Today’s business owners, start-up gurus and budding entrepreneurs love learning the ins and outs of business insurance. Between policy shopping tips, finding package policies and working on loss prevention, it seems there are a ton of money-saving approaches to policy planning.
So, what about taxes? If you’re running a for-profit business, you have a lot of expenses to write off. Can you deduct your business insurance costs?
Qualified Expenses: Ordinary and Necessary
Firstly, let’s dive into the qualities which determine whether your business insurance expenses fall into the deductible category. Usually, to deduct a business expense, it must be ordinary or necessary.
According to The Harford, business expenses which are ordinary—or common and accepted in your industry—are valid deductions. Necessary expenses are expenses which are helpful, and appropriate, for your business’s operation. These expenses are deductible as well.
This means, as a business owner, that your business insurance policy is tax-deductible. Because most businesses require a business insurance policy due to industry regulations, state laws and contracts—adequate insurance is both ordinary and necessary.
Writing Off Your Business Insurance Premiums
You can deduct your policy’s premiums. This said, you may not be able to deduct an insurance package’s health insurance premiums if you’re a sole proprietor. It’s a good idea to work alongside a tax professional, as they understand the conditions required for deduction.
So, which premiums can you deduct? According to the IRS Business Expenses Guide, you can deduct premium expenses for the following types of business insurance:
- General and Professional Liability Insurance
- Commercial Property Insurance
- Cyber Liability Insurance
- Business Interruption Insurance
- Workers’ Compensation Insurance
- Commercial Auto Insurance
Non-deductible Expenses
There are a lot of business insurance expenses you can deduct. There are, however, several things you can’t deduct. For instance: You can’t deduct any payments into a self-insured reserve. Some big businesses utilize these reserves as a workers’ compensation alternative—which reduces their credibility as overall expense drivers.
You also can’t deduct disability policy premiums which cover any lost income. You also can’t deduct premiums made for a loan protection policy. This said, tax rules aren’t always absolute. Sometimes, it’s possible to find deductible items which may not seem deductible at first.
Double-check your business insurance policy’s boundaries with your tax adviser. In doing so, you’ll discover any expenses which might be deductible. Deducting your business insurance premiums is a great way to save money on annual taxes—and it’s something every business owner should do.