When To Deduct Premiums

You can usually deduct insurance premiums in the tax year to which they apply.

Cash method. If you use the cash method of accounting, you must generally deduct insurance premiums in the tax year in which you actually pay them, even if you incurred them in an earlier year.

Accrual method. If you use an accrual method of accounting, you cannot deduct insurance premiums before the tax year in which you incur a liability for them, even if you paid them in an earlier year. In addition, you cannot deduct insurance premiums before the tax year in which you actually pay them (unless the exception for recurring items applies). For more information about accrual methods of accounting, see chapter 1. For information about the exception for recurring items, see Publication 538.

Cash or accrual method prepayments. You cannot deduct in one year the entire premium for an insurance policy that covers more than one year. You can deduct only the part of the premium that applies to that year. For each later tax year, you can deduct the part that applies to that tax year. This applies whether you use the cash or accrual method.

Example. You operate a business and file your returns on a calendar-year basis. You bought a fire insurance policy on your building effective October 1, 2000, and paid a premium of $1,200 for 2 years of coverage. On your 2000 return, you can deduct only the part of the total premium that applies to the 3 months of coverage in 2000. For 2001 and 2002, you can deduct the part of the premium that applies to each of those years. Since the total policy premium is $1,200 for 2 years, the yearly rate is $600 and the monthly rate is $50. For the 3-month period in 2000, you can deduct $150; for 2001, you can deduct $600; and for the 9-month period in 2002, you can deduct $450.

If you use the cash method of accounting and you pay the $1,200 premium in January 2001, you cannot deduct any amount on your 2000 return. However, you can deduct $750 (the $150 that applies to 2000 plus the $600 that applies to 2001) on your return for 2001.

Dividends received. If you receive dividends from business insurance and you deducted the premiums in prior years, at least part of the dividends generally are income. For more information, see Recoveries in Publication 525.

Previous| First | Next

Publication Index | IRS-Forms Main | Home