For many business owners, taxes are the black hole of running your own company. Understanding what business expenses can and can't be deducted from your taxes can save your business a lot of money.
Most people know there are general business-related expenses you can deduct from your taxes, but is your business insurance included in that? We know, so you don't have to. That's why an independent insurance agent can help you find the best business insurance for you but can also help you understand how your business insurance relates to your taxes.
Is Business Insurance Tax Deductible?
Yes! Fortunately, for business owners alike, your business insurance is tax deductible. This means when tax season comes around, if you are running a for-profit business, you can write off the expenses you pay for insurance as long as they're deemed ordinary and necessary and are related to your trade, business, or company.
Ordinary expenses: Any expense that is common and accepted in your trade or business
Necessary expenses: An expense that is appropriate and helpful for your trade or business
Which Premiums Can You Deduct?
Premiums associated with the following types of insurance can be written off on your taxes.
- General liability insurance: This covers third-party liability claims for injuries to other people.
- Commercial property insurance: This covers loss and damage to your commercial business property due to fires, storms and other causes.
- Professional liability insurance: This covers professionals against loss due to negligent professional duty, wrongful acts, and advice and services that lead to another person’s loss or injury.
- Cyber security Insurance: This provides protection for risks due to Internet use and online communications.
- Workers' compensation insurance: This covers your employees if they get ill or are injured while working on the job.
- Health insurance: This provides medical coverage for your employees.
These are the most common premiums that can be deducted from your taxes, but there may be additional options. You'll want to work with your independent insurance agent and tax advisor for a complete list of premiums you can deduct.
Which Premiums Can't You Deduct?
You cannot deduct any premiums that are related to personal, living, or family expenses. For example, you cannot deduct the cost of your personal family health care as a business expense on your taxes. You also cannot deduct your personal vehicles on your taxes unless you can prove they were used for business purposes. The same goes for your home. If you run your business out of your home, you can deduct some related expenses such as the space you use for your business, but you cannot deduct your homeowners insurance policy.
Other types of premiums that you cannot deduct from your taxes include any insurance that helps pay for losses due to sickness or disability or life insurance, any amount you pay towards a self-insured reserve, and insurance policies that help you secure a loan. Make sure to work with a tax professional for a full list of what can and can't be written off on your taxes.
What Expenses Can I Write Off Related to My Home?
If you run your business out of your home, there are variety of expenses that you can write off related to your home and your business. These include:
- Mortgage interest
When it comes time to write off expenses related to your home, you'll have two options: the simplified option and the regular method. In short, the simplified option simplifies the calculation and record keeping requirements of deductions. Here's a breakdown of the two methods:
|Simplified Option||Regular Method|
|Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes||Same|
|Allowable square footage of home use for business (not to exceed 300 square feet)||Percentage of home used for business|
|Standard $5 per square foot used to determine home business deduction||Actual expenses determined and records maintained|
|Home-related itemized deductions claimed in full on Schedule A||Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F)|
|No depreciation deduction||Depreciation deduction for portion of home used for business|
|No recapture of depreciation upon sale of home||Recapture of depreciation on gain upon sale of home|
|Deduction cannot exceed gross income from business use of home less business expenses||Same|
|Amount in excess of gross income limitation may not be carried over||Amount in excess of gross income limitation may be carried over|
|Loss carryover from use of regular method in prior year may not be claimed||Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year|
What Expenses Can I Write Off Related to My Car?
If you have a car that you use solely for your business, you'll want to obtain commercial auto insurance so that you can write off your premium and have proper protection.
However, if you occasionally use your personal vehicle for work-related events, you can write off some of your mileage and expenses related to your vehicle. The current standard mileage deduction, as of 2019, is $0.58 cents per mile.
How Do I Get the Tax Deduction?
When you write off a business expense on your taxes, including your business insurance, the amount you write off is deducted from your total revenue. This determines your total taxable income for your business.
The IRS also offers standard deductions for sole proprietors or small businesses. Depending on your situation, you may see a bigger benefit taking the standard deduction than itemizing your deductions. Ultimately, the more you can deduct from your taxes the better because it lowers the total amount of income you will be taxed on.
When you or your tax advisor is filing your taxes you'll be able to list out all of the deductions you have related to your business. This is why it's best to always keep track of any business-related expenses that you have.
What About LLCs and Other Small Businesses?
Being an LLC or small business does not disqualify you from being able to deduct your business insurance premiums from your taxes. In fact, a tax reform law in 2018 changed the tax laws for small businesses deeming that most small businesses could deduct up to 20% of their business expenses on their taxes. The caveat is that your business must make less than $100,000 to qualify.
The most common write-offs for LLCs and small businesses include:
- Home office
- Advertising and marketing
- Office supplies
- Legal fees
- Debt interest
Here’s How an Independent Insurance Agent Would Help
An independent insurance agent is no tax professional, but they can help you find necessary and ordinary business insurance policies that will protect your business. They search through multiple carriers to find providers who specialize in business insurance, deliver quotes from a number of different sources and help you walk through them all to find the best blend of coverage and cost.
TrustedChoice.com Article | Reviewed by Paul Martin
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