Life and Health Insurance

The cost of group-term life insurance coverage up to $50,000 per employee is deductible on the "employee benefits" line (Line 14) of your Schedule C, unless you are directly or indirectly a beneficiary of the policy. Premiums paid for life insurance on yourself as the business owner are not deductible as a business expense.

Health insurance. Group health benefits that you provide to employees and their dependents are generally deductible. The cost of your own health benefits under the plan is also 100 percent deductible.

Unless you operate in Hawaii, there are no federal or state laws that require you to have a health plan in 2013 for employees. However, if you do have a health plan, your plan must meet certain federal requirements or be subject to punitive excise taxes.

To avoid these excise taxes, your plan must include certain accessibility and portability features, most notably those that impose strict limits on the extent to which preexisting health conditions of employees or their dependents can be used to limit coverage. You must provide COBRA benefits to employees who lose coverage under the plan - that is, you must continue to allow them to purchase coverage at their own expense for 18 months (and up to 36 months in some cases), depending on the reason for the loss of coverage. COBRA coverage is not required, however, if you have fewer than 20 employees.

Tip If you haven't spoken to your insurance representative recently, we suggest you contact him or her to be sure your plan provides the required coverage.

Self-employed individuals - that is, sole proprietors, partners, LLC members, and S corporation shareholders owning more than 2 percent of the shares - can deduct 100 percent of their own health insurance premiums. However, this deduction is not claimed on Schedule C. Rather, health insurance premiums for yourself and your dependents are deductible on the first page of your Form 1040 (Line 29), rather than on your business tax form (e.g., Schedule C for sole proprietors).

As a result, the cost of the premiums serve to reduce your adjusted gross income (AGI), which in turn can increase your ability to take advantage of certain tax breaks like Roth IRAs and tax breaks for education. Since the premiums are not considered an itemized medical deduction, they are not limited by the 10 percent of AGI floor (7.5 percent if taxpayer or spouse is over age 65), as are most medical deductions.

Long-term care. Long-term health care contracts are arrangements designed to provide coverage if you become chronically ill or disabled after reaching a specified age, such as 50. Long-term care policies greatly expand the time period over which benefits will be paid out, when compared to standard accident and health policies. Another advantage is that, unlike Medicare coverage, long-term care contracts may cover the cost of custodial care, as well as skilled nursing care. These two advantages often make long-term care contracts a preferred way of pre-funding nursing home care for the elderly.

If certain specified requirements are met, long-term care insurance contracts issued after December 31, 1996 will generally receive the same income tax treatment as accident and health policies.

That means that amounts received under a long-term care insurance contract are nontaxable, although the exclusion is capped at $320 per day on per diem contracts in 2013 (as adjusted annually for inflation). It also means that company-paid premiums for long-term care are not taxable for the employee. If you purchase the policy as an individual rather than through your company, the premiums count as deductible medical expenses--although the amount that can be counted varies with your age.

Employer-provided long-term care premiums are deductible by the employer as employee benefits. For the business owner, they are treated as health insurance premiums, which means that they are also 100 percent deductible.