Note: This article has been updated from previous tax years. Notable 2020/2021 updates includes the increase to the standard mileage rate and a reminder about COVID-19 legislation. Disclaimer: We are not tax professionals. Please consult with your accountant or CPA for tax advice.
It’s tax season again, and we’ve put together a full tax deductions checklist specifically for independent insurance agents.
There are a couple things to go over before we get into the checklist:
- Get a professional to help you
- Understand what counts as a deduction
Get a Professional to Help You
If you run your own show, it’s important that you use the help of professional. The saying goes that hiring a CPA (Certified Public Accountant) to do your taxes can pay for itself, because they find every possible deduction for you, not to mention making sure you have all your i’s and t’s dotted and crossed.
CPAs are licensed by the state, and in order to keep a license, they have to keep up with current tax laws. Regular accountants aren’t licensed. You can read more about why CPAs are helpful here.
If you don’t already have a CPA, you can always do some online searching, but call several offices to get a feel for your options.
When it comes to finding deductions, it’s your job to keep track of receipts and expenses. A CPA can help you pinpoint deductions, but if you don’t have documentation to back it up, you can’t claim them.
What Counts as a Deduction?
According to the Business Expenses document put out by the IRS (Publication 535), your business expenses must be ordinary and necessary in order to be deducted from your taxes.
An ordinary expense is a common or accepted expense in your industry. A necessary expense is one that’s helpful and appropriate for your business.
Secondly, anything you use for both home and business must be divided up into accurate percentages. For example, let’s say you have a home office that’s 200 square feet. If your entire home is 2,000 square feet, you can only deduct 10% of your mortgage payments, insurance, utilities, repairs, and so on.
All of the information found in the following checklist is taken from Publication 535. The checklist makes it easy to see a full overview of what you can deduct, but if you need more specifics on something, feel free to open that document, search for your keyword, and you’ll be able to find it quickly.
(Note: The 2020 Publication 535 revision has not been released by the IRS as of January 18, 2021. When it is released, the link will be updated. You can view the draft for 2020 here.)
A Few Notes on COVID-19 Legislation
If you've never hired a CPA or tax professional to help you file your taxes, 2021 may be the perfect year to start.
All of the new legislation for COVID-19 relief can make it more confusing to do your taxes correctly. While there weren't any major changes to the tax code, there were plenty of tax incentives and programs to help small businesses such as yours.
Talk to your advisor about the CARES Act, Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL), Employee Retention Tax Credit (ERTC), and Families First Coronavirus Response Act (FFCRA).
Tax Deductions for Insurance Agents
- Mileage driven → MileIQ can make this easy
- Parking fees
- Registration fees
Note: Use Schedule C and Form 2106. The standard mileage rate for 2020 is 57.5 cents per mile. Beginning on January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 56 cents per mile. This is the second consecutive year the business use rate has decreased.
- State licenses
- Subscriptions to professional, technical, and trade journals that deal with your business field
- The All-Star Program
Note: Use Schedule A. Any education that qualifies you for a new career won’t count — only continuing education will.
- Health insurance
- Long-term care insurance
- Dental insurance
- Business insurance
- Part of your homeowner’s insurance
- Vehicle insurance
Note: Use Schedule A, Form 2106 and Form 1040. You can only deduct insurance if it’s for your business or if you’re self-employed. For homeowner’s insurance, you can deduct part of it based on the square footage of your home office.
- Meals and entertainment
- Baggage fees
Note: Use Form 2106. Half of the meals and entertainment tab can be deducted for business-related meals and entertainment. You must keep receipts, a note of who was entertained, and what the purpose of the meeting was. Note that if the meal is lavish or outrageously expensive, it will not count as a valid deduction.
- Home office
- Telephone service, but only for long-distance calls or a second line (the first line is not deductible)
- Office desk
- Reconditioning floors
- Repainting the interior or exterior walls
- Cleaning and repairing roofs and gutters
- Fixing plumbing leaks
Note: Use Form 8829, Schedule C, and Schedule A. For these deductions, you must divide the office space square footage by the square footage of the entire residence. Once you figure the percentage of your home that is solely for your business, you can calculate the deductions above.
Office Supplies and Equipment
- Paper clips
- Postage stamps
- Presentation folders
- Copying costs
- Overnight deliveries
- Internet fees
- Greeting cards
Note: Use Schedule C. Your computer must be used at least 50% for business.
- Charitable contributions
- Tax preparation fees (only for the part of your tax return related to your business)
Top Tax Deductions for Independent Insurance Agents
It can be difficult to remember to keep receipts for every single purchase. If you're just getting into the business or are self-admittedly not great at keeping track of your expenses, be sure to deduct some of the biggest business expenses you have.
- Office/Building rent or home office space. If you have a physical office, the rent is deductible, and if you work from home, your workspace is deductible. Your utilities are also deductible, such as your phone bill and internet.
- Advertising. Everything from Facebook ads to business cards are tax deductible.
- Continuing education and training. Your state licenses and continuing ed classes are all tax deductible – and they can add up.
- Travel. If you travel to take care of your clients or conduct any business, these costs are tax deductible. Your vehicle, flights, hotel, and even parking costs are all deductible.
- Software. Your CRM, scheduling system, and website maintenance costs are all tax deductible. These are often some of the biggest expenses for independent agents, so don't forget to write them off!
QBID Can Save Agents Money at Tax Time
Another recent change is the introduction of the Qualified Business Income Deduction, or QBID for short (read the full explanation at irs.gov).
In sum, if you report your income as a sole proprietorship (which many independent agents do), you might be entitled to a deduction of up to 20% of qualified business income.
Ultimately, you're going to pay less income tax because of this deduction.
You can read a lot more about QBID, plus an example scenario of how much you could save on taxes, here: New 2018 Tax Bill Is Saving Independent Insurance Agents a Lot of Cash
How to Keep Track of Your Tax Deductions
It’s a good idea to start keeping track of your receipts now for next year’s tax season, but it can be a HUGE pain.
A lot of self-employed workers swear by the free app Evernote Scannable, which keeps track of your receipts. You simply take a picture of the receipt, and you can save it to your Google Drive, the Cloud, or whatever application works the best for you.
This can be a pain-free way to make sure you get the most money back on your taxes.
Working with a tax professional is always advised to ensure you properly file your taxes. Use our cheat sheet as a guide to ensure you don't leave out any qualified expenses, but always consult with the experts!
The U.S. Small Business Administration also has a helpful website to assist you in paying your taxes appropriately.
If you want to take our tax deductions checklist with you, be sure to click on the image below. You can download a PDF of the checklist and check items off as you file your taxes in 2021.