There are always risks in business. The big one all businesses face is whether their idea works and brings in enough income to live the life of their dreams. So you work hard to make your business a success. However, you might face other risks in your business. To mitigate these risks, you look at insurance options — and what you pay for insurance is deductible as a business expense. Let’s look at the insurances you can purchase and how to determine the amount to deduct.
Your insurance options
Casualty and business auto insurance
Casualty insurance stands out among insurance options as the one you would buy to mitigate any damages done when you or one of your employees damages your or someone else’s property. For instance, if you are installing equipment at a customer’s house and damage something, casualty insurance will cover the cost of the damages.
Likewise, business auto insurance would cover any damages you cause while driving your vehicle for business.
Worker’s compensation insurance
Do you have employees? If so, you might want to purchase worker’s compensation insurance in case an employee gets hurt while on the job.
Liability and malpractice insurance
While you might not intend for something to go wrong while you are providing your goods or services, sometimes they do — and there are insurance options for these unfortunate situations. You can purchase liability insurance to cover your business if something goes wrong with a product you produce or a service you provide.
In addition, malpractice insurance covers you if you are in a healthcare field and helps to protect you from claims you harmed patients when you provided care.
Business interruption and life insurance
There is a possibility that you could become injured yourself, and not be able to meet your overhead costs to keep the business afloat while you are disabled. There are insurance options that cover your costs, but not your lost profits.
If something causes your operation to stop running for a period — like you become disabled, or experience a large-scale equipment failure, or a natural disaster — business interruption insurance covers the loss of income because of the event.
Likewise, you might have an employee who is essential to your business, and if that person dies, the loss could be catastrophic to your company. The business can take out a life insurance policy on that person to cover the loss to the business caused by their death.
Credit and health insurance
As a business owner, you hope your customers pay on time. Nevertheless, there is a risk they might become insolvent, bankrupt, or just default on what they owe you. Credit insurance provides some protection from the risk that you can have losses due to customers who undergo such difficulties.
Many business owners also purchase health insurance for themselves or others in their employ. Premiums paid for this insurance are deductible.
How much can you deduct?
As you might expect, you can deduct the premium for your insurance options for the year they relate. If you are paying for multiple years in advance, you must allocate the amount paid to the years to which it applies.
In addition, you cannot deduct the premium before it is paid if you are a cash-basis taxpayer. Most small business owners are cash-basis taxpayers, but check with your accountant to make sure.
There are a few items you cannot deduct:
- You cannot deduct premiums paid for loss of earnings insurance, but you might be able to deduct the premium’s overhead insurance expenses.
- Amounts paid to self-insurance reserve funds are not deductible.
- You can’t deduct a life insurance policy on you, an employee, or someone with a financial interest in your business if you, as the owner, are a beneficiary.
Visit the IRS Small Business and Self-Employed Tax Center for more information about all of these potential insurance deductions.
In running a business, you face numerous risks that could derail progress. Evaluating insurance options can help mitigate the losses from these risks, and you could take a deduction for many of those expenses. Talk to your CPA and insurance agent about the insurance options available to you.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.