When To Deduct Premiums(p21)

You can usually deduct insurance premiums in the tax year to which they apply.

If you use the cash method of accounting, you generally deduct insurance premiums in the tax year you actually paid them, even if you incurred them in an earlier year. However, see Prepayment, later.

If you use an accrual method of accounting, you cannot deduct insurance premiums before the tax year in which you incur a liability for them. In addition, you cannot deduct insurance premiums before the tax year in which you actually pay them (unless the exception for recurring items applies). For more information about the accrual method of accounting, see chapter 1. For information about the exception for recurring items, see Publication 538.

You cannot deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year.

Expenses such as insurance are generally allocable to a period of time. You can deduct insurance expenses for the year to which they are allocable.

In 2010, you signed a 3-year insurance contract. Even though you paid the premiums for 2010, 2011, and 2012 when you signed the contract, you can only deduct the premium for 2010 on your 2010 tax return. You can deduct in 2011 and 2012 the premium allocable to those years.

If you receive dividends from business insurance and you deducted the premiums in prior years, at least part of the dividends generally are income. For more information, see Recovery of amount deducted (tax benefit rule) in chapter 1 under How Much Can I Deduct?