If you’re a small business owner, you likely consider your rent, utilities, office supplies, and other business expenses as tax deductions. What you may not realize is that you can write off many — though not all — of your business insurance policy premiums.
In general, tax deductions include items that help your business operate and maintain profitability. Since insurance is considered a cost of doing business, certain policy premiums can be deducted from your taxable income. There are some grey areas however, especially if you run a business out of your home or your employees are working from home during the pandemic.
To help you understand what your business insurance tax deductions are and how to maximize them, we sat down with Steven Donohoe, Vice-President of Taxation at TruShield Insurance.
Maximizing your business insurance tax deductions
“Commercial insurance premiums would generally be deductible if they cover exposures that would have an impact on the profitability of your business, such as fire insurance, property insurance, and even cyber insurance,” says Donohoe.
“If it’s related to a capital asset, it could also be deductible,” he adds. For example, if your office building burns down, you’d be out of business, so you need fire insurance to protect that capital asset.
According to 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 must be claimed as motor vehicle expenses, and insurance costs related to the business use of workspace in your home must be claimed as business-use-of-home expenses.
Business insurance premiums that are tax deductible include:
Property: This provides protection for your business property, including your building, any equipment (including computers), fixtures, and furnishings, as well as inventory or supplies.
General liability: This covers injuries to customers, suppliers, employees, or visitors to your property. It also covers you if you or your staff are conducting business off-site and cause injury to a third party or their property.
Business interruption: This reimburses you for any lost net profits and other expenses required to help you carry on with your business until you’re able to get it up and running after an insured loss.
Cyber risk insurance: This is designed to support your business if computer networks are breached, causing information to be stolen or ransomed, business operations to be interrupted, or computer systems to be corrupted.
Product liability: This protects you if a product you manufacture or sell turns out to be defective or if there are inaccuracies in the assembly instructions or warnings.
Professional liability: If a customer claims that you failed to deliver on what was outlined in a contract or that you mismanaged a project, professional liability insurance will cover legal costs and expenses.
Commercial auto insurance: This insurance provides protection if your company owns vehicles that are driven by yourself or your staff as part of 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 premiums — unless your policy is being used as collateral for a business-related loan, in which case you may be able to deduct a portion of the premiums paid (though not the full amount).
“If premiums are related to personal matters rather than business, they are not deductible—it has to be business-related,” says Donohoe. There are grey areas, though. For example, you might be a sole proprietor who runs a business 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 where 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 if you have a complicated or special situation, then going to a tax advisor — even just to double-check your work — is recommended.”
After all, making incorrect deductions could end up in an audit. But at the same time, you want to ensure you’re maximizing all possible tax deductions for your business.
Coverages and deductions when working from home
If you or your employees are working from home, don’t assume home insurance has you covered for business losses — and don’t expect to write it off as a business expense.
“Home insurance would not automatically cover everything you need for a business operation, so you would likely need to have a separate policy or a rider—optional coverage you can add to your policy—if it’s offered,” says Donohoe. For example, if clients are coming to your home for business, home insurance wouldn’t necessarily cover a slip and fall, but would be covered under commercial general liability insurance instead.
The general rule of thumb around business tax deductions is to ensure they relate directly to the operation of the business. “That’s where you strengthen the deductibility,” says Donohoe. “If you have any grey areas, it’s always best to reach out to your tax advisor.”
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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 out of reliance on the information. Terms, conditions and exclusions apply to coverage. See policy for details.