Avoiding Insurance-Related Traps
As a small business owner you may be operating under some false assumptions you need to clear up:
- Trap: Believing that your company-paid health insurance is tax free. If your partnership or S corporation pays for your health insurance, the company may deduct the coverage as a business expense. However, the coverage is taxed to you as a guaranteed payment (in the case of a partnership) or compensation (if you own more than 2% of an S corporation). You can deduct only a percentage of it on your personal return as an adjustment to income (i.e., you don't have to itemize to claim this write-off). In 2000, this deduction is limited to 60% of the cost of the coverage. (The balance is part of itemized medical expenses.)
- Idea: If your spouse works for your business and you provide coverage for employees and their spouses, then you'll receive tax-free coverage as the spouse of your employee.
- Trap: Assuming you can deduct the full cost of your multiyear policy in the year you pay it. If your business uses the cash method of accounting, you can only deduct a ratable portion of the coverage in the year the premiums are paid. (Accrual method businesses can accrue only so much of the premiums as relate to the current year.)
- Idea: Unless the business realizes a premium savings for paying up front for multiyear coverage, then take only an annual policy. There's no tax advantage to the multiyear policy.
- Trap: Assuming your homeowner's policy covers your business equipment in your home office. If you run your business from home, your computer, office furniture and other equipment may be uninsured or underinsured. Further, your homeowner's policy may not cover injuries that business visitors may sustain on your premises.
- Idea: Check your current policy. You may be able to upgrade it with a rider or you may need to buy a separate policy (the cost for this type of coverage generally is modest).
- Trap: Assuming that your professional liability policy covers claims with respect to your Web site. If you are an accountant, attorney, or other professional and have a Web site for your business on which you display information that the reader may use for free, there's always the potential for liability. Your malpractice insurance probably doesn't cover this type of liability since you're not offering advice to clients (the Web viewer isn't paying you).
- Idea: Look into "cybercoverage," a type of insurance to cover potential liability arising from a Web site (including copyright and trademark infringement, errors and omissions in cyber content, and invasion of privacy).
BARBARA WELTMAN | Columnist
Barbara Weltman is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser?s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.