 Income tax 2022-2023, business expenses, insurance. Let's do some wealth preservation with some tax preparation. Most of this information comes from the tax guide for small business for individuals who use Schedule C, Publication 334 Tax Year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula we're focused online, one income. Remember in the first half of the income tax formula is in essence an income statement, but just to outline other forms, schedules flowing into these line items. One of those, the Schedule C, having business income minus business expenses, the net business income from the Schedule C, in essence flowing in to line one income of our income tax formula. The form 1040, noting that the Schedule C flows into the Schedule 1, that flows into page one form 1040, line number eight. We support accounting instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course, each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files, and more like QuickBooks backup files when applicable. So once again, click the link below for a free month membership to our website and all the content on it. Got the Schedule C, profit or loss from business has an income statement structure, income minus expenses, we're focused mainly on the expense side of things here, expenses related to insurance. All right, so insurance, you can generally deduct premiums you pay for the following kinds of insurance related to your business. Now, obviously how insurance works is you're gonna be safeguarding usually against some kind of future event. So clearly you would think then the insurance would be a deductible business item because you're safeguarding risk related to the business. Now, when we get into other kinds of insurance, then it gets a little bit more complicated. For example, if we have the health insurance, we'll discuss shortly, then that's a situation where it's kind of like a personal expense, but it's also one of like a muddy kind of area or a gray type of area because oftentimes when we have an employee, employee or situation, then the employee or might be providing the insurance to the employee. And because we want a similar kind of structure on the Schedule C kind of system, then we might have a situation where we can basically deduct the health insurance in some instances, although it might not be on the Schedule C in that case, but rather an above the line deduction. So we'll touch on that, but generally the types of insurance that are insurance related to the businesses we can deduct. Now, the other thing, and because they would be ordinary and necessary, they would fall into the category of ordinary and necessary. The other thing that's a little bit confusing about insurance is unlike other types of expenses, you generally prepay the insurance. You pay the insurance before you actually consume the insurance. The insurance is also a little bit more intangible most of the times, which can be a little bit confusing as well. So in other words, if we pay for say the telephone bill or the utility bill, usually we use the telephone, we use the utility, and then they bill us based on how much we used, and that's the billing process. For insurance, we have to plan the insurance that's gonna cover some period into the future, pay for it in advance, because that's the point of insurance, and then we're gonna get the benefit from it in the future. That means we have this kind of prepayment type of situation that if from an accrual basis, you would think that you would have to basically allocate the cost of the amount that you paid over the life of the insurance, and so you also wanna consider the timing of when you're gonna be taking the expense for the payment of the insurance. If you pay the insurance monthly, it's usually pretty close to the point in time that you got the benefit, but if you pay the insurance on a yearly basis, then you have a fairly substantial difference between when you paid it and when you got the benefit. Also note that you might think, well, I didn't get any benefit from insurance unless a tragedy happens and they repay me the insurance, but that's not exactly true because the benefit that you're getting is the insurance, the coverage. So the fact that you're covered in the event that something happens is what we are getting for the insurance, even if something bad does not happen, which we hope something bad doesn't happen, we're covered. So that means that we're consuming the insurance as the coverage period is passing even if nothing has actually happened. All right, so you might have then fire insurance. You might have theft insurance, flood insurance, similar insurance. These kinds of insurance will be specific to the type of industry that we are in. Obviously, if we have a store or something like that, fire and theft, if we have inventory, theft is gonna be more important oftentimes and flood might be something specific to a particular location, for example, more likely to have, say, flood insurance. Credit insurance that covers losses from business bad debts. So now that's clearly a business-type related insurance and in essence, making credit sales and insurance on that three group and that will be a specialized insurance you would think as well. Number two, group hospitalization and medical insurance for employees, including long-term care insurance. So now we're saying we're Schedule C business. If you don't have any employees as a Schedule C business, then we're not talking about the medical insurance here, although you might have a medical insurance for yourself that we might deduct not on the Schedule C, but possibly an above-the-line type of the deduction, adjustment to income type of deduction. This would be employees. If we have employees, then we might have the group hospitalization and medical insurance for them, including long-term care insurance. And then for liability insurance, that's probably the most common one for any kind of business, even if you don't have inventory, even if you're just and you don't have a store or something, you still might have liability insurance as a common type of business insurance. Five, malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. That would be specific to an industry where you're dealing with patients and clients. Generally, you would think, right? You would have malpractice insurance possibly, which would be an insurance that would be work-related. You would assume six, workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business regardless of fault. So that's kind of a mandatory insurance, oftentimes, that would be workers' comp. And again, you'd have to pay it. It would be business-related. If you want to do business, you might have to pay the workers' comp so you would expect it would be a deductible item. Seven, contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Number eight, so now we're forced to pay that as a business so you would think it would be an ordinary and necessary expense of doing business. Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Nine, car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. This is another one that gets a little bit messy because the car is something that if it's a business automobile that you would expect that the costs related to it would be deductible, but you have the issue of is it business and personal and what's gonna be the methods that you're gonna be using to deduct car. So if you operate a vehicle partially for personal use deduct only the part of insurance premium that applies to the business use of the vehicle. If you use the standard mileage rate to figure your car expenses you cannot deduct any car insurance premiums. So we talked about the car in the past. Remember the thought process is the standard mileage method is usually gonna be easier to calculate than the actual mileage method and you have to kind of think about which one to use when you first put the car in place and so on and so forth. So you can check that one out if you wanna go into more detail with that. 10, life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. So now you have the life insurance usually life insurance is set up. So now you're providing life insurance possibly for the employees. And so because it's a employee benefit possibly then it being deductible on the schedule C usually the life insurance beneficiary will be the family of the person of the employee in that case, not yourself, right? If it was yourself, that would be a weird kind of situation where it may change things up a bit. 11, business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. So you might buy insurance you might say, hey, look, I need my income. If there's a break in the income due to these items it would be catastrophic. My business would go under so maybe you set up an insurance in the event that that kind of problem happens to get you through that gap point would be the idea and if it's business insurance you would think would be ordinary and necessary. So non deductible premiums you cannot deduct premiums on the following kinds of insurance. One, self-insured reserve funds you cannot deduct amounts credited to a reserve set up for self-insurance. This applies even if you cannot get business insurance coverage for certain business risks. So in other words, you might think, you know, I can't afford whatever kind of insurance liability insurance or whatever insurance. And so I'm just gonna put some money away as my insurance fund. I'm not gonna touch it unless there's an issue in which case I'll dip into it. So I'm kind of self-insuring myself. That might not be a bad strategy to take to do that sometimes. Although some of the types of insurance that comes up like fire insurance or something is usually because the event is so big and catastrophic that it would be very difficult to self-insure. If you can self-insure against minor events like whatever happens that makes it so I can't work for a couple that would be like a savings fund or an emergency fund basically, which is kind of like a self-insurance type of thing. You can do that, but you can't just deduct the fact that you're holding money into an account because you're saying I'm not gonna touch it for insurance. Right, it's my insurance fund. I'm not gonna touch it. Well, you still have the money. You could touch it. It's not like insurance really. So however, your actual losses may be deductible. So when there's a problem and then you spend the money for the losses or when the losses happen, then that would be deductible. So for more information, see publication 5472, a loss of earnings. You cannot deduct premiums for a policy that pays you for your lost earnings due to sickness or disability. However, see item eight in the previous list. Okay, so three, certain life insurance and annuities. A, for contracts, so now we've got the life insurance and annuities, which often are tied together with the life insurance companies all the time. So A, your contracts issued before June 1997, you cannot deduct the premiums on a life insurance policy covering you and employee or any person with a financial interest in your business if you are directly or indirectly a beneficiary that's key point of the policy. So you are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. So that would be someone trying to work around this thing with saying it's a loan situation. So a person has a financial interest in your business if the person is an owner or port owner of the business or has lent money to the business. All right, B, for contracts issued after June 8th, 1997, you generally cannot deduct the premiums on any life insurance policy endowment contract or annuity contract if you are directly or indirectly a beneficiary. The disallowed supplies without regard to whom the policy covers. Four, insurance to secure a loan. If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot, so now they're gonna use it as collateral kind of rate. So you cannot deduct the premiums as a business expense nor can you deduct the premium as interest or business loans or as an expense of financing loans. In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. All right, self-employed health insurance deduction. You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. So this is kind of the weird one that comes into play here because usually you would think most of those other insurance things were business related. They're insurance for my employees or they are insurance for liability insurance. So you would think they'd be ordinary and necessary and therefore deductible although you still have that question of the timing of when you're gonna basically deduct them on the accounting methods that are gonna be used and whatnot but you're gonna say, okay, that makes sense but when you're dealing with an employee, like a lot of these laws that you can kind of make sense of them by looking at the structure of a corporation. So in a corporation, you've got and you deal with the interplay between the employees and the employers because remember that we are not an employee of our Schedule C business and that we don't issue ourselves a W-2. However, we're still treated as an employee of the business in that we're paying the self-employment tax and some of the other kind of relation in the form of self-employment taxes kind of similar payroll taxes. So other kind of situations come up when they pass laws that have an impact on an employee or situation which is typically focused on corporations that have a similar kind of impact when you're saying, hey, what about me? A little guy over here at the Schedule, the sole proprietorship I should get some kind of benefit related to that as well, shouldn't I? I mean, because I'm a sole proprietor and you're treating me in essence as an employee of my own business. So in a C corporation, for example, you would think that the, as we saw that the health insurance might be a deductible item for the employee that we saw even on the Schedule C but you can see it on a C corporation employee employer situation as well. So you might think, hey, I'm kind of being treated as an employee, shouldn't I get a similar kind of benefit? And that's why even though the health insurance is kind of a personal, as opposed to a business expense, you would think it would be a legitimate kind of expense. Okay, so how to figure the deduction? Generally, you can use the worksheet in the instructions for form 1040 to figure your deduction. However, if any of the following apply, you must use the worksheet in chapter six of publication 535. So you have more than one source of income subject to self-employment tax, that's gonna complicate things. You file form 2555 relating to foreign-earned income. You are using amounts paid for qualified long-term care insurance to figure the deduction. So you can also see publication 8962 and its separate instructions and publication 974 if the insurance plan established or considered to be established under your business was obtained through health insurance marketplace. So that also complicate health insurance market and you are claiming the premium tax credit. So you can dive into that in more detail. The general idea would be if I have my personal insurance, then I may not be able to deduct that on the schedule C but it might be an above the line deduction from income type of deduction. And the questions then would be, well, do I have access to insurance other than my schedule C business? Did I have the capacity to get insurance through say an employer or a spouse's employer, which can kind of complicate the situation because you can see from the IRS's perspective, they would kind of like an employee-employer situation is what they usually, and so you would think that it could complicate things if you had access to an insurance through the employee-employer's relationship from yourself or your spouse if you had a W2 wages in some kind in addition to your schedule C type of business. Now, the health insurance marketplace kind of muddies things up. You might know that as like Obamacare, right? And so what happened with that whole situation is you had the two people going in different directions for the argument. One group was arguing that we need to have a single payer system that's basically more centralized and standardized and whatnot. And that would also reduce the free rider problem because they would force everybody to have insurance for health insurance like they do with the car insurance. And the other side was saying, no, you can't force people to buy insurance. And if we centralized everything, you're gonna make the whole health insurance worse. The whole reason that we're the best, we have some of the best stuff is because of competition. So you should, to lower prices, you should increase the competition and open more types of insurance and allow companies regulate them, but allow companies in and allow states to have different policies and whatnot. So they ended up obviously squished in the middle here. So now they can't, they don't generally mandate the health insurance because I believe that was kind of struck down as unconstitutional. And but they still have this credit for the health insurance marketplace type of thing. And that kind of muddies up the system. So if you get a, because if you get a, if your income is below a certain threshold, you might be able to get this credit which basically lowers the premiums that you're paying into the health insurance marketplace. So you kind of get in a prepayment of the credit which is gonna complicate the amount of money that you paid for the insurance policy, which is gonna complicate how much you could deduct for the insurance policy. So if you're in that situation, you can dive into these publications for more detail on it.