Insurance is one of the more straightforward categories — most premiums that protect the business are deductible business expenses — but it contains two famous traps: health insurance and life insurance, which look like business costs and mostly aren't. Here's the map.

Clearly deductible: policies that protect the business

Premiums for coverage that is ordinary and necessary for your trade are deductible in the year they cover. That includes:

  • General liability — slip-and-fall, property damage, the baseline policy nearly every business carries
  • Professional liability / errors & omissions / malpractice — for anyone selling advice, design, code, or care
  • Commercial property insurance on business buildings, equipment, and inventory
  • Business owner's policies (BOPs) that bundle liability and property
  • Workers' compensation — required in most states once you have employees
  • Commercial auto on business vehicles (if you deduct actual vehicle costs; the standard mileage rate already includes insurance)
  • Cyber liability, employment practices liability, product liability, business interruption coverage
  • Fidelity bonds and performance bonds your clients require
  • Business renters insurance on a leased office or studio

If you pay an annual premium up front, cash-basis businesses can generally deduct it when paid under the 12-month rule; multi-year policies should be spread over the coverage period.

Health insurance: deductible, but not here

For sole proprietors, partners, and more-than-2% S corporation shareholders, health insurance premiums for you and your family are usually deductible — but as a personal adjustment to income (the self-employed health insurance deduction on your 1040), not as a business expense on Schedule C. The distinction matters: run it through the business books and you'll overstate business expenses while your tax preparer moves it anyway.

The picture changes with employees: premiums a business pays for employee group health coverage are deductible business expenses (and S corp shareholder premiums flow through wages in a specific way your payroll provider should handle). If you reimburse employees for individual coverage, formal arrangements like a QSEHRA or ICHRA are the compliant route — improvised reimbursements can trigger steep penalties.

The self-employed deduction also can't exceed the business's profit, and isn't available for months you were eligible for an employer plan (yours or a spouse's).

Life and disability: mostly personal

  • Life insurance premiums are not deductible when the business (or you) is a direct or indirect beneficiary — which covers nearly every small-business scenario, including policies backing a loan or funding a buy-sell agreement.
  • Disability insurance that replaces your own income is a personal expense. There's a real trade-off baked in: pay premiums personally with after-tax money and benefits are tax-free; deduct them (where even possible) and benefits become taxable. Most advisors prefer the tax-free benefit.
  • Business overhead expense disability policies — which pay the business's rent and payroll while you're disabled — are the exception: premiums deductible, benefits taxable.

Mixed-use policies

Where coverage spans business and personal, deduct the business share only. The classic examples: a rider on your homeowners policy covering business equipment (deductible), the base homeowners policy (personal, except a home-office percentage if you use the actual-expense method), and auto insurance on a car used 60% for business (60%, and only under the actual-cost method).

Bookkeeping notes

Keep one insurance account and use transaction notes to name the policy and coverage period ("GL policy 2026, Hartford, Jan–Dec"). Annual premiums arrive as lumpy charges, so notes prevent the June question about a $1,900 payment. Keep declarations pages with your records — auditors like to match premiums to actual policies, and so will you at renewal time when comparison shopping. Finally, when a policy refunds or audits down your premium (common with workers' comp), record the refund against the same account so the year's net cost is accurate.