Insurance Deductions and Expenses for Small Businesses

Stop paying too much in taxes. Be sure to take all the deductions possible for your business insurance expenses.

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It always pays to know what tax deductions you can make as a small business owner. Most business owners know that they can generally deduct operational costs such as rent, employee benefits and salaries. But what about other types of business expenses such as business insurance?

If you are missing some deductions for the business insurance policies you carry, you may be paying too much in taxes and wasting money that you could either take home in profit or reinvest in your business. Here’s how to make sure you are taking all of the deductions you are entitled to for your business insurance expenses.

Is business insurance tax deductible?

Generally, yes, according to the IRS. If you operate a for-profit business, “you can generally deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business or profession.”

“The most common mistake I see is that small business owners forget to deduct their self-employed health insurance,” Gabriel Sandler, enrolled agent and financial advisor at Wolverine Tax and Financial, told business.com. “This can include out-of-pocket premiums covering their whole families, Medicare premiums and even long-term care insurance.”

Business owners don’t often forget to deduct general liability insurance, Sandler said, “but it is important to remember that if you maintain a home office and use the actual expense method, a portion of your homeowners insurance should be included on Form 8829. … I do [also] often see small businesses with employees forget to deduct their workers’ compensation insurance.”

Unfortunately, as Sandler noted, disability insurance for yourself or your employees is not generally deductible.

What types of insurance payments (premiums) can businesses write off?

In general, you can deduct the following common commercial insurance policies as listed in IRS Publication 535, Business Expenses:

• General liability insurance: This covers third-party liability claims for injuries to other people.
• Commercial property insurance: This covers loss and damage to your commercial business property due to fires, storms and other causes.
• Business owner’s policy (BOP): A BOP includes commercial liability, commercial property and business interruption insurance.
• Business interruption insurance: This pays for lost profits if your business shuts down because of a fire or other cause.
• Professional liability insurance: This covers professionals against loss due to negligent professional duty, wrongful acts and advice and services that lead to another person’s loss or injury. This can consist of errors and omissions coverage and/or malpractice insurance.
• Cybersecurity insurance: This provides protection for risks due to internet use and online communications.
• Workers’ compensation insurance: This is set by state law that covers any workers’ comp claims for bodily injuries or job-related diseases that employees of your business incur, regardless of fault:
  • If a partnership pays workers’ compensation premiums for its partners, it generally can deduct them as guaranteed payments to partners.
  • If an S corporation pays workers’ compensation premiums for its over 2 percent shareholder-employees, it generally can deduct them, but it also must include them in the shareholder’s wages.
  • If a partnership pays accident and health insurance premiums for its partners, it generally can deduct them as guaranteed payments to partners, according to the IRS.
  • If an S corporation pays accident and health insurance premiums for its over 2 percent shareholder-employees, it generally can deduct them, but it also must include them in the shareholder’s wages (subject to federal income tax withholding).

  These are the most common premiums that can be deducted from your taxes, but this is not an exhaustive list. You can always find the latest specifics on IRS.gov. Speak with your insurance agent and tax advisor for a complete list of premiums and insurance-related costs that your business can deduct.

  What can’t a business deduct?

  According to the IRS regulations for 2022, businesses generally can’t deduct the following costs.

  • Prepaid insurance expenses: You generally cannot deduct expenses in advance, even if you pay them in advance. This applies to prepaid insurance premiums.
  • Disability insurance: Since this insurance covers the cost of your salary if you become sick or injured and unable to work, it is not deductible.
  • Life insurance coverage: You can’t deduct the cost of life insurance coverage for you, an employee or any person with a financial interest in your business if you’re a direct or indirect beneficiary of the policy.
  • Interest on loans with respect to life insurance policies: You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity or endowment contract that covers any individual, unless that individual is a key person in your business.
  • Insurance you get to secure a loan: If a lender requires you to get a life insurance policy to be approved for a loan, the premiums for this policy are not deductible.
  • Interest allocated to unborrowed policy cash value: Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity or endowment contracts. This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee or 20 percent owner.
  • Self-insurance reserve funds: You can’t deduct amounts credited to a reserve set up for self-insurance. This applies even if you can’t get business insurance coverage for certain business risks. However, your actual losses may be deductible.
  • Dividends from business insurance: If you receive dividends from business insurance and you have deducted the premiums in prior years, at least part of the dividends generally are income.
  Did You Know? Did you know

  If your business experiences a loss that is not covered by insurance, 100 percent of the loss is likely tax deductible. If the loss is partially covered, the uncovered part of the loss is usually tax deductible.

  How can a business deduct premiums?

  This depends on your accounting method. Businesses can usually deduct insurance premiums in the tax year to which they apply. The IRS discusses both the cash method and the accrual method.

  • Cash method: According to the IRS, if you use the cash method of accounting, you generally deduct insurance premiums in the tax year you paid them, even if you incurred them in an earlier year.
  • Accrual method: If you use an accrual method of accounting, you can’t deduct insurance premiums before the tax year in which you incur a liability for them. You also can’t deduct insurance premiums before the tax year in which you pay them (unless the exception for recurring items applies).
  Tip Bottom line

  IRS laws and regulations can change from year to year and the rules relating to deductions can depend on the specifics of your business operations. To be sure you are doing your taxes correctly, engage the services of a tax professional.

  Can you deduct premiums in advance?

  No. According to the IRS, “You can’t deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Expenses such as insurance are generally allocable to a period of time. You can deduct insurance expenses for the year to which they are allocable.”

  For example, let’s say that you signed a three–year insurance contract. Even though you paid the premiums for all three years when you signed the contract, you can only deduct the premium for 2024 on your 2024 tax return. You can deduct the premium allocable to the other years on those years’ tax returns.

  How do you file and list your business insurance expenses?

  How you list your insurance expenses on your business’ tax return depends on the structure of your company.

  Type of business structure

  Where to list business insurance expenses

  Sole proprietorships and single-member limited liability companies (LLCs)

  Schedule C, line 15 under “Expenses”

  Partnerships and multimember LLCs

  Form 1065 in the “Deductions” section

  Each partner should also list his or her share of all income, credits and deductions on Schedule K-1.

  For C corporations: Form 1120 in the “Deductions” section

  For S corporations: Form 1120S in the “Deductions” section

  Follow the instructions for each form, deducting the amount of the insurance and other business expenses from income as outlined.

  As always, check with your accountant if you have specific questions. Also note that IRS regulations are subject to change every year and this is just an overview. For more details, consult a tax professional or visit IRS.gov.

  Jennifer Dublino contributed to this article. Source interviews were conducted for a previous version of this article.

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  Share Article: Written By: Nicole Urbanowicz Senior Writer & Expert on Business Operations

  Nicole Urbanowicz is a small business owner who studied management and finance at Harvard, where she received her master's degree. Before becoming an entrepreneur herself, she started her career writing about business and investing for Dow Jones and The Wall Street Journal, after which she became a research analyst for Allured Business Media, using business intelligence data to develop strategic guidance. At business.com, Urbanowicz covers a range of insurance topics, including workers' compensation, endorsements, coinsurance and more. Today, in addition to running her e-commerce business, Urbanowicz continues to provide financial analysis and advice and uses her certification from the New York State Department of Financial Services to consult on insurance matters.