Accounting Considerations for Business Insurance Coverages

Business Insurance CoveragesWith more than eight million small businesses in America, and more than $776 billion in net premiums issued by the insurance industry in 2022 for commercial policies (according to the Insurance Information Institute), business insurance is big business. Along with protecting businesses from a myriad of claims, insurance expenses also have to be accounted for correctly.

When it comes to defining prepaid insurance, it’s essentially remittances that businesses (and individuals) make to an insurance company in advance. Normally, the usual time-frame for an insurance policy is 12 months. The time-frame is important when it comes to distinguishing between current and long-term asset classification.

If a prepaid expense, such as an insurance premium payment, is not utilized within 12 months of the remittance, it’s considered a long-term asset. Since it’s very uncommon for it to happen, it’s not seen in many financial statements, but is an important consideration to ensure that prepaid expenses are accounted for correctly.  

Important Accounting Factors

Since the coverage takes place in the future, but the payment is recorded in a preceding period, the prepaid insurance expense is considered a current asset on the balance sheet. Then, when the coverage is effective, the accounting consideration changes to the expense side of the business’ balance sheet.  

Here is an example of how businesses account for insurance expenses.

Company X pays an insurance premium of $3,000 on May 15 for the following 12 months starting June 1. The May 15 payment is recorded on the same date with a debit of $3,000 attributed to prepaid insurance along with a credit of $3,000 to cash. As of May 31, nothing has changed insurance-wise or accounting-wise for this policy, so the full $3,000 will be reported as prepaid insurance. However, once coverage is effective things change.

When June 30 rolls around, an adjusting entry will show a debit insurance expense for $250 (one-twelfth of the annual policy premium), and the same amount will see a credit to prepaid insurance. The June 30 debit balance for prepaid insurance will now be $2,750, leaving the remaining 11 months of insurance coverage that hasn’t yet elapsed – or eleven-twelfths of the $3,000 insurance premium cost.

This process repeats for the remaining 11 months. Depending on the business’ needs, coverage changes, policy changes, etc., the amounts may change but the process will likely remain the same.

Additional Factors

A related term, insurance payable, is another type of debt that is connected with an insurance expense. Listed on a company’s balance sheet, it represents a business’ outstanding premiums. This shows how much a company needs to pay the insurance company, and ideally by the end of the current period to remain current, avoid overdue fees, or have the policy canceled by the insurance carrier.

Along with giving businesses peace of mind, having the right mix of commercial insurance requires the right type of accounting considerations for the business’ internal and external accounting and tax reasons.


How to Develop a Credit Policy

How to Develop a Credit PolicyA credit policy explains how a company will manage lines of credit for client accounts and what procedures to follow for severely outstanding invoices. It helps a business promote a robust foundation for its working capital level.

Defining a Credit Policy

Unlike personal credit scores, business scores range from 0 to 100; the scores from the FICO Small Business Scoring Service range from 0 to 300. According to the U.S. Small Business Administration, a first step to establishing business credit is to sign up for a Dun & Bradstreet (DUNS) number for each business location.

There are three components to a company’s credit policy. First, develop an effective system of following up on past-due invoices. Second, define when, how much, and the terms of credit extended to customers. Third, establish how the business underwrites a client’s creditworthiness and put guidelines in place to determine when to increase or decrease lines of credit for clients.

Memorializing a Company’s Credit Policy for External and Internal Uses

The reason why it’s so important to have a credit policy in writing is because 6 in 10 workers in large American business workplaces have found it challenging to get information from their fellow co-workers, according to a report by YouGov and Panopto. This same report found that processes that are not documented result in employees wasting an average of 5.3 hours/week either looking for the right person or waiting for a response.

Internally, it enables employees to understand the policy inside and out, creating more efficient workers. Externally, it sets clear ground rules and reduces the likelihood of mismatched customer expectations.

Considerations Before Writing Out a Credit Policy

Depending on the interest rate environment, clients may have a hard time obtaining financing. If they are able to obtain financing in a high-interest rate environment, it will come with a higher cost for the customer. The business may need to have more stringent policies.

Terms of Sale May Not be One-Size-Fits-All

It is imperative to explain how payment terms work before the company engages with clients. Be it net 15, 30, or 60 days, etc., consider how payment timeframes may incentivize pre-payment or early payment discounts. From there, determine when and how the company takes action to deem when payment is “delinquent,” and when it’s considered uncollectable and finally written off and sold to a debt collector.

Depending on the size/revenue/etc. of the company writing the policy, it is not ideal to treat smaller companies the same as larger/more established companies. For example, giving a company a net 45 term versus a net 30 or net 15 has two available outcomes.

Larger companies may be able to pay faster, but if they are given more time to pay, it can negatively impact the receiving company’s cash flow. And while giving small companies similar terms can create more goodwill, it also can cause a company to take it for granted. This presents the potential to never receive payment for outstanding invoices if the small business faces bankruptcy. Similarly, depending on the type of business and/or sector it’s in, risk should be rated appropriately.

Determine Roles/Responsibilities

Ensure each department and person within each department has a defined role within the credit approval process. The sales department can help craft payment terms to reduce late payments and maximize sales. The credit department can handle reviewing to extend, lower, and increase credit limits. The accounts receivable (AR) department should follow up on late invoices, collect payments, and record incoming payments.    

While there’s no boilerplate form for a business’ credit policy, having a policy in place will help a business navigate its internal and external needs more effectively.


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IRS Audit Alert: Are You Making These Common Mistakes?

Worried about getting audited by the IRS? Check out the statistics on IRS audits and tips to reduce your risk of being audited.

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IRS Audit Alert: Are You Making These Common Mistakes?

Article | September 15, 2023 | Authored by KDP LLP

The Internal Revenue Service (IRS) conducts audits to ensure both individuals and businesses are complying with tax laws and accurately reporting their income and deductions. Even though audits are relatively rare, certain income brackets and specific actions can attract the attention of the IRS. In this article, we’ll provide audit rates from the most recent IRS Data Book, along with tips to minimize your risk of audit.

IRS audit rates

Each year the IRS releases the Data Book, which provides valuable statistics on IRS audit activity. According to the data for 2019 tax returns, the likelihood of an audit increases with higher income levels. Taxpayers earning between $1 million and $5 million face an audit rate of 1.3%, while those with incomes over $10 million have close to a 9% audit rate. In comparison, the audit rate for taxpayers earning between $25,000 to $500,000 is around 0.2%. 

Estate tax returns also face more rigorous examinations compared to personal tax submissions. For the 2019 tax year, the IRS examined 1.4% of estate tax submissions, a significant contrast to the percentage of personal tax submissions inspected. 

To provide a better understanding of the likelihood of an audit and the respective factors contributing to it, we have included a table highlighting the most recent IRS audit rates based on 2019 tax returns. This table illustrates the audit rates across various income levels and the differential scrutiny of tax returns such as personal and estate tax submissions. Please note that the IRS can pursue new enforcement actions for 2019 tax returns through at least 2023, so these estimates could still change. 

Return type

Percentage of returns examined

Individual Returns


Returns with EITC


No total positive income


TPI $1-$25,000


TPI $50,000-$75,000


TPI $75,000-$100,000


TPI $200,000-$500,000


TPI $500,000-$1 million


TPI $1 million-$5 million


TPI $5 million-$10 million


TPI > $10 million


Business Returns


Total Corporation income tax returns


Partnership returns


S-corporation returns


Estate tax returns


How long does the IRS have to audit you? 

In general, the statute of limitations for an audit runs three years from the time you file your return. Technically, the statute of limitations clock starts running on the later of your filing date or the actual due date, so filing early will not necessarily start the clock earlier. And, if you fail to file or forget to sign your return, it is not considered a valid return, and the clock does not start until the error is resolved.

In some situations, you could face an audit up to 6 years after your return was filed or due, whichever is later. For instance, if you omitted more than 25% of your income, the statute of limitations is doubled to 6 years. If you overstated your cost basis on the sale of an asset that reduced taxable income by more than 25%, the statute of limitations is doubled to 6 years. Worse yet, there are circumstances in which the statute of limitations never runs out, meaning the IRS can audit you indefinitely. If you never file a return or file a fraudulent return, there is no time limit.

While never filing a return or filing a fraudulent return seem like obvious reasons for no time limit, there are many less obvious situations. For example, forgetting to include certain forms when required, such as Form 3520 for receiving a gift or inheritance from a non-U.S. person or Form 8938 for overseas assets causes the statute of limitations clock to not even start.

The IRS’s time limits are anything but simple, and there are many exceptions to the general three-year statute of limitations rule. This is why it’s imperative that you work with a seasoned CPA when filing your taxes, as even minor mistakes and oversights can cause an audit and lead to large civil penalties and potential criminal liability. 

Strategies to reduce audit risk

While the risk of an audit may be small, it’s important to understand common triggers for an audit and, when possible, how to avoid them.  

Report income accurately

One of the most critical steps in avoiding an IRS audit is to report all income and expenses accurately. Underreporting income can raise red flags with the IRS, increasing the likelihood of an audit. This can be triggered when the income sources and amounts reported on your tax return are inconsistent with those reported by third parties. 

Income taxes originating from regular wages are typically withheld and reported by your employer. However, non-wage earnings, such as capital gains and dividends, usually do not have taxes withheld, making them more susceptible to inconsistencies and scrutiny by the IRS. 

To ensure you accurately report all sources of income, we have compiled a table that outlines common types of income, their associated tax forms, and the deadlines by which you should receive these forms.

Type of Income

Relevant Form

Should be Received by

Regular Wages


Jan. 31

Independent Contractor Income


Feb. 1

Partnership Income

Schedule K1

Mar. 15

Misc. Income (e.g., rent, royalties)


Feb. 1

Social Security


Jan. 31

Distributions from Retirement Accounts, Pensions, Annuities


Jan. 31

Real Estate Sale


Feb. 15

Securities Sale


Feb. 15



Jan. 31



Jan. 31

Deductions and credits

It’s important to fully understand the eligibility criteria for deductions and credits when filing your taxes. If you are unsure of your eligibility for deductions or credits or plan to claim complex deductions, it’s wise to seek professional guidance. 

Be specific when listing deductions, especially if you’re deducting things like travel, advertising, inventory, and office supplies. If any significant changes or discrepancies in your deductions occur, you can provide an explanatory statement with your return to prevent arousing suspicion. 

Avoid claiming excessive or unusual deductions, particularly for business expenses, as this can be an audit trigger. If you claim a home office deduction, make sure you understand and follow the IRS rules. The space must be used exclusively and regularly for your business, and it must be the principal place of your business. 

Also, claiming a sizable charitable tax deduction relative to your total income could draw the attention of the IRS. Be prepared to provide documentation to support any figures you report on your return, and only report the actual amount of deductions for which you are eligible.

Business Losses

It’s common for businesses, particularly new ones, not to be profitable. However, reporting losses for an extended number of years or showing a big swing in losses may attract the attention of the IRS. The underlying expectation is that a business should generate profits over the long term, and the IRS may seek explanations if this doesn’t occur. And, of course, if your business shows an unusually high loss, it could trigger a red flag. 

Double-check your tax return

Always thoroughly check your tax return for accuracy and unintentional omissions. Ensure all math and figures are correct, and confirm that you’re using the appropriate number of exemptions. Note that round numbers on your tax return can look suspicious, so it’s best to use exact amounts whenever possible. 

Make certain that all figures match up with other tax-related forms (such as your 1099 or W-2), as data entry errors are a frequent red flag for auditors. While the IRS’s automated system will detect discrepancies, it won’t be apparent whether the discrepancy was accidental or intentional.

Electronic filing

Timely, electronic submission of your tax return can also reduce the likelihood of an audit. The error rate for a paper return is significantly higher than that for returns filed electronically, mainly because tax software helps to correct errors. By filing electronically, you are less likely to make errors and more likely to avoid an audit.

Understanding the frequency of IRS audits and common triggers can help reduce the likelihood of an audit. While this article provides insights on audit rates and strategies to reduce your risk, there’s no substitute for personalized advice based on your unique situation. If you have any questions or would like assistance with your tax return, please contact our office to speak with one of our expert advisors.

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KDP is a team of CPAs and business advisors with a local focus, but a national reach. We have offices in Medford, Oregon and Boise, Idaho, as well as satellite offices throughout the United States. We have been providing professional tax, accounting, audit, and management advisory services since 1976, serving clients nationwide. Our firm has more than 90 trained professionals on staff dedicated to furnishing high-quality, timely and creative solutions for our clients.

For more information on how KDP LLP can assist you, please call us at:

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