Is insurance a direct expense?
Insurance is typically an indirect expense because it supports the overall operation of the business, not a specific project or product. It’s recorded as an operating cost and is fully tax-deductible when used for business purposes.
Insurance expenses
Insurance is generally an indirect expense, not a direct expense. This is because insurance costs (like liability, property, or health coverage) support overall business operations rather than being tied to the production of a specific product or service.
What is a direct expense?
Direct expenses are costs that can be directly traced to a specific product, project, or revenue-generating activity. In manufacturing or project-based industries, these include materials, production labor, and other costs that exist only because of that specific job or output.
Since insurance covers the entire business (for protection and risk management), it can’t be directly attributed to a single product or project, making it an indirect expense.
How to categorize insurance expenses
- Record as an Operating Expense on your income statement.
- Classify under Indirect Costs or Overhead Expenses.
- Use a “Business Insurance” or “Insurance Expense” account in your chart of accounts.
- For manufacturing businesses, factory or equipment insurance may be partially allocated to manufacturing overhead.
- If an insurance policy covers a specific project or contract, you may treat that portion as a direct expense for accurate job costing.
Examples of indirect insurance expenses
- General liability insurance.
- Property and casualty insurance.
- Workers’ compensation coverage.
- Vehicle or fleet insurance.
- Professional liability (E&O) insurance.
- Business interruption or cyber insurance.
- Health and dental insurance for employees.
Tax implications for insurance expenses
- Business insurance premiums are fully tax-deductible as ordinary and necessary business expenses.
- Most insurance is treated as an operating expense rather than a direct cost.
- Insurance premiums tied to specific assets (e.g., equipment used in production) can be partially allocated to Cost of Goods Sold (COGS).
- Personal or non-business insurance (home, personal car) is not deductible.
- Maintain copies of insurance policies and premium statements for tax and audit documentation.
