Purchasing the insurance you need for a commercial business can provide a tax benefit. However, it is not as much a percentage exemption as a deductible business expense.
To qualify for a deduction, an expense for a business must be ordinary and necessary. Ordinary refers to an accepted or common expense. Necessary does not have to be required, but something that is reasonably needed. Insuring a business, the property and the products is services common and needed.
For the purpose of taxes, insurance for your business is a business expense, as compared to a capital expense. However, you cannot include your insurance costs in the cost of the goods or services you sell. This would create a double deduction.
IRS publication 535 covers the requirements for business expenses. In most cases, you are allowed to deduct the full amount of this type of expense. Exceptions are made if you recover a part of the costs or trade services for the costs. Limitations may also be placed on the amount you can deduct. Businesses that operate at a loss are affected by this rule.
Your accounting method may also play a part in your situation. If you use the cash method for accounting, you would take the deduction for the year or quarter that you pay your insurance premium. If you use accrual accounting, your method may be different. However, if you pre-pay your insurance premiums, you cannot take the deduction in advance. You may only deduct the amount of insurance that applies to the term of your taxes.
When it comes to tax issues, especially business taxes, you should consult a tax professional. When it comes to commercial insurance, we are ready to help you with all of your needs. As an independent agency, we can offer you quotes from a variety of national insurers. We will also be available to answer any insurance related questions that you have.
