Generally, you can deduct premiums you pay for the kinds of insurance used in your business:
- Fire, theft, flood or similar insurance
- Credit insurance for losses from business bad debts
- Group hospitalization and medical insurance for employees, including long-term care insurance
- Liability insurance
- Malpractice insurance covering personal liability for professional negligence resulting in injury or damage to patients or clients
- Workers’ compensation insurance set by state law 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 if they are considered to be taxes by state law.
- Overhead insurance that pays for business overhead expenses you incur during long periods of disability caused by an injury or sickness
- Insurance that covers vehicles used in your business against liability, damages and other losses. If a vehicle is operated partly for personal use, deduct only the part of the insurance premium that applies to business use of the vehicle. If the standard mileage rate is used, car insurance premiums cannot be deducted.
- Life insurance covering your employees if you are not directly or indirectly a beneficiary under the contract
- Business interruption insurance that pays for lost profits if your business is shut down due to fire or other cause
Self-Employment Health Insurance
You may also be able to deduct medical, dental and long-term care insurance for you and your family. At the bottom of Schedule C on your 1040.com return, just enter your total amount paid for self-employed health insurance for you, your spouse and dependents. Deductible amounts will first carry to line 29 of Form 1040; any amounts left over will go to the PDF form of Schedule A if you're itemizing deductions.
Premiums can only be deducted in the year they’re in effect. Even though you may, for example, prepay three years of insurance premiums, the premiums may only be deducted one year at a time.
Some insurance premiums, however, are not deductible:
- 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 for certain business risks. However, your actual losses may be deductible.
- Loss of earnings – You cannot deduct premiums for a policy that pays you for lost earnings due to sickness or disability. Note that this is not the same as the overhead insurance mentioned in the deductible list above.
- Certain life insurance and annuities – Refer to IRS Publication 334 – Tax Guide for Small Business for a detailed breakdown.
- 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. In the event of death, the proceeds of the policy are not taxed as income, even if they are used to liquidate the debt.
Remember that you can’t deduct expenses in advance, even though you’ve paid them in advance. The rule extends to any expense paid far enough in advance to, in effect, create an asset with a useful life that extends substantially beyond the end of the current tax year. For example, if you prepay for three years of insurance, you can deduct the 2014 payment on your 2014 taxes, your 2015 payment on your 2015 taxes and the 2016 payment on your 2016 taxes.