Business Insurance Options: What You Can DeductJun 07, 2021
As a business owner you might be thinking about insurance and whether the cost could be deductible for IRS tax purposes. This guide explains which insurance types are deductible. Reducing your taxes can offset some of the cost of the insurance, making it more affordable. Deductible and non-deductible insurance is detailed in IRS publication 535: Business Expenses and summarized below.
General note: This blog post may not cover all types of insurances you can purchase. Insurance companies and brokers can provide additional information about types of insurance polices you can purchase for yourself or your business. Consult your tax professional to confirm a particular insurance premium is deductible in your situation.
Let's start with what is not deductible.
The IRS Publication 535 states that you cannot deduct premiums on the following kinds of insurance.
Self-insurance reserve funds, including money you set aside because you can't or didn't purchase insurance for an anticipated loss.
Loss of earnings, including a policy that pays for lost earnings due to sickness or disability.
Certain life insurance and annuities, including policies that provide a benefit to the owner(s) of the business.
Insurance to secure a loan, including a policy to cover the owner(s) life or the life of another person with a financial interest in the business, or to get or protect a business loan.
Fortunately, there are many types of insurance premiums you can deduct.
You can deduct premiums for the following types of insurance:
Insurance that covers fire, storm, theft, accident, or similar losses.
Credit insurance that covers losses from business bad debts.
Group hospitalization and medical insurance for employees, including long-term care insurance. Note: benefits for partnership owners are generally recorded as guaranteed payments, benefits for S-Corp owners are included in W2 wages subject to federal income tax withholding.
Malpractice insurance that covers personal liability for professional negligence resulting in injury or damage to patients or clients.
Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in the business, regardless of fault. Note: benefits for partnership owners are generally recorded as guaranteed payments, benefits for S-Corp owners are included in W2 wages subject to federal income tax withholding.
Contributions to a state unemployment insurance fund if considered a tax.
Overhead insurance that pays for business overhead expenses during long periods of disability caused by the owner(s) injury or sickness.
Car and other vehicle insurance that covers vehicles used in the business for liability, damages, and other losses, IF you use the actual expenses method and only for the portion of the car that was driven for a business purpose. See the car blog for more details.
Life insurance covering officers and employees if the owner(s) are not directly or indirectly a beneficiary under the contract.
Business interruption insurance that pays for lost profits if the business is shut down due to a fire or other cause.
Self-employed health insurance deduction
Business owners are often in a position of needing to purchase their own health insurance. This can be a significant cost but it is helped a little by being able to deduct the premiums, even if your business does not pay the premiums.
Three facts need to be true to get the self-employed health insurance premium deduction:
The business owner is not eligible to get subsidized employer insurance coverage.
Many business owners also have separate W2 jobs or have a spouse with a W2 job. If any of those employers offer subsidized health insurance coverage, even if the coverage is terrible and costly to the employee, that disqualifies the business owner from deducting their own health premiums for tax purposes.
The policy must be in the name of the business or in the business owners name.
The business owner cannot take the self-employed health insurance deduction if the policy is in someone else's name such as a former employer, spouse or relative. It must be in the business owners name or the name of the business.
The business must have profits greater than the premiums.
If the business is operating at a loss, or has profits that are less than the premium amount, the full deduction cannot be taken. For example, say a business owner pays $12,000 in health insurance premiums during the year, but the businesses profit is only $9,000. The self-employed health insurance deduction is only allowed up to the $9,000 of business profit.
The health insurance policy can cover the business owner, spouse and dependents including children who are under age 27 on the last day of the current tax year. For example, if your child turns age 27 on October 1, 2023 you can deduct a policy that covers the child for the year 2021 and 2022, but not for 2023.
Deduction for sole proprietor and single member LLC owners
Sole proprietor and single member LLC owners report their taxes on Schedule C as part of their 1040 tax return. Although the business can pay for the health insurance premiums, the deduction is not taken on the Schedule C like other business deductions. The deduction is instead taken on the individual return. For 2020 and 2021 you will see the deduction on Schedule 1 of the 1040. It does not make a difference if the owner pays for the premiums personally or the business pays the premiums.
Special considerations for partnerships and S-Corp owners
A partner or S-Corp owner can either pay for the premiums personally or have the partnership/S-Corp pay for the premiums. However, if the premiums are paid personally, the business must reimburse the owner. The premiums are then included as income for the business owner, either as guaranteed payments for a partner or in box 1 of the W2 for an S-Corp owner. The premiums are then deducted on the personal 1040 return of the owner, the same as the deduction for sole proprietors and single member LLC owners.
Health savings accounts (HSA)
HSAs have a triple tax benefit: a) the contributions are not taxed, b) any investment growth in the account is not taxed and c) the withdraws for qualified health expenses are not taxed. Unused HSA funds can be rolled over year to year, so there is no pressure to spend the funds currently. They can accumulate for future health expenditure needs.
If you have a high deductible insurance plan (HDHP) that you own or your business owns, you may qualify to open a health savings account (HSA). A health savings account is treated like health insurance premiums and can be deducted in a similar manner for taxes to the self-employed health insurance deduction.
If you have an HSA for only part of the year, you may be able to make the full HSA contribution for the year, but you will then be required to maintain your HDHP during the entire next calendar year. See the "Last-month rule" and "testing period" sections of this IRS link: Publication 969.
Business owners cannot participate in Health Reimbursement Accounts (HRA) or Flexible Spending Accounts (FSA) plans for themselves. They may only deduct HRA and FSA costs related to providing these benefits to non-owner employees. However, owners can participate in HSA benefits for themselves and their families.
Qualified long term care premiums
You can include premiums for long-term care coverage for the business owner and their family in the self-employed health insurance deduction, however, the amounts are limited based on the covered individuals age at the end of the tax year.
Choosing a health insurance broker
To find an appropriate health plan, you may want to consult an insurance broker to determine what health plans might work best for your business and your employees.
An insurance broker can help you explore options, choose and implement a health plan for your small business. Below are some factors to consider when choosing an insurance broker. It is helpful to consider several candidates and choose the one that best fits your needs as a small business.
- Is the broker part of a local, regional or national firm? This may determine the type of resources the broker has access to and in some cases the amount of personalization for the service provided.
- What is the brokers experience and background? It is okay to ask the specific skills and experience of the broker you are hiring.
- How is the broker compensated? The manner and amount of compensation can have implications for the cost to your business and what products you are offered during the process.
- Who does the broker represent? What companies do they work with and what products are they able to recommend? Is this list limited or expansive? Agents typically represent one company, brokers typically work with several but may not have access to all types of health plans.
- Is the broker licensed and do they have E&O insurance? You can inquire as to the brokers license and verify the license status online. Errors and Omissions (E&O) insurance products you and the broker if the broker makes errors while providing the service.
- What service do they provide to the employer and employees? Does the broker help you after the selection process? Do they have access to analytical tools to help you evaluate the plan options? Do they provide HR services to help employees with the administration of the health plan? Does the broker have depth of knowledge of your state and local, as well as federal laws related to health plans?
Consider also asking other business owners you know who they use. Do not go with the first name you get, without also considering other candidates and comparing the services they offer. You may be able to find a local or state-wide broker directory in addition to these national options:
Insurance is an important business consideration and most premiums, but not all, can be deducted as a business expense. There is a tax benefit to being a business owner when having to purchase your own health insurance coverage. The tax benefit has a number of limits and the deduction is generally taken on your personal return, but you qualify for a deduction the tax benefit will offset some of the cost of the premiums. Deducting insurance premiums can be complicated, so know the rules and then discuss with a tax professional.
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