what year to deduct business insurance premium

[arejfour]

I paid my 2024 self employed liability insurance premium Dec 30 2023. Do I deduct it on my 2023 or 2024 taxes? Also, I purchased a new router for $318. Given the small value should I enter it as an office expense or depreciate it? Thanks

[Mike9241]

Under the IRS 12-month rule, a taxpayer can deduct a prepaid expense in the current year if the rights or benefits for the taxpayer do not extend beyond the earlier of:

• 12 months after the right or benefit begins OR
• The end of the tax year after the tax year in which payment is made

your ok

 as for the $318 show it as supplies or office expense.

[arejfour]

Thank you for your prompt reply. This is a yearly premium. I would rather deduct  the premium in 2024. Is that OK? Thanks

[Mike9241 · Accepted solution]

What have you done in the past with regard to the 12-month rule. ? If you deducted the prepayment in the year paid (ie in 2022 you deducted the prepayment for 2023 in 2022) in the past you must continue this method. If you didn't, then you deduct it in 2024. If this is your first time having this type of prepayment, you get to choose the year but you are locked into this method for all future years unless you apply for a change in accounting methods.  IRS PUB 538

[arejfour]

Thank you for your reply. In the last 20 years I can only recall one instance where I paid the premium early, but, in that instance I deducted it in the year it was paid e.g. year 2018 was paid in 2017 and was deducted in 2017. In all other instances the premium was paid and deducted in the year it was due e.g. year 2020 was paid and deducted in 2020. Thanks

[rwom1217]

In tax year 2023, I paid for and deducted the cost of biz insurance for the first time.  I did the math such that I deducted the actual amount used that year.  I would rather do this much simpler method of just deducting the amount that I paid in the year I paid it.  Can I amend my return for this amount/to this method without having to apply for a change since it was my first year?

Also, can I use different account methods for different deductions?

[Mike9241]

The tax code allows a business to calculate its taxable income using the cash or accrual basis, but it cannot use both. Using prepayment for the insurance is an accrual concept. what method of accounting was elected on your tax return first business tax return?  the choices should have been cash, accrual, other - schedule C, 1120-S, 1120, other

[rwom1217]

With inventory, I used the cash method.  With expenses that bridged multiple tax years, I'd typically do the math to deduct the amount used each year.  For example, if I paid $100 for a year-long license on June 1, I'd claim $58.63 in the year I purchased it.  (June 1 - Dec 31 is 214 days.  214/365 = .5863).

[rwom1217]

I selected cash method and used that for my inventory.  I was unaware this was (sounds like) a global selection across the business.  For expenses that bridged multiple years, I typically did the math so that I deducted the amount according to the portion used each year.  For example, if a paid $100 on June 1 for a one-year license, I would have deducted $58.63 (214 days from June 1 through Dec 31.  214/365 = .5863).

[Mike9241]

You are using a method for expenses inconsistent with the method of accounting you selected.  under the cash method expenses are deducted 100% in the year paid. No prepayment except if the expense would span more than 12 months. some insurance policies cover 3 years so for those prepayment treatment is necessary.  See a tax pro to review what you are doing and, if needed, help correct any issues. The last thing you want is for the IRS to come in some day an mkae you use the accrual method which could disallow the deduction for unconsumed inventory and require revenue to be reported when the sale is made not when you get payment.