It can be challenging for business owners and freelancers to determine whether an expenditure qualifies for a tax write-off. When you work for yourself, you are typically able to claim operating costs as business expenses, but some overhead items are difficult to categorize.
What is a Business Expense?
Regarding tax definitions, it’s a good idea to go straight to the source: the Internal Revenue Service (IRS). The IRS defines a business expense as the costs of operating a business and further clarifies that they are usually deductible if the business is for-profit.
To be considered a business expense, the item But what does that mean? An ordinary expense is one that is common in your industry. For example, if you own a restaurant, food and raw ingredients are likely considered an ordinary and necessary expense to operate your business.
Beyond that, a business expense cannot otherwise be categorized as a personal expense, capital expense, or expense used to figure out the costs of goods sold.
Now that you have a good handle on the basic definition, read on to find out in what circumstances you can claim life insurance as a business expense.
Examples of Business Expenses
When it comes to taxes and write-offs, it’s a good idea to consult with a tax professional.
That being said, the list below covers some of the more common business expenses:
- Phone and internet
- Computers, printers, and software
- Mileage and meals
- Employee salaries and benefits
- Education, webinars, and certifications
- Legal expenses
- Contributions to tax-deferred retirement accounts
When Can You Claim Life Insurance as a Business Expense?
Typically, you cannot claim life insurance as a business expense, even if you are self-employed. In most cases, your life insurance premium is considered a personal expense (and therefore not tax deductible).
There are two types of life insurance that small business owners are most curious about when it comes to life insurance as a business expense: group life insurance and key person life insurance.
Can Life Insurance Be a Business Expense if It Is an Employee Benefit?
If you are an employer and provide your employees with group life insurance, the premiums you pay for your employee’s coverage are considered a business expense. But there is a small catch. In doing so, the death benefit of the group life insurance you provide becomes taxable to the beneficiary who receives it. As a result, their life insurance payout could be subjected to taxes of up to 40%, which could serve as a disappointing surprise.
Can Life Insurance Be a Business Expense if It Is Key Person Life Insurance?
Some businesses purchase key person life insurance, also known as key man life insurance, to help provide some financial protection for the business. Key person life insurance provides coverage for a person who is considered critical to the operations of the business.
In a small business, a key person could be the founder or an owner. A key person could also be an employee who contributes in a way that is essential for the business to succeed. For example, a high-concept experiential hotel may claim its creative director as a key person, or a reality show may claim the beloved host as a key person.
With key person life insurance, if the employee, founder, or owner covered were to pass away insured, the death benefit would go to the business. They might use the life insurance payout to cover revenue loss or recruit a replacement.
But is key person life insurance considered a business expense? Many tax experts lean towards no, stating that you can’t claim the premiums of a key person life insurance policy if the beneficiary is your business.
Do You Need Life Insurance as a Business Owner?
Whether you have an LLC or S-Corp, or are self-employed, you have a lot to think about regarding the future of your business and your loved ones.
Self-employed people and business owners often lack the benefits of corporate employees. If you don’t have a retirement account or group term life insurance, you may want to consider what would happen to your loved ones if you were to pass away.
And if you have built up a successful small business, could it continue to run without you?
If you pass away insured, the life insurance payout from your policy can be used for anything your beneficiaries need — to pay off debt, supplement income, cover the mortgage, or float the business while they figure things out.
Term Life Insurance for Business Owners
Navigating the world of owning a business can be challenging at times. But one thing that doesn’t have to be stressful for business owners is term life insurance. Bestow has made term life insurance super easy. You can apply online in minutes, and there is no medical exam whatsoever. And everyone gets a same-day decision.
As a business owner, term life insurance can help provide a little financial cushion for your loved ones and give them some time to keep your business afloat should you pass away. While your term life insurance may not be a business expense, rates start at just $11 per day with Bestow.
Budget-friendly and stress-free — that’s Bestow. Start with a free quote and learn more about coverage, terms, and life insurance payouts in the Bestow Learning Center.
Looking to learn more about key person life insurance? Check out eFinancial to connect with a knowledgeable agent.
- According to the IRS, a business expense must be both ordinary and necessary in the specific industry of that business.
- Can life insurance be a business expense? Typically, no. But there are exceptions.
- You can claim the premiums of group life insurance as a business expense, but in doing so, the death benefit your employee’s beneficiaries receive is considered taxable income.