Table of Contents
You generally can deduct the ordinary and necessary cost of insurance as a business expense if it is for your trade, business, or profession. However, you may have to capitalize certain insurance costs under the uniform capitalization rules. For more information, see Capitalized Premiums , later.
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Deductible premiums
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Nondeductible premiums
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Capitalized premiums
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When to deduct premiums
Publication
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15-B Employer's Tax Guide to Fringe Benefits
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525 Taxable and Nontaxable Income
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538 Accounting Periods and Methods
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547 Casualties, Disasters, and Thefts
Form (and Instructions)
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1040 U.S. Individual Income Tax Return
See chapter 12 for information about getting publications and forms.
You generally can deduct premiums you pay for the following kinds of insurance related to your trade or business.
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Insurance that covers fire, storm, theft, accident, or similar losses.
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Credit insurance that covers losses from business bad debts.
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Group hospitalization and medical insurance for employees, including long-term care insurance.
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If a partnership pays accident and health insurance premiums for its partners, it generally can deduct them as guaranteed payments to partners.
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If an S corporation pays accident and health insurance premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder's wages subject to federal income tax withholding. See Publication 15-B.
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Liability insurance.
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Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients.
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Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault.
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If a partnership pays workers' compensation premiums for its partners, it generally can deduct them as guaranteed payments to partners.
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If an S corporation pays workers' compensation premiums for its more-than-2% shareholder-employees, it generally can deduct them, but must also include them in the shareholder's wages.
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Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law.
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Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.
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Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums.
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Life insurance covering your officers and employees if you are not directly or indirectly a beneficiary under the contract.
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Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.
You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent. A child includes your son, daughter, stepchild, adopted child, or foster child. A foster child is any child placed with you by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.
One of the following statements must be true.
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You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Profit or Loss From Business; Schedule C-EZ (Form 1040), Net Profit From Business; or Schedule F (Form 1040), Profit or Loss From Farming.
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You were a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.
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You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.
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You received wages in 2012 from an S corporation in which you were a more-than-2% shareholder. Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2, Wage and Tax Statement.
The insurance plan must be established, or considered to be established as discussed in the following bullets, under your business.
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For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.
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For partners, a policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
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For more-than-2% shareholders, a policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
Medicare premiums you voluntarily pay to obtain insurance in your name that is similar to qualifying private health insurance can be used to figure the deduction. If you previously filed returns without using Medicare premiums to figure the deduction, you can file timely amended returns to refigure the deduction. For more information, see Form 1040X, Amended U.S. Individual Income Tax Return.
Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer cannot be used to figure the deduction.
Take the deduction on Form 1040, line 29.
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The amount paid for that person.
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The amount shown below. Use the person's age at the end of the tax year.
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Age 40 or younger–$350
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Age 41 to 50–$660
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Age 51 to 60–$1,310
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Age 61 to 70–$3,500
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Age 71 or older–$4,370
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It must be guaranteed renewable.
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It must provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract may be used only to reduce future premiums or increase future benefits.
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It must not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed.
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It generally must not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer or the contract makes per diem or other periodic payments without regard to expenses.
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Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and
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Maintenance or personal care services.
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An individual who has been unable, due to loss of functional capacity for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual. Activities of daily living are eating, toileting, transferring (general mobility), bathing, dressing, and continence.
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An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
Note. Use a separate worksheet for each trade or business under which an insurance plan is established.
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1. | Enter the total amount paid in 2012 for health insurance coverage established under your business for 2012 for you, your spouse,
and your dependents. Your insurance can also cover your child who was under age 27 at the end of 2012, even if the child was
not your dependent. But do not include the following.
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1. | |||
2. | For coverage under a qualified long-term care insurance contract, enter for each person covered the smaller of the following amounts. | ||||
a) | Total payments made for that person during the year. | ||||
b) | The amount shown below. Use the person's age at the end of the tax year. | ||||
$350— | if that person is age 40 or younger | ||||
$660— | if age 41 to 50 | ||||
$1,310— | if age 51 to 60 | ||||
$3,500— | if age 61 to 70 | ||||
$4,370— | if age 71 or older | ||||
Do not include payments for any month you were eligible to participate in a long-term care insurance plan subsidized by your or your spouse’s employer or the employer of either your dependent or your child who was under the age of 27 at the end of 2012. If more than one person is covered, figure separately the amount to enter for each person. Then enter the total of those amounts | 2. | ||||
3. | Add lines 1 and 2 | 3. | |||
4. | Enter your net profit* and any other earned income** from the trade or business under which the insurance plan is established. Do not include Conservation Reserve Program payments exempt from self-employment tax. If the business is an S corporation, skip to line 11 | 4. | |||
5. | Enter the total of all net profits* from: Schedule C (Form 1040), line 31; Schedule C-EZ (Form 1040), line 3; Schedule F (Form 1040), line 34; or Schedule K-1 (Form 1065), box 14, code A; plus any other income allocable to the profitable businesses. Do not include Conservation Reserve Program payments exempt from self-employment tax. See the Instructions for Schedule SE (Form 1040). Do not include any net losses shown on these schedules. | 5. | |||
6. | Divide line 4 by line 5 | 6. | |||
7. | Multiply Form 1040, line 27, by the percentage on line 6 | 7. | |||
8. | Subtract line 7 from line 4 | 8. | |||
9. | Enter the amount, if any, from Form 1040, line 28, attributable to the same trade or business in which the insurance plan is established | 9. | |||
10. | Subtract line 9 from line 8 | 10. | |||
11. | Enter your Medicare wages (Form W-2, box 5) from an S corporation in which you are a more-than-2% shareholder and in which the insurance plan is established | 11. | |||
12. | Enter any amount from Form 2555, line 45, attributable to the amount entered on line 4 or 11 above, or any amount from Form 2555-EZ, line 18, attributable to the amount entered on line 11 above | 12. | |||
13. | Subtract line 12 from line 10 or 11, whichever applies | 13. | |||
14. | Enter the smaller of line 3 or line 13 here and on Form 1040, line 29. Do not include this amount when figuring any medical expense deduction on Schedule A (Form 1040). | 14. | |||
* If you used either optional method to figure your net earnings from self-employment from any business, do not enter your net profit from the business. Instead, enter the amount attributable to that business from Schedule SE (Form 1040), Section B, line 4b. | |||||
* *Earned income includes net earnings and gains from the sale, transfer, or licensing of property you created. However, it does not include capital gain income. |
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You had more than one source of income subject to self-employment tax.
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You file Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.
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You are using amounts paid for qualified long-term care insurance to figure the deduction.
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Any amounts you included on Form 8885, line 4.
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Any qualified health insurance premiums you paid to “U.S. Treasury-HCTC.”
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Any health coverage tax credit advance payments shown in box 1 of Form 1099-H, Health Coverage Tax Credit (HCTC) Advance Payments.
You cannot deduct premiums on the following kinds of insurance.
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Self-insurance reserve funds. You cannot deduct amounts credited to a reserve set up for self-insurance. This applies even if you cannot get business insurance coverage for certain business risks. However, your actual losses may be deductible. See Publication 547.
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Loss of earnings. You cannot deduct premiums for a policy that pays for lost earnings due to sickness or disability. However, see the discussion on overhead insurance, item (8), under Deductible Premiums, earlier.
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Certain life insurance and annuities.
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For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business.
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For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. The disallowance applies without regard to whom the policy covers.
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Partners. If, as a partner in a partnership, you take out an insurance policy on your own life and name your partners as beneficiaries to induce them to retain their investments in the partnership, you are considered a beneficiary. You cannot deduct the insurance premiums.
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Insurance to secure a loan. If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. In the event of death, the proceeds of the policy are generally not taxed as income even if they are used to liquidate the debt.
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property.
Indirect costs include premiums for insurance on your plant or facility, machinery, equipment, materials, property produced, or property acquired for resale.
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Produce real property or tangible personal property. For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property.
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Acquire property for resale.
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Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years.
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Property you produce if you meet either of the following conditions.
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Your indirect costs of producing the property are $200,000 or less.
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You use the cash method of accounting and do not account for inventories.
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You can usually deduct insurance premiums in the tax year to which they apply.
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