Business Insurance is Tax Deductible
If you’re operating a for-profit business, business expenses, including insurance, can be deducted from your taxes if it is both ordinary and necessary.
An ordinary business expense is common and accepted in your business or industry. A necessary business expense is helpful and appropriate for your business or industry. The expense does not have to be considered necessary.
As a business owner, you can deduct the ordinary and necessary cost of an insurance policy as a business expense if the insurance policy is for your business, according to the IRS.*
Most businesses are required to carry some type of business insurance because of state laws, industry regulations, or contracts. For example, small businesses with employees in New York have to provide disability benefits and carry workers’ compensation insurance. Because of this, the required insurance policies fall under the ordinary and necessary rule by the IRS and a business owner can write it off.
Writing Off Your Business Insurance Premiums
Several types of business insurance are tax deductible, including:
- Data Breach Insurance
- Commercial Property Insurance
- Professional Liability Insurance
- General Liability Insurance
- Workers’ Compensation Insurance
If you have any of these insurance policies to help protect your business, you may be able to write the premiums off. If the insurance policies are common and necessary for your business, you can write off the full amount.
Tax Write-Offs: Personal vs. Business Expenses
When it comes to tax write offs, there’s a difference between personal and business expenses.
The IRS’ rules state you can’t deduct personal, living, or family expenses. The full cost of businesses expenses can be deducted.
However, if you purchase something that’s used for both personal and business reasons, you can divide the cost appropriately and write off the business portion. For example, if you purchase a new computer system that you plan to use for the business 60% of the time and personal use the other 40%, you can generally deduct the 60%.
Here are some common scenarios where you may use something for both personal and business reasons:
- If your business is in your home, you may be able to write off certain expenses for the business, such as mortgage interest, insurance, utilities, repairs, and depreciation.
- If you use your car for business and personal use, you can write off the part that is used for business purposes. You can do this by dividing the expenses based on actual mileage.
More Types of Business Expenses You Can Write Off
Aside from business insurance, there are other items that are necessary and common with your business and industry that could be written off as a business expense.
The IRS allows business owners to deduct the pay given to employees for the services they perform. You can also deduct retirement plans that are offered to you and your employees.
Here are some other business expenses you can write off:
- Rent Expenses: You can deduct rent payments if the rent is for the property you’re using for your business. If you’re making a payment each month and you receive equity in the property, the rent is not deductible.
- Interest: The interest you’re paying on loans used for your business can be deducted as a business expense.
- Taxes: The federal, state, local, and foreign taxes you pay for your business can be written off as a business expense.
What Kind of Business Insurance Cannot Be Deducted?
Not every business insurance premium can be written off as a business expense. If the insurance policy you want to write off isn’t ordinary and necessary, then the IRS won’t consider it a business expense.
Premiums paid for an insurance policy that helps cover the earnings lost due to a sickness or disability or life insurance policies can’t typically be written off as a deduction. The amount you pay to set up a self-insured reserve also won’t be considered a business expense. Policies that you pay for to help secure a loan also cannot be deducted.
For a list of insurances that can and can’t be written off as a business expense, take a look at the IRS guidelines.*
Business Insurance Deductions: Seek a Tax Professional
Although there are a number of business insurances that can be written off as a business expense, consider speaking to a tax professional about your business’ financial situation.
Working with a tax professional can take out the guess work when it comes to which types of insurances are considered a business expense and can be written off as a deduction. And if you have any financial questions, the tax professional can likely answer them.
When it comes time to review your finances, a tax professional can take a look at how much revenue your business brought in and how much you owe in taxes. If you think you want to write off the premiums you were paying for your data breach insurance as a business expense, a tax professional can tell you whether it’s possible and how much you can write off.
This article provides general information, and should not be construed as specific legal, financial, insurance, tax or accounting advice. As with all matters of a legal nature, you should consult with your own legal counsel and tax professionals. The Hartford shall not be liable for any direct, indirect, special, consequential, incidental, punitive or exemplary damages in connection with the use by you or anyone of the information provided herein.