Is the Upfront Premium Tax Deductible?
- Premium taxes are associated with many insurance policies, including casualty, life, accident and reinsurance policies and are typically based on a percentage of the total insurance premium. As with insurance premiums, premium tax is typically paid in advance by the policyholder. Typically, the premium tax is aggregated with the total premium charges -- and is not readily separable from the premium. Premium taxes are deductible by business taxpayers in all instances where the associated premiums also are deductible.
- The timing of the deduction is dependent upon whether the taxpayer is a cash or accrual basis taxpayer. Generally, a cash basis taxpayer claims a deduction for expenses in the period in which they are paid. As a result, cash basis taxpayers can fully deduct premium tax at the time it is paid. This is even true if the full amount of upfront premium tax covers future periods for which the taxpayers have yet to benefit for the insurance coverage.
- Accrual basis taxpayers do not deduct expenses when paid, but rather when incurred. The Internal Revenue Service provides that both the liability for the expense must have occurred, that the expense is readily determinable, and economic performance has occurred. Typically, with upfront premium tax, this means that a portion of the premium cannot be immediately deducted but instead must be listed as an asset on the entities balance sheet as a prepaid premium tax. The remainder of the premium tax is then deductible in future periods as the policy period is used (i.e. economic performance occurs).
- If insurance premiums are not deductible, then the premium tax associated with the policies is not deductible either. This is often the case with personal insurance policies, such as individual homeowners insurance. In addition, certain business entities can not deduct life or health insurance for owners. In these instances, the premium tax paid is not deductible by the business, although the health insurance and related premium tax may be ultimately deductible by the owners on their individual income tax returns.