Insurance Checklist: Deductible vs. Nondeductible

Use this list to determine which types of insurance expenses are deductible for your small business.

You can generally deduct premiums you pay for the following kinds of insurance related to your business.

1. Credit insurance on losses from unpaid debts.
2. Fire, theft, flood, or similar insurance.
3. Group hospitalization and medical insurance for employees, including long-term care insurance.
4. Liability insurance.
5. Malpractice insurance that covers your professional personal liability for negligence resulting in injury or damage to patients or clients.
6. 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.
7. Contributions to a state unemployment insurance fund. You can deduct these contributions as taxes if they are considered taxes under state law.
8. Overhead insurance. This insurance pays you for business overhead expenses you have during long periods of disability caused by your injury or sickness.
9. Car and other vehicle insurance for vehicles used in your business if you do not use the standard mileage rate to figure your car expenses.
10. Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract.
11. Use and occupancy and business interruption insurance. This insurance pays you for lost profits if your business is shut down due to a fire or other cause. Report the proceeds as ordinary income.

You cannot deduct the following kinds of insurance premiums.

1. Self-insurance reserve funds. You cannot deduct amounts credited to a reserve you set up for self-insurance. This applies even if you cannot get business insurance coverage for certain business risks. However, your actual losses may be deductible. See Publication 547, Casualties, Disasters, and Thefts (Business and Nonbusiness).
2. Loss of earnings. You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. However, see item (8) in the previous list.
3. Insurance to secure a loan. If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Nor can you deduct the premiums as interest on business loans or as an expense of financing loans.

Health Insurance Deduction for the Self-Employed

You can typically deduct up to 100% of the amount you paid for medical insurance and qualified long-term care insurance premiums for yourself and your family. The deduction is reported as an adjustment to your personal gross income on Form 1040 under the rules for the Self-Employed (SE) Health Insurance Deduction. In addition, you may be able to deduct any un-reimbursed medical and dental expenses you paid for yourself and your family as itemized medical and dental expense deductions on Schedule A of Form 1040 subject to IRS rules.

Cash or Accrual Method Prepayments

You cannot deduct the entire premium for an insurance policy that covers more than one tax year in the year you make the payment or incur a liability for the payment. For the year in which you make the payment or incur the liability, you can deduct only the part of the premium that applies to that year. For each later tax year, you can deduct the part that applies to that tax year.

More Information

For more information about deducting insurance, see Publication 535.

Source: IRS Publication No. 334