Business Insurance & Tax Tips

Business Insurance & Tax Tips

The rule of thumb when it comes to getting a clear picture and strategy for your business’ taxes is to meet with your tax professional to discuss the details of your particular set of circumstances. However, you might find yourself asking some basic questions on what you can deduct or how to handle business property-related loss. We’re here to help you understand some income tax principles to better guide your conversation with your tax advisor. Take a look:

Does all insurance qualify as a deductible business expense?

Insurance is a necessity for every business owner to insulate the business from loss, damage, and lawsuits. It’s also a great tool to support and preserve a strong employee base. But it’s important to remember that any business expense can only be deductible if it is both ordinary and necessary; some examples may include:

  • Group medical insurance for employees
  • Life insurance for employees
  • Business liability insurance
  • Fire, theft, or flood insurance
  • Business malpractice insurance
  • Business automotive or other vehicle insurance

However, even this list has some caveats, for instance, your business is unable to deduct premiums paid on behalf of an owner or anyone else who has a financial interest in the business.

What about property loss, damage, or theft?

You’ll want to review your insurance policies to determine what you can expect your insurance company to cover. If you find yourself concerned about whether you carry enough or the appropriate insurance for your business needs, consider sitting down with a financial planner adept at evaluating business and individual coverage. By doing so, you could significantly reduce your risk of loss.

Once you’ve determined whether your insurance policy covers property-related loss, you’ll want to review its reimbursement clause. Depending on the circumstances, your coverage could vary from all or a portion to none. In the case that you are not reimbursed or are only partially reimbursed for your loss, there may still be an opportunity to deduct the uncompensated portion of the loss. Be careful, though, since any reimbursement that exceeds the loss may need to be reported as taxable income. There’s also the possibility of claiming a casualty loss tax deduction for a loss of property caused by a specific or unexpected event such as a storm, vandalism, or theft.

When can I use the casualty tax deduction?

If you have been compensated by your insurance for the total value of the loss, it’s likely the loss will not qualify for a casualty tax deduction. This deduction may apply  for uninsured or partially reimbursed losses. Ultimately, if your business suffers an uninsured loss, you may be eligible to deduct 100% of that loss. That percentage is adjusted based on the reimbursement you receive from your insurance company. To estimate the value of the property loss, refer to these three variables:

  1. The reduction of the property’s fair market value as a result of the casualty.
  2. The property’s original costs modified by the cost of any improvement, minus any depreciation in its value.
  3. The amount the business has been reimbursed by insurance, if any.

Keep in mind the tax law is clear on this — if your property is, in fact, covered by insurance, an insurance claim must be filed before a casualty loss deduction is pursued.

What else don’t I know?

It’s important to know and understand that if you are considered self-employed, different rules may apply to you even if you have employees. For instance, you may be unable to deduct insurance premiums that directly benefit you even if you also provide the same benefits to your employees. We could go down the rabbit hole of insurance and tax strategy, but the goal is to better prepare you for your conversation with your business tax professional as well as considering the need to get additional advice regarding your insurance options.

We’ve educated several of our clients on how to navigate insurance products and the potential risk of loss surrounding their businesses. We welcome you to contact us regarding how we can help you protect you and your family.

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