Running a business is expensive with endless costs, like employment expenses and the organization’s ordinary operating costs. As a business owner, cutting some of these expenses is beneficial to maintain business operations and increase profit. Getting professional liability insurance is one way to save your business from legal fees and expensive lawsuits. By paying professional liability insurance premiums, you get protection against liability claims.
Another way to cut expenses is to file for tax deductions and get necessary expenses deducted from your business taxes. The question here is:
Are professional liability insurance premiums tax deductible?
Stick around, we’re here to answer that question and give you all the info you need about professional liability insurance and tax deduction.
What is Professional Liability Insurance?
Professional liability insurance is also known as errors and omissions (E&O) insurance. In short, mistakes are inevitable sometimes and PLI protects you against losing a lot of money for making them. If a client files a lawsuit for negligence, malpractice, mistake, or misrepresentation, PLI covers the legal expenses and settlement fees. It’s a necessity to maintain business operations and professional status.
Examples of Professional Liability Insurance Claims
For example, if you’re a physician and you misdiagnose a patient, causing health complications, the patient may file a lawsuit against you. If they win the lawsuit, you will have to pay an expensive settlement fee.
Let’s say your lawyer gave you misleading advice that led you to lose the case. In that case, you may file a lawsuit against your lawyer. Having PLI protects you from paying the settlement fee. And since your lawyer is covered by PLI, they don’t have to worry as well.
In Canada, some professionals are legally required to carry PLI, like physicians, accountants, and lawyers.
At EasyCover, we are experts when it comes to professional liability insurance. Call us now to get a quote and learn more about different types of business insurance.
Understanding Tax Deductions
According to the CRA (Canadian Revenue Agency), you can deduct any reasonable current expense you incur to earn business income. Here’s a list of business expenses that you claim as tax deductibles:
- Business start-up costs
- Supplies
- Business tax, fees, licences and dues
- Office expenses
- Business use-of-home expense
- Salaries, wages, benefits
- Travel
- Rent
- Management and administration fees
- Interest and bank charges
- Property taxes
- Telephone and utilities
- Insurance
- Bad debt
- Advertising
What are the Conditions for Tax Deductibility?
There are specific criteria and conditions for a business expense to be covered under tax deductibles. First of all, it must be an ordinary and necessary expense that helps you generate income. Secondly, it should be customary and common in your industry. And it should also be appropriate and helpful. So, it can’t be an expense that is considered luxury or unusual, like installing a pool on the roof.
As you can see, insurance is included on the list of tax deductibles. It’s on the official list that the CRA put forward for tax-deductible expenses. Moreover, it’s a necessary expense that ensures the protection and continuity of your business operations.
So, premiums you pay for different types of business insurance, including professional liability insurance, are generally considered deductible business expenses you can claim to the CRA.
How to Make an Insurance Tax Deduction Claim?
Claiming the deduction is a simple yet delicate process because of the legal considerations. Follow these two steps to claim a deduction on your paid insurance premiums.
Step 1: Gather Documents and Records
Before filing the tax claim, it’s important to keep accurate records and receipts throughout the fiscal year. The premiums should be listed as a business expense when preparing an income tax return. The receipts should be included as proof of insurance cost.
Step 2: Consult the T2125 Tax Form
Then, report the deduction on your business tax return. Sole proprietors use Form T2125 (Statement of Business or Professional Activities), while corporations use T2 Corporation Income Tax Return.
Get Help From Professionals
Canadian tax laws are complex and may constantly change. A tax professional can help you understand the specific deductions applicable to your business in Canada. Moreover, they can also help you claim deductions correctly to avoid audits or penalties from the CRA. Keep in mind that online advice is here to help put you on the right path and isn’t an alternative to getting a professional consultation.
Getting professional liability insurance will protect your business without costing you additional taxes. Learn more about business insurance now!