Insurance can help protect your business from property damage, personal injury suits, and other forms of monetary loss or be viewed as an employee benefit. One of the issues business owners may face is knowing the tax treatment of business-related insurance.
A business can deduct certain properly paid business expenses that are ordinary (commonly accepted) and necessary (appropriate/helpful). A company might also be able to deduct paid insurance premiums for coverages such as:
- Fire, theft, flood or other casualty
- Employee group medical
- Business liability
- Professional malpractice
- Business interruption
- Vehicle insurance used for business (unless the standard mileage rate is used to figure car expenses)
- Credit insurance (covers losses from unpaid debts)
If a business is the beneficiary of a life insurance policy, it can’t deduct the life insurance premiums paid on behalf anyone who has a financial interest in the business.
It is important to read the business insurance policy carefully to find out what is and isn’t covered. A policy should explain the types of property coverages, list what perils your business is insured against, describe the exclusions and detail conditions you must meet for coverage to apply.
Oftentimes, your policy will reimburse your business for a given loss. Sometimes, you’ll be only be partially reimbursed or not compensated at all. In such cases, your business may be entitled to some tax relief. Normally, a reasonable insurance reimbursement is not taxable. If you receive reimbursements, subtract them from your total loss. The unreimbursed portion may be deductible. If the amount of your reimbursement exceeds the loss, you may have to report taxable income.
If your business property is damaged or destroyed in an accident, an act of nature, or through a crime, and your policy does not completely reimburse the loss, your business may be entitled to claim a casualty loss deduction.
With a casualty loss, a company can deduct 100 percent of the loss against business income (if no insurance reimbursement). To compute this deduction, you must know three things:
- The decrease in the fair market value of the property as a result of the loss
- Adjusted basis in the property before the casualty or theft
- The amount of the insurance reimbursement that you receive (or the salvage value)
If your property was damaged but not destroyed, the casualty loss equals the decrease in the property’s FMV as a result of the damage, minus any insurance reimbursements. If your property was destroyed, compare the adjusted basis of the property before the incident to the insurance reimbursement. You can deduct the amount that the adjusted basis exceeds the insurance reimbursement.
An insurance claim must be filed if your property is covered by insurance or the casualty loss deduction is not allowed. Use IRS Form 4684 to calculate and report casualty losses or gains.
Business interruption insurance pays for lost profits if your business is shut down due to a covered cause. Report any insurance proceeds as ordinary income.
Business owners can also deduct most ordinary and necessary business expenses against business income. Different rules may apply if you’re self-employed and you provide group insurance benefits employees. Businesses can generally deduct the cost of group insurance premiums, but not the premiums that benefit the owner personally or the deduction may be limited. This is true even if owners provide similar benefits to employees and are able to deduct the cost of those benefits.
The self-employed can’t deduct health insurance premiums or other medical costs as business expenses. They may qualify for the self-employed health insurance deduction though, which allows a person to deduct 100 percent of the health insurance cost that you provide for those on your plan. If some of these premiums do not qualify for the deduction, they might be deductible them on Schedule A of Form 1040, assuming one itemizes and meets all other requirements. (Self-employed includes sole proprietors, partners, and owners of more than 2 percent of an S corporation.)