Can A Sole Proprietor Deduct Disability Insurance?

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   Marlin McKelvy

   President, Consumer Directed Benefit Solutions, Memphis, Tennessee

   An excellent question and one to which the answer will vary upon the purpose of the disability insurance policy for which the sole proprietor purchased the coverage. Most people only think about disability insurance for purposes of replacing their personal income during a period of disability. However, for business owners there is often the additional need to protect themselves in regard to the fixed expenses of their business that will continue regardless of whether or not the sole proprietor can work and generate income. The rent/lease for office space, utilities and other such business expenses are examples. If the disability insurance policy is taken out specifically to reimburse a sole proprietor for overhead expenses incurred during a period of disability then the cost of the disability policy is considered an ordinary and necessary business expense and would qualify as a deductible business expense. To qualify the policy must state specifically that the policy proceeds are to be used to cover business expenses during the period of disability. This is separate and distinct from a disability insurance policy a sole proprietor might want to take out to replace their income. Deducting this type of disability policy as a business expense is not a good idea as I don't believe it meets the IRS criteria and if you did deduct such a disability policy as a business expenses it is highly likely that in the event of a disability claim the policyholder would have to pay income taxes on their disability insurance payments and thus reduce the net income amount the sole proprietor would receive during their disability period.

   Answered on September 10, 2014

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