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6.   Insurance

What's New

Advance payments of the Health Coverage Tax Credit (HCTC). Beginning in 2016, an individual who qualifies for the HCTC can enroll in a program in which the IRS makes monthly advance payments of the HCTC directly to health plan administrators for qualified health insurance coverage. Participants not enrolled in the program claim the HCTC on their tax return after paying all their health insurance premiums for the year. For more information on the program, go to IRS.gov/HCTC.

Reminder

Premium tax credit. You may have to use the worksheets in Pub. 974 instead of the worksheet in this chapter if the insurance plan established, or considered to be established, under your business was obtained through the Health Insurance Marketplace and you are claiming the premium tax credit. See Pub. 974 for details.

Introduction

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.

Topics - This chapter discusses:

  • Deductible premiums

  • Nondeductible premiums

  • Capitalized premiums

  • When to deduct premiums

Useful Items - You may want to see:

Publication

  • 15-B Employer's Tax Guide to Fringe Benefits

  • 525 Taxable and Nontaxable Income

  • 538 Accounting Periods and Methods

  • 547 Casualties, Disasters, and Thefts

Form (and Instructions)

  • 1040 U.S. Individual Income Tax Return

  • 1040-NR U.S. Nonresident Alien Income Tax Return

  • Schedule A (Form 1040) Itemized Deductions

  • Schedule C (Form 1040) Profit or Loss From Business

  • Schedule C-EZ (Form 1040) Net Profit From Business

  • Schedule F (Form 1040) Profit or Loss From Farming

  • Schedule SE (Form 1040) Self-Employment Tax

  • Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

  • 1099-H Health Coverage Tax Credit (HCTC) Advance Payments

  • 2555 Foreign Earned Income

  • 2555-EZ Foreign Earned Income Exclusion

  • 8885 Health Coverage Tax Credit

  • W-2 Wage and Tax Statement

See chapter 12 for information about getting publications and forms.

Deductible Premiums

You generally can deduct premiums you pay for the following kinds of insurance related to your trade or business.

  1. Insurance that covers fire, storm, theft, accident, or similar losses.

  2. Credit insurance that covers losses from business bad debts.

  3. Group hospitalization and medical insurance for employees, including long-term care insurance.

    1. If a partnership pays accident and health insurance premiums for its partners, it generally can deduct them as guaranteed payments to partners.

    2. 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 Pub.15-B.

  4. Liability insurance.

  5. Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients.

  6. 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.

    1. If a partnership pays workers' compensation premiums for its partners, it generally can deduct them as guaranteed payments to partners.

    2. 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.

  7. Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law.

  8. Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.

  9. 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 can’t deduct any car insurance premiums.

  10. Life insurance covering your officers and employees if you aren’t directly or indirectly a beneficiary under the contract.

  11. Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.

Self-Employed Health Insurance Deduction

You may be able to deduct the amount you 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 2016, even if the child wasn’t 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.

  • You were self-employed and had a net profit for the year reported on Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040).

  • You were a partner with net earnings from self-employment for the year reported on Schedule K-1 (Form 1065), box 14, code A.

  • You used one of the optional methods to figure your net earnings from self-employment on Schedule SE.

  • You received wages in 2016 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.

The insurance plan must be established, or considered to be established as discussed in the following bullets, under your business.

  • 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.

  • 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 the 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 won’t be considered to be established under your business.

  • 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 the 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 in box 1 as wages to be included in your gross income. Otherwise, the insurance plan won’t 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. Amounts paid for health insurance coverage from retirement plan distributions that were nontaxable because you are a retired public safety officer can’t be used to figure the deduction.

Take the deduction on Form 1040, line 29.

Qualified long-term care insurance.   You can include premiums paid on a qualified long-term care insurance contract when figuring your deduction. But, for each person covered, you can include only the smaller of the following amounts.
  1. The amount paid for that person.

  2. The amount shown below. Use the person's age at the end of the tax year.

    1. Age 40 or younger–$390

    2. Age 41 to 50–$730

    3. Age 51 to 60–$1,460

    4. Age 61 to 70–$3,900

    5. Age 71 or older–$4,870

Qualified long-term care insurance contract.   A qualified long-term care insurance contract is an insurance contract that only provides coverage of qualified long-term care services. The contract must meet all the following requirements.
  • It must be guaranteed renewable.

  • 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.

  • It must not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed.

  • 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.

Qualified long-term care services.   Qualified long-term care services are:
  • Necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services; and

  • Maintenance or personal care services.

The services must be required by a chronically ill individual and prescribed by a licensed health care practitioner.

Worksheet 6-A. Self-Employed Health Insurance Deduction Worksheet

Caution. You may have to use the worksheets in Pub. 974 instead of this worksheet if the insurance plan established, or considered to be established, under your business was obtained through the Health Insurance Marketplace and you are claiming the premium tax credit. See Pub. 974 for details.

Note. Use a separate worksheet for each trade or business under which an insurance plan is established.

1. Enter the total amount paid in 2016 for health insurance coverage established under your business (or the S corporation in which you were a more-than-2% shareholder) for 2016 for you, your spouse, and your dependents. Your insurance can also cover your child who was under age 27 at the end of 2016, even if the child was not your dependent. But do not include the following. 
  • Amounts for any month you were eligible to participate in a health 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 2016.

  • Any amounts paid from retirement plan distributions that were nontaxable because you are a retired public safety officer.

  • Any qualified health insurance coverage payments that you included on Form 8885, line 4, to claim the HCTC.

  • Any advance monthly payments of the HCTC that your health plan administrator received from the IRS, as shown on Form 1099-H.

  • Any qualified health insurance coverage payments you paid for eligible coverage months for which you received the benefit of the HCTC monthly advance payment program.

  • Any payments for qualified long-term care insurance (see line 2).

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.    
    $390— if that person is age 40 or younger     
    $730— if age 41 to 50    
    $1,460— if age 51 to 60    
    $3,900— if age 61 to 70    
    $4,870— 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 2016. 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 (or Form 1040NR), 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 (or Form 1040NR), 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 (or Form 1040NR), 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, don’t 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 doesn’t include capital gain income.
Chronically ill individual.   A chronically ill individual is a person who has been certified as one of the following.
  • 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.

  • An individual who requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.

The certification must have been made by a licensed health care practitioner within the previous 12 months.

Benefits received.   For information on excluding benefits you receive from a long-term care contract from gross income, see Pub. 525.

Other coverage.   You can’t take the deduction for any month you were eligible to participate in any employer (including your spouse's) subsidized health plan at any time during that month, even if you didn’t actually participate. In addition, if you were eligible for any month or part of a month to participate in any subsidized health plan maintained by the employer of either your dependent or your child who was under age 27 at the end of 2016, don’t use amounts paid for coverage for that month to figure the deduction.

  These rules are applied separately to plans that provide long-term care insurance and plans that don’t provide long-term care insurance. However, any medical insurance payments not deductible on Form 1040, line 29, can be included as medical expenses on Schedule A (Form 1040), if you itemize deductions.

Effect on itemized deductions.   Subtract the health insurance deduction from your medical insurance when figuring medical expenses on Schedule A (Form 1040) if you itemize deductions.

Effect on self-employment tax.   For tax years beginning before or after 2010, you can’t subtract the self-employed health insurance deduction when figuring net earnings for your self-employment tax from the business under which the insurance plan is established, or considered to be established as discussed earlier. For more information, see Schedule SE (Form 1040).

How to figure the deduction.   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. However, if any of the following apply, you must use Worksheet 6-A in this chapter.
  • You had more than one source of income subject to self-employment tax.

  • You file Form 2555 or Form 2555-EZ.

  • You are using amounts paid for qualified long-term care insurance to figure the deduction.

   If you are claiming the HCTC, complete Form 8885 before you figure this deduction.

HCTC.   You elect to take this credit only if you were an eligible trade adjustment assistance (TAA) recipient, alternative TAA (ATAA) recipient, reemployment trade adjustment assistance (RTAA) recipient, or Pension Benefit Guaranty Corporation (PBGC) pension recipient. Use Form 8885 to figure the amount, if any, of this credit. When figuring the amount to enter on line 1 of Worksheet 6-A, don’t include any amounts you included on Form 8885, line 4.

  There is coordination of tax benefits between advance monthly payments of the HCTC and the HCTC. In general, you cannot claim the HCTC for a payment you made for qualifying health insurance when you file your tax return if you previously received the benefit of the advance monthly payment program for that coverage month. If you benefited from the advance monthly payment program, your health plan administrator will send you a Form 1099-H that reports the amount of the payments that were forwarded directly to your health plan administrator for each coverage month. Do not report these amounts on Form 8885.

More than one health plan and business.   If you have more than one health plan during the year and each plan is established under a different business, you must use separate worksheets (Worksheet 6-A) to figure each plan's net earnings limit. Include the premium you paid under each plan on line 1 or line 2 of that separate worksheet and your net profit (or wages) from that business on line 4 (or line 11). For a plan that provides long-term care insurance, the total of the amounts entered for each person on line 2 of all worksheets can’t be more than the appropriate limit shown on line 2 for that person.

Nondeductible Premiums

You can’t deduct premiums on the following kinds of insurance.

  1. Self-insurance reserve funds. You can’t deduct amounts credited to a reserve set up for self-insurance. This applies even if you can’t get business insurance coverage for certain business risks. However, your actual losses may be deductible. See Pub. 547.

  2. Loss of earnings. You can’t 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.

  3. Certain life insurance and annuities.

    1. For contracts issued before June 9, 1997, you can’t 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.

    2. For contracts issued after June 8, 1997, you generally can’t 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.

    3. 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 can't deduct the insurance premiums.

  4. 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 can't 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.

Capitalized Premiums

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.

Uniform capitalization rules.   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit.
  1. Produce real property or tangible personal property. For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property.

  2. Acquire property for resale.

However, these rules don't apply to the following property.
  1. Personal property you acquire for resale if your average annual gross receipts are $10 million or less for the 3 prior tax years.

  2. Property you produce if you meet either of the following conditions.

    1. Your indirect costs of producing the property are $200,000 or less.

    2. You use the cash method of accounting and don't account for inventories.

More information.   For more information on these rules, see Uniform Capitalization Rules in Pub. 538 and the regulations under section 263A.

When To Deduct Premiums

You can usually deduct insurance premiums in the tax year to which they apply.

Cash method.   If you use the cash method of accounting, you generally deduct insurance premiums in the tax year you actually paid them, even if you incurred them in an earlier year. However, see Prepayment , later.

Accrual method.   If you use an accrual method of accounting, you can't deduct insurance premiums before the tax year in which you incur a liability for them. In addition, you can't deduct insurance premiums before the tax year in which you actually pay them (unless the exception for recurring items applies). For more information about the accrual method of accounting, see chapter 1. For information about the exception for recurring items, see Pub. 538.

Prepayment.   You can't deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year.

  Expenses such as insurance are generally allocable to a period of time. You can deduct insurance expenses for the year to which they are allocable.

Example.

In 2016, you signed a 3-year insurance contract. Even though you paid the premiums for 2016, 2017, and 2018 when you signed the contract, you can only deduct the premium for 2016 on your 2016 tax return. You can deduct in 2017 and 2018 the premium allocable to those years.

Dividends received.   If you receive dividends from business insurance and you deducted the premiums in prior years, at least part of the dividends generally are income. For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1 under How Much Can I Deduct .


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