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.
Insurance coverage is “ordinary” if other businesses in your industry typically have it.
Let’s say you’re a third-party Amazon seller, and you rent space to store your inventory. You maintain commercial property insurance to protect your business from losses due to theft and damage to your inventory.
Likely, you’re not alone. Many Amazon sellers have this type of coverage to protect their investment, so it meets the IRS’s “ordinary” requirement.
But what about the “necessary” part of the definition?
When the IRS says you can deduct premiums that are “necessary,” it doesn’t mean you can only deduct insurance that’s legally required to operate your business. It just means insurance that’s helpful and reasonable for a business like yours to have.
So, let’s say you’re a fitness professional, giving clients guidance about nutrition and exercise. If one of your clients gets sick or injured while working with you, they could sue you for providing bad advice. If that happens, it would be helpful for you to have professional liability insurance to cover the cost to defend yourself in the lawsuit.
You may not be legally required to have professional liability insurance to run your business, but it still meets the IRS’s definition of “necessary.”
Many small business insurance premiums may be tax-deductible, including:
General liability helps protect your business if you or an employee are responsible for bodily injuries to a third-party or property damage.
Workers’ comp covers employee medical expenses and lost wages if they get sick or injured on the job. Most states require this type of coverage for businesses that have one or more employees.
Sometimes called errors & omissions, this type of coverage helps protect you against accusations of negligence, missed deadlines and business errors. It can help pay for the cost of defending you in a lawsuit and damages that may be awarded if you’re found liable.
Malpractice insurance, a form of professional liability coverage, is also usually tax deductible.
Commercial property insurance helps protect your storefront or office space from damage due to theft, vandalism, fire and other covered perils. It also covers other business property including inventory, supplies and equipment you need to run your business.
Business income insurance (aka business interruption insurance) also falls under property coverage. This insurance protects you from the loss of income your business may experience in the event of a disaster. If the damage is so severe that you can’t operate your business temporarily, can help replace your income until you get your company up and running again.
Personal auto insurance doesn’t typically cover vehicles used for business purposes, but commercial auto does. However, if you deduct your commercial auto insurance premium, you can’t deduct the mileage you accrue while driving for business purposes. So, you’ll have to choose which deduction you want to take.
If you pay for health, dental or long-term care insurance for yourself, your spouse or your dependents, you may be able to deduct the health insurance premiums if you meet specific requirements.
While you can legally deduct premiums for many types of coverage, some insurance premiums aren’t tax-deductible, including:
When you file your taxes each year, you need to report your earnings and expenses to the IRS. How you report your business expenses, including insurance premiums, varies depending on your business structure.
If you’re a sole proprietor, you need to file Form 1040 and use Schedule C to list deductions, including your insurance premiums.
If you set up your company as an LLC, the forms you need to file vary depending on whether the IRS treats your business as a corporation, partnership or disregarded entity. A disregarded entity just means taxes get filed as part of the LLC owner’s return.
The IRS maintains the latest guidelines for what is and isn’t tax-deductible. However, tax laws change frequently and whether you can or can’t write off a particular expense may depend on the unique circumstances of your business. Since improper deductions can trigger an audit, you may want to consult a tax professional before filing your taxes.
NEXT creates customized business insurance packages, which may be tax-deductible, for more than 1,300 types of small businesses.
With our online application, you can apply, review policy options, purchase coverage and get your certificate of insurance — all in less than 10 minutes.
If you need help throughout the process, our licensed, U.S.-based insurance professionals are available to help.
Get started with a free quote today.
Next Insurance does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.
Kim Mercado is a content editor at NEXT's blog, where she writes and edits posts for small business owners. She enjoys helping entrepreneurs solve their business challenges and learn about insurance. Kim has contributed to Salesforce, Samsara and Google.
You can find Kim trying new recipes and cheering the 49ers.
Take a look at some helpful blog posts
16 amazing 1099 tax deductions for independent contractors
How to start a real estate investment company
Tips for filing small business taxes for the first time
What we cover Business Insurance General Liability Workers’ Compensation Commercial Property Business Personal Property Commercial Auto Professional Liability Errors and Omissions Tools & Equipment Business Owner's Policy Product Liability Employment Practices Liability LLC Business Insurance Liquor Liability Certificate of Insurance Who we insure Architects & Engineers Auto Services Construction Consulting Contractors Entertainment Financial Services Food Services Real Estate Top professions Carpenter Insurance Daycare Insurance Debris Removal Insurance General Contractor Insurance Handyman Insurance HVAC Insurance Landscaping Insurance Painters Insurance Personal Trainer Insurance Roofing Insurance Auto Repair Shop Yoga Teacher Insurance Retail Store Insurance Most popular Accountant Insurance Amazon Sellers Architect Insurance Catering Insurance Ecommerce Insurance Engineer Insurance Massage Insurance Photographer Insurance Real Estate Agent Insurance Restaurant Insurance Texas General Liability Florida General Liability California General Liability Become an Agent Help Center Insurance Glossary Partner With Us Find an Agent Chat with UsMon – Fri | 8 a.m. – 5 p.m. CT
© 2024 Next Insurance, Inc. 975 California Ave, Palo Alto, CA 94304, United StatesIssuance of coverage is subject to underwriting. Not available in all states. Please see the policy for full terms, conditions and exclusions. Coverage examples are for illustrative purposes only. Your policy documents govern, terms and exclusions apply. Coverage is dependent on actual facts and circumstances giving rise to a claim. Next Insurance, Inc. and/or its affiliates is an insurance agency licensed to sell certain insurance products and may receive compensation from insurance companies for such sales. Policy obligations are the sole responsibility of the issuing insurance company. Refer to Legal Notices section for additional information.
† Any starting prices or premiums represented before an actual customer quote are not guaranteed and are representations of existing premiums of active policies as of December 6, 2023. To the extent permitted by law, applicants are individually underwritten, not all applicants may qualify. Individual rates and savings vary and are subject to change. Discounts and savings are available where state laws and regulations allow, and may vary by state. Certain discounts apply to specific coverages only.
