Is Umbrella Insurance Tax Deductible?

As a business owner, buying the right insurance can be a win-win situation. Commercial insurance policies not only provide direct protection in the event of accidents or theft but you can often claim a valuable tax deduction for the cost of your premiums. 

Commercial umbrella insurance is typically considered a tax-deductible expense when used for business.

In this article, we’ll cover the basics of how umbrella insurance works, how to know if you can claim premium costs as a deduction on your taxes, and look at a few common situations where umbrella coverage can be essential. 

Can You Write Off Umbrella Insurance on Your Taxes?

Yes, if you have purchased umbrella insurance for commercial coverage (such as an LLC or for other business activity) then you’re likely eligible for a federal tax write-off.

Umbrella insurance acts as a safety net if you face a lawsuit settlement, court judgment, or legal fees related to your business. Specifically, an umbrella policy kicks in after a claim or claims have exhausted the coverage limits of standard policies – like commercial property, general liability, errors and omissions coverage, and so forth.

The monthly or annual premium cost associated with your umbrella coverage may be tax-deductible as long as the insurance is only for business use and meets other criteria – most importantly, IRS rules around “ordinary and necessary” expenses. For example, you can’t claim 100% of an insurance premium expense if part of the coverage is for personal use.

Understanding Umbrella Insurance

Umbrella insurance supplements primary insurance policies, extending coverage to liabilities that exceed standard policy limits. 

Your specific coverage may vary but umbrella policies typically include protection if you’re sued for remaining medical expenses after an injury on your property; libel or slander; excessive property damage you cause; and other legal defense-related costs.

The tax deductibility of umbrella insurance premiums hinges on whether the policy serves personal or business purposes. Premiums can qualify as deductible business expenses if purchased to protect business activities, which includes umbrella insurance for rental properties.

Let’s look at a few examples where buying umbrella coverage can be a smart strategy for insurance and tax interests:

1. Landlords
   
   Investing in landlord umbrella insurance to shield rental income and assets from liabilities – such as expensive claims related to tenant injuries or property damage – allows you to deduct premiums as business expenses.
   
   For instance, if a tenant files a lawsuit due to injuries sustained on the rental property and primary insurance coverage is insufficient, umbrella insurance can cover the excess costs. This protection extends to various scenarios, including accidents that occur in common areas or damages caused by tenant negligence.

2. Manufacturing Business
   
   A manufacturing company purchases umbrella insurance to cover potential product liability claims exceeding primary policy limits. If a defective product results in substantial injury or property damage, the umbrella policy covers the excess costs, which are deductible as business expenses. This scenario highlights the importance of umbrella insurance in industries with high liability risks, ensuring that businesses remain financially stable even in the face of significant claims.

3. Consulting Firm
   
   A consulting firm invests in umbrella insurance to protect against claims of professional negligence or errors that exceed standard liability coverage. If a client alleges financial losses due to faulty advice, the umbrella policy covers legal fees and settlements after standard errors and omissions coverage has been applied. This type of coverage is essential for professionals who provide advisory services, as it protects against the financial repercussions of potential mistakes or oversights.

4. Retail Business
   
   A retail store owner obtains umbrella insurance to safeguard against slip-and-fall accidents and other premises liabilities. If a customer sustains severe injuries on the premises, resulting in a lawsuit exceeding primary insurance coverage, the umbrella policy covers additional costs. This coverage ensures that retail businesses can continue operations without the fear of debilitating financial losses from customer claims.

Other Tax-Deductible Insurance Premiums

Determining other insurance premiums that are tax-deductible will depend heavily on your trade or industry, the type of policies you buy, and your broader tax situation. Always discuss your goals and tax needs with a professional certified tax advisor. You shouldn’t assume your insurance premium costs are tax-deductible but many business owners find they qualify for an assortment of tax benefits from buying insurance.

As a starting point, you can look to the IRS’ basic definition of “ordinary and necessary” business expenses:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

Apart from umbrella insurance, various insurance premiums qualify as “ordinary and necessary” for conducting business operations. These include policies safeguarding against risks such as property damage, liability claims, and business interruptions. Examples include:

• Property Insurance: Covers damages to business property caused by fire, theft, or natural disasters.

• Liability Insurance: Protects against claims of bodily injury or property damage caused by the business’s operations, products, or services.

• Workers’ Compensation Insurance: Provides wage replacement and medical benefits to employees injured in the course of employment.

• Business Interruption Insurance: Compensates for lost income and operating expenses if a business is temporarily unable to operate due to a covered event.

Is Personal Umbrella Insurance Tax Deductible?

If you’ve purchased umbrella coverage for personal use – as excess liability coverage on top of auto insurance, for instance – there’s no federal income tax deduction. But if you claim a home-office deduction and have other insurance premium expenses for a business you operate from home, you may have other options. 

Speak with a tax professional about your options for credits and deductions when it comes to filing personal tax returns. Tax deductions for umbrella insurance and other insurance premiums generally apply only to businesses or self-employed taxpayers.

How To Buy Umbrella Insurance for a Business

As an excess liability line of coverage, you’ll need to first obtain the right insurance for general liability coverage and property protection before adding umbrella insurance.

The amount of umbrella insurance you need depends entirely on the value of the assets you want to cover and your relative risks. Premium costs will vary based on multiple factors like where your business is located, your claims history, and the type of work you do.

At Independent Insurance Associates, we’ll spend time to understand your specific business goals and insurance needs. Our brokers have access to policies from dozens of insurance companies which means we help you quickly and efficiently find the best overall value. If you want to explore adding umbrella coverage to your commercial insurance portfolio, we’ll be glad to work with you! Give us a call or send us a request for a free quote today!