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If you are a small business owner, you likely consider your rent, utilities, office supplies online, along with other business expenses as tax deductions. What you may not realize is that you can discount many – though not every – of the business insurance policy premiums.
In general, tax deductions include items which help your company operate and keep profitability. Since insurance is considered an expense to do business, certain policy premiums can be deducted from your taxable income. There are several grey areas however, particularly if you run a business out of your home or perhaps your workers are working at home during the pandemic.
To help you understand what your company insurance tax deductions are and the way to maximize them, we sat down with at TruShield Insurance.
Maximizing your business insurance tax deductions
“Commercial insurance costs would certainly be deductible when they cover exposures that will have an impact on the profitability of the business, for example fire insurance, property insurance, as well as cyber insurance,” says Donohoe.
“If it's associated with a capital asset, it could be also deductible,” he adds. For instance, in case your office building burns down, you would be bankrupt, so you need fire insurance to safeguard that capital asset.
According towards the Canada Revenue Agency, small business owners can deduct “all ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business.” However, insurance costs related to your vehicle should be claimed as automobile expenses, and insurance costs related to the business utilization of workspace in your home must be claimed as business-use-of-home expenses.
Business insurance premiums that are tax deductible include:
Property: This gives protection for the business property, including your building, any equipment (including computers), fixtures, and furnishings, in addition to inventory or supplies.
General liability: This covers injuries to customers, suppliers, employees, or people to your property. Additionally, it covers you if you or your staff are working off-site and cause problems for a third party or their property.
Business interruption: This reimburses you for any lost net profits along with other expenses necessary to help you carry on with your company until you can get it up and running after an insured loss.
Cyber risk insurance: This is designed to support your company if computer networks are breached, causing information to be stolen or ransomed, business operations to be interrupted, or personal computers to be corrupted.
Product liability: This protects you if your product you manufacture or sell turns out to be defective or maybe there are inaccuracies within the assembly instructions or warnings.
Professional liability: If a customer claims that you simply failed to deliver on which was outlined inside a contract or that you simply mismanaged a project, professional insurance will cover legal costs and expenses.
Commercial auto insurance: This insurance provides protection in case your company owns vehicles that are driven by yourself or perhaps your staff in your day-to-day business.
Coverage for contractors: This protects your tools, equipment, and installation materials against loss or damage from causes such as theft, fire, and vandalism.
What can't you deduct?
You can't deduct your life insurance costs – unless your policy is being used as collateral for a business-related loan, then you might be able to deduct a portion of the premiums paid (though not the full amount).
“If premiums are based on personal matters instead of business, they are not deductible-it needs to be business-related,” says Donohoe. There are grey areas, though. For example, you may be a sole proprietor who runs a company from home or a small business owner with employees working from home during the pandemic, so some of your home-related expenses are related to the business.
“That's in which you need to see a tax advisor because you're blending personal and business,” says Donohoe. “The CRA website offers pointers for the pandemic situation, but when you've got a complicated or special situation, then going to a tax advisor – even just to double-check your projects – is usually recommended.”
After all, making incorrect deductions will finish up in an audit. But at the same time, you want to ensure you're maximizing all possible tax deductions for the business.
Coverages and deductions when working from home
If you and your workers are working from home, don't assume home insurance has your back for business losses – and don't be prepared to write it off like a business expense.
“Home insurance wouldn't automatically cover all you need for a business operation, so you would likely need to have a separate policy or perhaps a rider-optional coverage you can include to your policy-if it's offered,” says Donohoe. For instance, if customers are coming to your house for business, property insurance wouldn't necessarily cover a fall, but would be covered under commercial general insurance instead.
The general rule of thumb around business tax deductions is to ensure they relate straight to the operation of the business. “That's in which you strengthen the deductibility,” says Donohoe. “If you've any grey areas, i suggest you get in touch with your tax advisor.”
Position your small business for growth with tailored insurance coverage
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This blog is provided for information only and is not a substitute for professional advice. We make no representations or warranties regarding the accuracy or completeness of the information and will not be responsible for any loss arising from reliance upon the data. Terms, conditions and exclusions apply to coverage. See policy for details.
