Small business owners know that their commercial insurance policies are a necessary cost of doing business, but sometimes it’s a pretty sizable chunk of their budget. Tax time is an opportunity to find out if some of that expense can be offset as a deduction. The good news is that most insurance premiums can be deducted on your annual tax returns.
Of course, as with all things related to the government, there are rules and restrictions. The deductions may not always apply, and there are usually a few requirements for them to be acceptable. Always confirm the specifics with your CPA or tax preparer. If you file your own taxes, consider paying for a professional review of your taxes to make sure you have everything in order. The only thing worse than paying taxes is having to pay fines and penalties for getting them wrong.
Which Business Insurance Premiums are Tax Deductible for Small Businesses?
Business expenses that you really need in order to operate are generally considered tax deductible. Since insurance is necessary, and in some cases legally required, it falls into the category of ordinary and necessary expenses for tax purposes.
General liability and commercial property insurance, which are the two standard policies most business owners have, are usually fully deductible for tax purposes. Be careful, however, with which entity claims the commercial property deduction. Many business owners form a separate business entity for real estate in order to protect their main business and personal interests. Only the entity that owns the property should claim the premiums for commercial property insurance.
When we write commercial property policies, we ask clients to make sure they account for the expenses under the correct business’s ledger. Otherwise, the premiums can get recorded under someone’s main business entity, or even personal taxes. Incorrect accounting of the expense leads to tax audit headaches down the road. If Bob Jones forms Jones Properties, LLC to buy the building from which he sells Bob’s Baklava, LLC treats, Mr. Jones needs to put all of his personal and commercial insurance expenses into the right buckets.
Workers compensation and professional liability insurance premiums are also tax deductible expenses. Payroll records are essential for tracking workers compensation costs. If you are manually calculating payroll, keep these submissions clearly labeled. If you have a payroll company, request detailed reports at the end of every year (or call us for a referral if they aren’t helpful).
Business Insurance Expenses That May Not Be Tax Deductible
Not all insurance premiums fall into the same bucket. This is why it’s so important to have detailed bookkeeping and a knowledgeable CPA lined up for your small business. If you deduct insurance premiums that are not tax deductible, you are setting yourself and your business up for a difficult time with the IRS.
Premium deductions need to be accounted for in the correct tax year. The actual date you pay your premiums, as well as your accounting method of either a cash or accrual basis, will have an impact on when you can record the expenses. It’s important to know how upfront versus monthly payment systems affect your taxes.
Certain business related life insurance policies are not tax deductible, particularly key person policies in which the business is the beneficiary. Self-insured individuals who pay financial reserves should verify whether or not those payments are deductible. Also, fines and penalties that are assessed in association with a claim against your policy may not be deductible.
Business owners who work from a home office may want to deduct part of their homeowners insurance premiums as a business tax expense. This is often possible, but it must meet the IRS requirements, which restrict the deduction to the actual square footage of the exclusively designated office space. It’s usually far more practical, in both a business and tax sense, to purchase a separate commercial policy to cover business operations in the home.
Smart Insurance Recordkeeping as Part of a Comprehensive Tax Planning Strategy
Documentation, in the form of policy declarations and detailed bookkeeping, is the key to accurately filing your business and personal taxes. Record payments under the correct entities, using your insurance billing statements and policy paperwork as a guide. If you ever feel unsure of which entity is paying a particular premium, reach out to your insurance agent to be sure. Most agents will produce a convenient year-end statement upon request, or you can download one from your agency’s app. Keep a close watch for premiums that were paid by the wrong account (business expenses under your personal bank account, for example). When this happens, get in touch with a bookkeeper to learn how to properly attribute the expenses for tax purposes.
Early review is also an important aspect of making sure you are able to properly claim every available tax deduction. Never wait until the last minute to hunt down various expenses with the hope of reducing your tax bill. Start early, either before year-end or right after, to check and double-check your finances. This is especially important if your insurance premiums or policies changedduring the year. You will want to reconcile all the payments to the right policies to make sure you maximize your tax savings.
If you have never considered how your insurance premiums impact your tax bill, contact us. Although we are definitely not tax professionals, Smyrl Insurance understands the importance of tracking expenses for accurate filing. When it comes to insurance and taxes, we educate, nurture, and empower our clients on the insurance details so that they can execute smart tax strategies with their CPA. We serve small business owners with general liability, commercial property, workers compensation, professional liability and all other commercial insurance solutions in Hatfield, Lansdale, Souderton, Harleysville, and throughout the region in Montgomery County and Bucks County, Pennsylvania.
