While business insurance is commonly associated with protection and risk management, its value doesn’t end there. Savvy business owners recognize that certain types of business insurance can also yield financial benefits in the form of tax deductions.
Small business tax deductions
A small business tax deduction is a qualifying expense that you can subtract from your taxable income. These tax deductions can help lower your tax burden on income subject to federal and state taxation.
According to the Internal Revenue Service (IRS), for a business expense to be deductible, it must be both ordinary and necessary. “An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”1
Can you write off business insurance?
Generally, you can write off business insurance as long as it complies with IRS requirements that it be “both ordinary and necessary.” So, how does that apply to business insurance?
For business insurance to be considered “ordinary,” it should be common for other businesses in your industry to have it. And for business insurance to be considered “necessary,” it could mean that you are legally required to have it OR it could mean that it is helpful and reasonable for a business like yours to have it.
Disability Income Insurance
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For example, professional liability insurance, otherwise known as errors and omissions insurance, is considered an “ordinary” and “necessary” business insurance for healthcare professionals, like nurses, physical therapists, and occupational therapists. Not only is it “ordinary” for individuals in these fields to have professional liability insurance, but it is also “necessary” to protect them from claims of medical malpractice.
Business insurance that is tax deductible
According to the IRS, you can generally deduct the premiums you pay for these types of business insurance:2
- Insurance that covers fire, storm, theft, accident, or similar losses.
- Credit insurance that covers losses from business bad debts.
- Group hospitalization and medical insurance for employees, including long-term care insurance.
- Liability insurance.
- Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients.
- Workers’ compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault.
- Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law.
- Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.
- Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. If you operate a vehicle partly for personal use and partly for business use, deduct only the part of the insurance premium that applies to the business use of the vehicle. If you use the standard mileage rate to figure your car expenses, you can’t deduct any car insurance premiums.
- Life insurance covering your officers and employees if you aren’t directly or indirectly a beneficiary under the contract.
- Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.
Is workers comp tax deductible?
Premiums for workers comp insurance are typically tax deductible for business owners. However, any workers comp benefits an employee receives would be taxed.
Is professional liability insurance tax deductible?
Professional liability insurance aka errors and omissions insurance is another type of business insurance that is generally tax deductible. Mistakes happen, and those mistakes by you or your employees can lead to an angry customer who files a lawsuit for a negligent act, error, or omission.
Even if you aren’t at fault, an upset customer could still file a claim against you and your business. It’s an inherent risk of owning a business, particularly if your profession can have a large impact on your customer’s bottom line.
Tax deduction for health insurance premiums
Health insurance premiums that you pay for your employees are tax deductible as employee benefit program expenses. However, if you are self-employed and are not eligible for employer-based health insurance then you can deduct the amount you spend on health insurance premiums from your taxes.
What kind of business insurance cannot be deducted?
While many kinds of business insurance are tax deductible, the IRS prohibits businesses from writing off premiums for insurance covering the loss of life, limbs, vision, or hearing, disability insurance, certain life insurance or annuity premiums, and premiums paid on insurance for the purpose of securing a loan.
How much business insurance can I deduct?
Typically, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense.3
How much business insurance do I need?
The amount of business insurance you need will depend on various factors, including the size and nature of your business, the number of employees you have, the specific risks associated with your work, and any legal requirements in your jurisdiction. It’s important to carefully assess your individual needs to determine the appropriate coverage limits.
An insurance agent who specializes in business insurance for small businesses can make sure you get the right coverage. At Woligo, our insurance pros can help assess your specific needs, consider the risks you face, and recommend appropriate coverage limits based on their expertise and knowledge of the industry.
Consult a tax professional
A tax professional is a person with the knowledge, credentials, and hands-on experience to assist you with your tax preparation. There are three main types of Federally Authorized Tax Practitioners (FATPs) recognized by the IRS related to tax return preparation:
- Certified Public Accountants (CPAs)
- Enrolled Agents (EAs)
- Tax attorneys
Every business is unique, which is why it is always advised that you consult a tax professional.
Small business insurance
By understanding the intricacies of business insurance tax deductions, small business owners and independent contractors can safeguard their hard work and reduce their tax burden.