Imagine looking over your expenses from the year, and you calculate not only no refund, but you owe a hefty sum. Your small business is doing well, but not well enough that it can take a heavy tax hit or any other easy mistake. What can you do? Did you take tax-deductible insurance into account?
The savvy business owner works to get the most out of their return. Whether you use a tax app or are a pen-and-paper warrior, each person must hunt for every last tax deduction available to them. This helps puts money back in your business, and money in your business is an investment in its success.
So, how can you get ahead of the curve? For the self-employed, the small business owners, and even larger companies, certain tax information can be murky. Uncovering the mysteries of insurance premiums and how they fit with taxes can help lower your payments come tax season.
Insurance is a Cost of Business
The IRS’s 2018 Publication on Business expenses states, “You generally can deduct the ordinary and necessary cost of insurance as a business expense if it is for your trade, business, or profession. However, you may have to capitalize certain insurance costs under the uniform capitalization rules.” This means money spent that was necessary to keep the business running necessary business running can be deducted. It also allows for a process called “capitalization” for certain expenditures, which means transforming your insurance premiums from a business “expense” to a business “cost.” The difference between these two is that an expense refers to the usage of an item, whereas a cost is purely money spent.
So, now the IRS has given you the go-ahead. You can take stock of your premiums and capitalize them if needed. When filling out your tax forms, make sure you place the correct amount spent for the year. For example, on a 1040 form, lines 46, 61, and 69 will be used to report your insurance expenditures.
These examples can be used by the self-employed as well. It comes down to locating which coverages you have, how much you spent on them, and if the premiums are deductible. Let’s look at what premiums make the biggest impact on your tax statement.
Only Some Insurance Is Tax-Deductible
You can start crossing off expenses and reducing your tax payment, putting more capital back into your company’s financial reservoir. Here are the premiums that are deductible:
- Fire, theft, accidents, storm, or losses similar to these categories
- Business interruption
- Group Health/medical
- Long-term care
- Credit insurance coverage against bad debt
- Worker’s Compensation
Other items of note are life insurance, vehicle insurance, unemployment funds, or overhead insurance. Life insurance can be useful here only if it covers you under contract. For your vehicles, they can be deducted (even if one is for personal use) only when used for the business. The payments to the unemployment fund are only counted in this list if they are approved by your state of residence. Also, the overhead insurance comes into play if you have used it for a long period due to a disability.
- Payments made for a self-insurance reserve
- Loan security
- Earnings Loss
- Life insurance/annuities not covered above
Another good rule to note is that if you paid for a premium in advance, this is not considered suitable for the current tax year. Remember, if you take out a premium for five years, each year only one-fifth of the payment can be used to offset your expenses. So you can not deduct the entire premium in one year since you are using it over the course of five.
If you are a sole-proprietor or self-employed, there is more good news for you. Your payments for coverages like medical, dental, and long-term care can be included as an expense. However, this is not the case if you “could” have been covered by your spouse for a certain time in the year. If they see you had the option, they will not take the deduction on your taxes.
In most cases, your business’ essential premiums are considered tax-deductible insurance, so they will be useful come next season. Using the list provided, you can cut down on business costs and fill out that revenue line. What could be better than being covered and saving money?
EZ.Insure is help both you and your business. Your agent will answer any questions you have, compare different plans for you, and even sign you up when you’re ready, free of charge and without having to worry about being hounded by endless calls. To get started simply enter your zip code in the bar above, or you can speak to an agent by emailing email@example.com, or calling 888-350-1890. EZ.Insure makes the entire process easy, and quick.