Insurance and Your Taxes — What Business Owners Need to Know

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Business Owners, Did You Know That Insurance Premiums Are Tax Deductible?

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If you didn’t know it already, let’s break the good news – insurance premiums are tax-deductible business expenses. Fortunately for the business owners, the new tax reform has come to be as somewhat advantageous as they are eligible for many deductions such as the 20% pass-through deduction, deductions related to vehicles and business meals, and also business-related travel expense deductions.

While most business owners are aware of these few beneficial deductions, not many know the fact that insurance premiums, too, are tax-deductible. So, today, we’ll be educating you about the deductible insurance premiums for your business!

 

What are the types of insurance premiums that you can deduct?

Usually, you can club your business insurance premiums along with other deductible business expenses to reduce your tax liability.

Here’s a list of business insurance premiums that you can deduct:

  • Credit insurance against business debts.
  • Insurance against any kind of malpractice.
  • Insurance for business assets from natural disasters such as storms, fire, flood, etc., as well as thefts.
  • Health insurance for employees (also includes long-term care insurance).
  • Life insurance for employees (if only you are not the beneficiary).
  • State unemployment insurance for employees (only deductible if your state regards this insurance as a tax).
  • Overhead insurance to pay off business overhead expenses.
  • Insurance for vehicles used for your business (only deductible if you aren’t taking the standard mileage rate deduction).

 

Apart from these deductions, there are some other kinds of insurance premiums that you can deduct:

  • In case you hold a rental property, you can deduct any insurance related to that property on Schedule E along with other rental expenses.
  • If you pay insurance premiums for any manufacturing process, you can club the insurance premium amounts with other expenses under Cost of Sold Goods.

Another thing to remember here is that if you prepay your insurance premiums, you should only enter them in the for which they apply, irrespective of whether you pay cash or opt for the accrual method.

 

Self-employed health insurance premiums

Every self-employed business owner can claim the self-employed health insurance premium deduction even if they do not choose to itemize the deductions. Since this is an “above the line” adjustment, claiming this deduction will not only minimize your AGI but it might also make you eligible for other tax benefits such as medical, dental, and qualified long-term care insurance that covers yourself, your spouse, your children (under 27) and your dependents, if any.

However, to be able to deduct the self-employed health insurance premiums, you must be self-employed and also make a net profit for the given year. By self-employed, it means you could either be a sole proprietor, or if you are an employee who has received wages from an S Corp in which you held more than 2% of the shares, or a partner with net earnings.

In case you were an employee of an S Corp and you received wages from the corporation, then your Form W-2 must display your health insurance premiums that have been reimbursed by the S Corp.

You should also know that you cannot avail the self-employed health insurance deduction for any month during which you were ‘eligible’ to participate in a subsidized health plan provided by your employer, irrespective of whether or not you participated in such a plan.

 

Can you itemize the health insurance premium deduction?

If you are not eligible for the self-employed health insurance deduction, you can itemize your health insurance premium deduction. However, there are certain conditions that you must fulfill to be able to itemize this deduction:

  • Your insurance premiums along with your other deductible medical expenses must be of a considerable proportion before you can start claiming tax benefits against them.
  • Your aggregate medical expenses (including the health insurance premiums) must be more than 10% of your AGI.

 

What about long-term care insurance?

When it comes to qualified long-term care insurance plans, the IRS sets the allowable deduction ceiling according to your age. Here are the five age brackets and their corresponding deductible ceiling:

  • Individuals aged 40 or less – $420
  • Individuals over 40 but not more than 50 – $780
  • Individuals over 50 but not more than 60 – $1,560
  • Individuals over 60 but not more than 70 – $4,160
  • Individuals over 70 – $5,200

That’s all you need to know about insurance premiums deductions for businesses. We hope that this informative piece will help you plan your tax returns better in the upcoming tax season.

For any other queries related to insurance premium deductions, call our tax experts at (888)-482-0279. You can also write to us at tax@mytaxfiler.com.

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