Business insurance covers risks like natural disasters, theft and lawsuits that threaten an enterprise’s income or assets – protecting it is crucial no matter its size or industry.
Business insurance costs can vary significantly depending on the level of risk your business poses, the size and composition of its workforce and applicable state laws. Bundling policies together and managing risks effectively can help keep costs at an acceptable level.
Expenses
Insurance expenses of a company consist of the premiums paid for policies it has in place to protect its property, products, and workers. These expenses are recorded as expenses in their expense account with some being eligible to be written off as tax deductions on income taxes; unexpired premiums may also be listed as “prepaid insurance”, in an asset account.
Cost of Business Insurance Policies Vary Based on Policy Type and Coverage NeedsThe costs associated with business insurance vary based on policy type and coverage needs, for instance companies leasing unique property or having an established claims history will typically pay higher premiums compared to those without such requirements or claim histories. Other variables influencing costs of insurance for a company include its size, revenue and employee counts.
Insurance typically falls into the category of operating expenses; however, some forms can also qualify as nonoperating expenses, such as disability coverage for employees – these costs typically aren’t tax deductible.
Taxes
An insurance expense for businesses is an integral component of doing business and can be significantly decreased by taking full advantage of all available tax deductions.
The IRS allows businesses to deduct expenses that are “ordinary and necessary” from taxable income, including business insurance such as general liability coverage, property insurance and workers’ comp. Many forms of business insurance qualify for this deduction including general liability coverage, property coverage and workers’ comp policies.
These policies provide coverage against specific risks a company could face, such as injuries to employees or customer property being damaged; as well as potential lawsuits and liabilities.
Work closely with a tax professional when it comes to identifying which business insurance premiums qualify for tax deduction. Certain policies cannot be written off, including disability and life coverage for company owners or employees as well as premiums paid to establish self-insured reserves – these policies and more can be found in Publication 334: Small Business Tax Guide and 15B: Employer’s Tax Guide to Fringe Benefits respectively.
Depreciation
Businesses utilizing assets for production purposes wear down over time, so depreciation must be calculated for tax purposes to estimate their net book value accurately – something public companies commonly report back to shareholders as part of their annual reporting requirements.
Depreciation associated with long-term assets reduces their costs recorded on a company’s balance sheet and is charged directly against its income statement each year, creating what is known as capital cost allowances.
Depreciation is typically applied to tangible assets like equipment and buildings, as well as intangible ones like intellectual property and software. There are various methods available to calculate depreciation – straight-line, accelerated and declining balance methods are among many IRS-approved ones – that companies can choose depending on their own business processes and needs; some allow a first year deduction equal to a proportional share of total asset cost divided by useful life of assets purchased.
Capitalization
Cost of business insurance varies widely based on multiple factors. These may include your profession, coverage needs and claims history as well as where your business operates; in areas with higher crime or natural disaster risks the costs may increase significantly; you may even require specific policies in certain states or to meet regulatory requirements.
Business income and extra expense insurance is designed to replace lost profits should your company be forced to close due to fire or another covered event, providing up to a one year benefit that can cover fixed expenses without needing to tap savings or increase debt. Premiums for this policy may even be tax deductible! A similar product called life and accidental death insurance pays out benefits if someone dies from work-related injury.