy covers legal expenses when your business is sued over third-party bodily injuries on your property, property damage your business causes, and advertising injuries.
Commercial property insurance. This compensates you for the cost of repairing or replacing your damaged or lost business property (e.g., real estate, equipment, inventory, etc.).
Business interruption insurance. Usually part of your property insurance policy, this covers your lost profits when your business is shut down because of fire, windstorms, or another covered event.
Cyber liability insurance. Third-party cyber liability policies cover lawsuit expenses when you're responsible for someone else's data breach. First-party cyber liability can cover response costs when your business suffers a breach.
Workers' compensation insurance. Employers are required to carry a certain amount of workers' comp coverage in most states. It pays your employees' medical expenses and lost wages after a workplace injury or illness.
Commercial auto insurance. This policy covers liability and property damages associated with accidents in business-owned vehicles. Note: You have to choose between this deduction and the mileage deduction. You can't have both.
Unemployment insurance. You can usually deduct the amount you contribute to a state fund.
Health insurance and life insurance. These policy premiums can be deducted if they are for employees.
Certain premiums cannot be deducted
There are some types of insurance premiums that you usually can't deduct:
- What you pay into a self-insured reserve (some big businesses use these reserves instead of carrying workers’ comp coverage)
- Premiums on a disability policy that covers your lost income
- Premiums for loan protection insurance
Of course, when it comes to taxes, nothing is written in stone. Be sure to talk over these items with your tax advisor if you have any questions.
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