Deductible Premiums

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

1. Fire, theft, flood, or similar insurance.
2. Credit insurance on losses from unpaid 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 made to the partners.
   2. If an S corporation pays accident and health insurance premiums for its 2% shareholder-employees, it generally can deduct them.

   For more details, see Accident and Health Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.

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 these amounts as guaranteed payments to the partners.
   2. If an S corporation pays the workers' compensation premiums for its 2% shareholder-employees, it generally can deduct these amounts.
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 you 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, you can deduct only the part of your insurance premiums 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.
10. Life insurance covering your officers and employees if you are not directly or indirectly a beneficiary under the contract.
11. Use and occupancy and business interruption insurance that pays you for lost profits if your business is shut down due to a fire or other cause.

Health Insurance Deduction for the Self-Employed

You can deduct 60% of the amount paid during 2000 for medical insurance and qualified long-term care insurance for yourself and your family if you are one of the following.

• A self-employed individual.
• A general partner (or a limited partner receiving guaranteed payments) in a partnership.
• A shareholder owning more than 2% of the outstanding stock of an S corporation.

You are allowed this deduction whether you paid the premiums yourself or your partnership or S corporation paid them and you included the premium amounts in your gross income. Take this deduction on line 28 of Form 1040.

Deductible percentage increases after 2001. For tax years beginning after 2001, the deductible percentage of your health insurance premiums gradually increases. The increases are shown in the following table.

Long-term care insurance. If you pay the premiums on a qualified long-term care insurance contract for yourself, your spouse, or your dependents, you can include those premiums when figuring your deduction. But, for each person covered, you can include only the smaller of the following amounts.

1. The amount you pay 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 -- $220
   2. Age 41 to 50 -- $410
   3. Age 51 to 60 -- $820
   4. Age 61 to 70 -- $2,200
   5. Age 71 and older -- $2,750

Long-term care insurance contract. A long-term care insurance contract is any 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 as collateral for a loan, 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.

Chronically ill individual. A chronically ill individual is a person who has been certified as one of the following.

• An individual who, for at least 90 days, is unable to perform at least two activities of daily living without substantial assistance due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, 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 from gross income benefits you receive from a long-term care contract, see Publication 525.

Table 7-1. Self-Employed Health Insurance Deduction Worksheet

Limits. You cannot deduct more than your net earnings from the trade or business in which the medical insurance plan or long-term care insurance plan is established. If the business in which the insurance plan is established is an S corporation, you cannot deduct more than your wages from the S corporation.

Other coverage. You cannot 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. This rule is applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance. However, any medical insurance payments not deductible on line 28 of Form 1040 can be included as part of your medical expenses on Schedule A (Form 1040) if you itemize your deductions.

Effect on self-employment tax. Do not subtract the health insurance deduction when figuring net earnings for your self-employment tax.

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

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 the worksheet in this chapter.

• You have more than one source of income subject to self-employment tax.
• You file Form 2555 or Form 2555-EZ (relating to foreign earned income).
• You are using amounts paid for long-term care insurance to figure the deduction.

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 (Table 7-1) to figure each plan's net earnings limit. Include the premium you paid under each plan on line 1 of that separate worksheet and your net profit (or wages) from that business on line 6 (or line 13). For a plan that provides long-term care insurance, enter the premiums paid on line 2 instead, but the total of the amounts entered for each person on line 2 of all worksheets cannot be more than the appropriate limit shown on line 2 for that person.

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