What expense category is Overhead Insurance?

For a small business, the owner's ability to work is often directly tied to the company's ability to operate. If an owner becomes sick or disabled, who pays the rent, utilities, and employee salaries? Business overhead insurance is a specialized policy designed to cover fixed operating costs, ensuring the business can continue to operate while the owner recovers.

Accountants and business owners must understand that the premiums for this type of policy are a deductible business expense, unlike personal disability insurance. This guide explains how to categorize these premiums, the key tax rules that apply, and how to track these expenses for compliance purposes.

Overhead Insurance Category

The premiums you pay for business overhead insurance are an ordinary and necessary business expense. IRS Publication 535 lists overhead insurance explicitly, which pays for business overhead expenses you have during long periods of disability caused by your injury or sickness, as a deductible type of insurance.

On your company's books, these premiums should be categorized under Insurance Expenses.

Important Considerations When Classifying Overhead Insurance

The most critical factor in deducting these premiums is understanding the difference between overhead insurance and personal disability insurance.

Deductible Overhead Insurance vs. Non-Deductible Loss of Earnings Insurance

The IRS makes a clear distinction between these two types of policies:

• Deductible Overhead Insurance: This policy covers your actual business operating expenses (like rent, salaries, utilities) if you are disabled. The premiums are deductible.
• Non-Deductible Loss of Earnings Insurance: This is a personal disability policy designed to replace your own personal income if you are unable to work. Publication 535 explicitly states that you cannot deduct the premiums for a policy that pays for your lost earnings due to sickness or disability.

Tax Implications of Overhead Insurance

The tax treatment of overhead insurance involves both the premiums you pay and any benefits you might receive from the policy.

Deducting the Premiums

For a sole proprietor filing a Schedule C (Form 1040), premiums for business overhead insurance are deducted under Part II, Line 15, Insurance (other than health).

Taxability of Insurance Proceeds

While the premiums are deductible, it is essential to note that if you become disabled and the policy pays out, the benefits you receive are considered taxable income. These payments are meant to replace the business income you would have used to pay your overhead expenses, so they must be reported as income on your business tax return.

What Records to Keep

To substantiate your deduction, you must keep:

• The insurance policy document.
• Invoices or statements from the insurance provider for the premiums.
• Proof of payment, such as canceled checks or credit card statements.

How Fyle Can Automate Tracking for Overhead Insurance Premiums

Fyle helps you manage and document your insurance premium payments, ensuring you have a complete and compliant record for tax time.

• Centralized Policy Documents: Forward your overhead insurance policy and invoices directly to Fyle for a centralized, easily accessible digital record.
• Track Premium Payments: Capture every premium payment in real time using Fyle’s credit card feeds or by submitting invoices for other payment methods.
• Create a Clear Audit Trail: Fyle consolidates policy documents, invoices, and proof of payment into a single, organized expense record.
• Automate Your Accounting: Sync the categorized premium expense directly to your Insurance Expense account in QuickBooks, Xero, NetSuite, or Sage Intacct.