You generally can 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 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 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.
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 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 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. 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 60% of the amount paid in 2001 for medical insurance and qualified long-term care insurance for you, your spouse, and your dependents if you are one of the following.

• A self-employed individual with a net profit reported on Schedule C, C-EZ, or F.
• A partner with net earnings from self-employment reported on line 15a of Schedule K-1 (Form 1065).
• A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2.

The insurance plan must be established under your business. You may be 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 the deduction on line 28 of Form 1040.

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

For Tax Years Beginning In:	Deductible Percentage
2002	70%
Years after 2002	100%

Qualified long-term care insurance. You can include premiums paid on a qualified long-term care insurance contract for you, your spouse, or your dependents 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 year.)
   1. Age 40 or younger-$230
   2. Age 41 to 50-$430
   3. Age 51 to 60-$860
   4. Age 61 to 70-$2,290
   5. Age 71 or older-$2,860

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.

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 from gross income benefits you receive from a long-term care contract from gross income, see Publication 525.

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

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 had 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 qualified 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 or line 2 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, 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.

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

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