 | Income Tax Tips: Business Insurance Insurance serves many purposes for a business. You'll need insurance to protect your business from property damage, personal injury suits, and other forms of financial loss. In addition, you may want to provide your employees with certain types of insurance (e.g., group health and life insurance) to attract and retain them. One of the issues you'll face as a business owner involves the tax treatment of business-related insurance. Just what can you deduct, and how do you handle insurance reimbursem*nts? Here's an overview of what you should know. Your business may be able to deduct insurance premiums paidA business can deduct certain business expenses that it has properly paid. To be deductible, business expenses must be both ordinary (i.e., common and accepted in your field of business) and necessary (i.e., appropriate and helpful for your business). Your company may be able to deduct--as a business expense--insurance premiums paid for a variety of coverages. These include:
However, if your business is the beneficiary of a life insurance policy (either directly or indirectly), it can't deduct the life insurance premiums it pays on behalf of an owner, employee, or any person who has a financial interest in the business. This also applies to split dollar life insurance coverage on key employees--the business can't deduct the premiums. What happens if your business property is damaged, destroyed, or stolen?If your business suffers a property-related loss, you should read your business insurance policy carefully to find out what is and isn't covered. Your policy should explain the types of property coverages, list the specific perils that your business is insured against (e.g., damage caused by fire, theft, and hail), describe the exclusions from coverage (e.g., damage caused by a flood or earthquake), and detail any conditions you must meet for coverage to apply. In many cases, your business insurance policy will reimburse your business for a given loss. Sometimes, though, you'll be only partially reimbursed or not compensated at all. In such cases, your business may be entitled to some tax relief. In general, a reasonable insurance reimbursem*nt is not taxable. If you receive reimbursem*nts, subtract them from your total loss. The unreimbursed portion of your loss may be deductible. But if the amount of your reimbursem*nt exceeds the loss, you may have to report taxable income (see a tax professional for exceptions to this rule). If your business property is damaged or destroyed in an accident, by an act of nature (e.g., storm), or through theft or vandalism, and your policy does not completely reimburse your business for the loss, your business may be entitled to claim a casualty loss tax deduction. (A casualty is direct damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.) Calculating the amount of your casualty or theft loss deductionIf there's a casualty loss, a company can deduct 100 percent of the loss against business income (assuming there's no insurance reimbursem*nt). To compute a business casualty loss deduction, you've got to know three things:
If your property was damaged but not destroyed, the casualty loss equals the decrease in the property's FMV as a result of the damage, minus any insurance reimbursem*nts. If your property was completely destroyed, ignore the FMV and compare the adjusted basis of the property before the incident to the insurance reimbursem*nt. You can deduct the amount by which the adjusted basis exceeds the insurance reimbursem*nt. Remember, if your property is covered by insurance, an insurance claim must be filed; otherwise, the casualty loss deduction is not allowed. Use IRS Form 4684 to calculate and report all casualty losses or gains. Handling other types of business insurance proceedsBusiness interruption insurance pays for lost profits if your business is shut down due to a fire or other covered cause. You should report any insurance proceeds as ordinary income. Any credit insurance proceeds should also be reported as ordinary income. What if you're self-employed?If you own your own business, you can also deduct most ordinary and necessary business expenses against business income. However, different rules may apply if you're self-employed and your business provides group insurance benefits to its employees. Although a business can generally deduct the cost of group insurance premiums, you may be unable to deduct those insurance premiums that benefit you personally. Alternatively, your deduction may be limited. This is true even if you provide similar benefits to your employees and are able to deduct the cost of those benefits. For example, assume you are a sole proprietor and maintain a group health employee benefit plan. Your business deducts the costs associated with the plan. However, any expenditures (e.g., premiums) made for your own benefit are generally not deductible as a business expense. You can get around this, though, if your spouse is an employee of your business, participates in the group health plan, and covers you under a family plan. If you're self-employed and can't deduct your health insurance premiums and other medical costs as a business expense, you may qualify for the self-employed health insurance deduction. This deduction enables you to deduct 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. If some of your health insurance premiums do not qualify for the self-employed health insurance deduction, you may still be able to deduct them on Schedule A of your Form 1040, assuming that you itemize and meet all other requirements. (The definition of self-employed for this purpose includes sole proprietors, partners, and owners of more than 2 percent of an S corporation.) For more information, speak with a tax professional. | |
FAQs
Can I write off business insurance on my taxes? ›
The IRS generally considers business insurance a cost of doing business, so your policy premiums may be deductible from your taxable income. A tax professional can ensure you fill out the proper paperwork to ensure you are taking advantage of all deductions available to you.
Is health insurance a tax write off for small business? ›You may qualify for the Small Business Health Care Tax Credit that could be worth up to 50% of the costs you pay for your employees' premiums (35% for non-profit employers).
Is business insurance income taxable? ›As long as the reimbursem*nt you get from filing an insurance claim does not surpass the value of the loss, insurance proceeds are not taxable to a business. Casualty loss insurance proceeds for business property damage are not taxable either.
Should my small business have business income insurance? ›Most small businesses can benefit from a business income insurance policy. This coverage helps pay for lost income if your company has to shut down due to a covered loss, like a fire.
What insurance can you deduct from taxes? ›Medical Insurance Premium Deductions: What Can Be Included
Dental insurance. Medicare A insurance (if you're enrolled voluntarily and not as a Social Security recipient or government employee) Medicare B supplemental insurance. Medicare D prescription insurance.
Business insurance is an expense in your business. You can utilize expenses for tax deductions for your small business in many instances. According to the IRS: “To be deductible, a business expense must be both ordinary and necessary.” Not all insurance is classified as ordinary and necessary by the IRS — but many are.
How to calculate business income for insurance? ›- Calculate your total revenue.
- Subtract your business's expenses and operating costs from your total revenue. This calculates your business's earnings before tax.
- Deduct taxes from this amount to find you business's net income. Your net income will be your business income.
Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them. However, any interest you receive is taxable and you should report it as interest received. See Topic 403 for more information about interest.
How is business insurance calculated? ›Insurers calculate how much your business insurance costs using several basic factors, including your profession, number of employees, and coverage needs. You can expect to pay above the average rate if you require more coverage, lease a unique property, or have a claims history.
What is 12 months business income coverage? ›In most business owners' or BOP policies, you have 12 months of business income coverage for what you actually sustain as a loss. Meaning the insurer will pay all ongoing costs and lost profits for up to 12 months while you're fully or partially out of business.
Does business insurance cover lost revenue? ›
The coverage allows businesses to pay fixed expenses, including costs incurred while operating at an offsite location, while the property is closed for repairs and restoration. Policies also reimburse owners for lost revenue that would have otherwise been earned if the business remained open.
What is the monthly limitation on business income? ›Monthly limit of indemnity—suspends the coinsurance and will pay the business income for 3, 4 or 6 months depending on the selection made. Each month 1/3, 1/4 or 1/6 of the business limit of liability may be available to pay for the business income loss of that month.
Can you write off insurance self-employed? ›Are health insurance premiums tax deductible? Yes, they are deductible if you have qualifying insurance and if you're an eligible self-employed individual. Qualifying health insurance includes medical insurance, qualifying long-term care coverage and all Medicare premiums (Parts A, B, C and D).
Is there a deductible for business income coverage? ›Under most policies, Business Income coverage is subject to either a waiting period (for example, the first 24 hours after the damage that caused the suspension) or a monetary deductible.
Can I write off business expenses on my personal taxes? ›An expense that meets the definition of ordinary and necessary for business purposes can be expensed and, therefore, is tax-deductible. Some business expenses may be fully deductible while others are only partially deductible. Below are some examples of fully deductible expenses: Advertising and marketing expenses.
Can a business owner write off car insurance? ›Car insurance is tax deductible as part of a list of expenses for certain individuals. Generally, people who are self-employed can deduct car insurance, but there are a few other specific individuals for whom car insurance is tax deductible, such as for armed forces reservists or qualified performing artists.