Staying financially responsible is one of the pillars of a quality growth strategy, which is why small business owners and startup founders are constantly looking for new ways to save money. Many business owners are wondering is business insurance tax deductible? One of the best cost-saving tools that small businesses have at their disposal is the ability to claim a variety of tax deductions on business-related expenses.
And while tax season can certainly be an incredibly stressful time of the year for business owners, putting in the time and effort to take advantage of every tax deduction opportunity available is well worth it.
Business insurance premiums just so happen to be an excellent tax deduction opportunity that no business should miss out on. Since the Internal Revenue Service (IRS) classifies insurance as a necessary cost of conducting a trade or business, many of the policies you have purchased are deductible expenses on your federal tax return and can provide you with significant savings.
Let’s take a closer look at what types of business insurance premiums are and aren’t deductible and talk further about what your business needs to do in order to take advantage of this excellent cost-cutting opportunity.
Business Insurance Premiums That Are Deductible
The IRS states that all “ordinary and necessary costs of insurance” can be considered business expenses. What does this exactly mean?
First, “ordinary” means that it is a type of insurance that is very common and accepted in your industry and the type of business that you run. “Necessary” would mean that the insurance might not be required to have, but that it is considered appropriate and helpful for your business to obtain this coverage.
More specifically, these are the insurance coverages that are most commonly deemed deductible:
General Liability Insurance: General liability is a basic insurance policy that just about every business needs and will cover any legal expenses and damages arising from third-party injuries or property damages directly related to your business.
Commercial Property Insurance: This coverage protects your business property and will cover the costs of repairing or replacing damaged or lost business property. Commercial property insurance, obviously, protects your main business properties and locations but can also cover contents, equipment, furniture, tools, warehouse contents, computers, servers, and more.
Business Interruption Insurance: If your property is ever damaged so severely that your business needs to shut down for a period of time to rebuild or relocate, business interruption insurance will provide you with financial aid in these efforts. Businesses will most typically buy general liability, commercial property, and business interruption insurance as a bundle by purchasing what is referred to as a Business Owners Policy (BOP).
Commercial Auto Insurance: This policy covers liability and property damages related to accidents that occurred in business-owned vehicles while an employee of your company was operating it. One of the most important things to note with commercial auto insurance is that you cannot claim both a deduction of your auto insurance premium and the mileage deduction, you’re going to have to choose between the two. So if you’re calculating car expenses using the standard mileage rate, you can’t deduct your auto insurance premium as well. Also, if you are using the vehicle for both business and private reasons, you are only going to be able to deduct the portion of your premium that specifically applies to the vehicle’s business uses.
Professional Liability Insurance: This coverage is commonly referred to as errors & omissions insurance or malpractice insurance. Professional liability insurance protects your business in cases of alleged professional negligence. Claims related to client losses resulting from bad advice, violations of good faith, misrepresentation, and similar professional errors and omissions will be covered by this policy.
Cyber Liability Insurance: Both first and third-party cyber liability insurance premiums are tax-deductible. Some issues that cyber liability insurance typically covers include data loss, recovery, and cyber extortion costs. In the case of a data breach, phishing attack, or hacking, a cyber liability insurance policy pays for client/user notification costs, any resulting civil damages, and even computer forensics to help you identify and rectify the issues that lead to the cyber attack.
Workers Compensation Insurance: As most business owners know, workers compensation is a coverage that is required by most states, so the fact that the premium is tax-deductible shouldn’t be surprising. This policy pays for medical expenses, rehabilitation, and lost wages related to employee injuries at the workspace.
Health insurance: If you provide health insurance and similar benefits for your employees, they are tax-deductible as well.
Surety Bonds or Fidelity Bonds: Both surety bonds, such as ones that construction companies are required to take out, and fidelity bond coverage that protects businesses from damages such as employee theft can be deducted.
Business Insurance Premiums That Aren’t Deductible
While consulting with a tax professional is obviously always recommended when filing your business tax returns in order to see which premiums can and can’t be deducted, generally speaking, the IRS prohibits businesses from deducting premiums for the following types of business-related insurance.
Business Disability Insurance: This is one that is a bit tricky if you are a business owner and you’re buying disability insurance to cover yourself. If you deduct insurance premiums for yourself, then the benefits that are paid to you if you are disabled will be considered taxable income by the IRS.
Self-Insured Reserve Funds: Some larger businesses might use these types of reserves instead of choosing to carry workers compensation insurance. However, it’s important to note that you can’t deduct payments that you’ve made to the fund. However, you should be able to deduct reserve fund losses.
Corporate-Owned Life Insurance: If you have purchased life insurance for yourself as the owner or director of your company, you will not be able to deduct this premium. Even life insurance coverage purchased to protect a vital employee, which is usually referred to as key person insurance, will not be deductible come tax time.
Loan Protection Insurance: If you have purchased a life insurance policy as one of the needed conditions for obtaining a business loan, for example, you won’t be able to deduct that premium either.
Writing Off Your Business Insurance Premiums
As with all things related to the IRS and tax filing, you are going to have to fill out a good amount of paperwork in order to take advantage of the tax deductions on premiums that you are in line to get.
If you’d like to learn more about what tax deductions you can claim for your business, reading Chapter 6 of IRS Publication 535, is a good start because that’s where you can learn about which premiums are and aren’t deductible. Additionally, IRS Publication 15B offers information on specific employee benefits or “fringe benefits.”
However, it’s important to stress that working with a tax professional when filing for business insurance tax deductions is highly recommended. The tax deductions that are permitted by the IRS change very frequently and no one knows all of the conditions that need to be met better than licensed accountants who offer these services professionally. Another reason it’s better to let a professional help you is that deductions that are miscalculated very commonly lead to audits, which is why making sure they are correct the first time is something that should be taken very seriously by your business.
If you’d like to talk to an insurance expert about specific business insurance needs, then you’re in the right place. Embroker can help your business put together an insurance program that provides you with the right coverage for the best price. Feel free to reach out to one of our brokers at any time.
*The information contained herein is subject to Embroker’s Terms, is based upon Embroker’s experience as an insurance broker, available information, current insurance information, and marketplace, or may be of a general nature. Nothing in the content provided should be construed as tax, accounting, legal or actuarial advice. While we provide comments and recommendations related to the types and terms of insurance coverage, the decision to act or not act is ultimately the insurance purchaser’s alone.
Loss run reports are, essentially, the insurance world’s equivalent to credit scores. This report will reflect on how well the business is operating and managed.