Is Insurance Premium an Expense? A Comprehensive Guide

Insurance is an important part of operating any business. It protects against potential losses and provides financial security. But with so many different insurance policies available, business owners often wonder – is the premium paid for insurance considered a business expense?

The short answer is yes. Insurance premiums are usually considered a normal business operating cost by the IRS and can be deducted from business taxes. However, there are some caveats depending on the type of insurance and business structure.

This comprehensive guide breaks down everything small businesses need to know about deducting insurance premiums as a business expense on their taxes.

Overview of Insurance Premium Expenses

• Insurance premiums paid for policies that are ordinary and necessary for the company’s operations are generally tax deductible business expenses. This includes common policies like:

  • Property insurance
  • Liability insurance
  • Workers’ compensation
  • Business interruption
  • Commercial auto
  • Professional liability

• Premiums must be for business purposes, not personal assets/coverage.

• How the deduction is claimed depends on the business structure:

  • Sole proprietorships and single-member LLCs deduct premiums on Schedule C, Line 15.
  • Partnerships and multi-member LLCs deduct premiums on Form 1065.
  • Corporations deduct premiums on Form 1120.

• Some insurance premiums are nondeductible by the IRS:

  • Life insurance premiums
  • Premiums for policies securing loans
  • Premiums paid into a self-insured reserve
  • Disability insurance protecting the business owner’s income

Deductibility of Common Insurance Policies

The IRS considers premiums paid for many standard business insurance policies to be ordinary and necessary expenses. Here is a breakdown of the deductibility of some common small business insurance premiums:

Property Insurance

• Covers damage to business property due to fire, theft, vandalism, and natural disasters.

• Deductible: Yes, as long as the policy is for business property only.

Liability Insurance

• Protects against third-party bodily injury and property damage claims. Includes general liability, product liability, professional liability.

• Deductible: Yes, policies covering business operations are deductible.

Workers’ Compensation

• Covers medical care and lost wages for employees injured on the job. Required by law in most states.

• Deductible: Yes, premiums are deductible business expenses. Benefits paid out to injured employees are nondeductible.

Business Interruption

• Replaces lost income if the business must suspend operations due to disaster/damage.

• Deductible: Yes, premiums qualify as a business expense.

Commercial Auto

• Covers vehicles used for business purposes including delivery and transportation.

• Deductible: Yes, if using the actual expense method. Not deductible if using the standard mileage rate.

Cyber Insurance

• Protects against losses from data breaches, hacking, malware, etc.

• Deductible: Yes, premiums are fully tax deductible.

Key Person Insurance

• Covers financial losses if an important employee dies or becomes disabled.

• Deductible: Yes, as long as policy is owned by company for business purposes.

Business Owner’s Policy (BOP)

• Bundles property, liability, and business interruption into one policy.

• Deductible: Yes, component premiums are deductible.

As you can see, premiums for most common small business insurance policies are considered normal operating expenses by the IRS and can reduce your taxable income.

Nondeductible Insurance Premiums

While most standard business insurance is deductible, there are some exceptions. The IRS does not allow tax deductions for:

• Life insurance premiums – Premiums for life insurance policies (even key person life insurance) are not deductible.

• Disability insurance premiums – Policies covering lost wages due to the disability of a business owner are not deductible.

• Insurance securing loans – Premiums paid for policies required by lenders to secure financing are not deductible.

• Self-insured reserves – Contributions made to reserves set aside for self-insurance purposes.

• Personal insurance – Any premiums paid for policies covering personal assets or individuals.

Business owners should consult with a tax professional to determine if a particular insurance premium can be treated as a deductible business expense.

Claiming the Tax Deduction

How and where the insurance premium deduction is claimed depends on the structure of the business:

Sole Proprietorships & Single-Member LLCs

• Report insurance premiums as an expense on Schedule C, Line 15

• Use Form 1040 to file along with Schedule C and other schedules/forms

Partnerships & Multi-Member LLCs

• Report insurance premiums as a deduction on Form 1065

• Issue K-1s to partners/members to report their share of deductions

Corporations

• Report insurance premiums as a deduction on Form 1120

• File Form 1120 annually to report corporate income and expenses

S-Corporations

• Report insurance premiums as a deduction on Form 1120S

• Issue K-1s to shareholders

Regardless of structure, businesses need to keep detailed, accurate records showing they properly deducted insurance premiums as a business expense.

Strategies to Maximize Tax Deductions

Business owners can employ certain strategies to maximize their tax deductions for insurance premiums:

• Accelerate payments – Pay premiums for the upcoming year early to deduct the full amount this year.

• Bundle coverage – BOPs and commercial packages allow multiple premiums to be combined into one deduction.

• Use accrual accounting – Deduct the full premium when billed rather than just the amount paid.

• Watch expiration dates – Deduct policies as they expire rather than amortizing.

• Meet deductible thresholds – Group smaller deductions together to exceed local deductible minimums.

The Bottom Line

Insuring your business is necessary to mitigate risk, but can also provide tax benefits. Premiums for property, liability, auto, workers’ comp, business interruption, and many other standard policies are deductible expenses. Just be sure to exclude life, disability, and other nondeductible premiums.

Keeping detailed records and claiming the deduction properly based on your business structure is key to maximizing the tax savings from business insurance. With the right coverage and tax strategy, insurance can protect your company both from losses and high tax bills.