What expense category is Bid Bond Expenses?

For businesses in the construction industry and other sectors that rely on competitive bidding, securing a bid bond is a standard and often mandatory step in submitting a proposal. A bid bond provides a financial guarantee to the project owner that the winning bidder will honor their bid and enter into a contract.

The premium paid to a surety company for this bond is a necessary cost of doing business. For accountants and business owners, it's important to know that this is a fully deductible expense. This guide will clarify how to categorize bid bond expenses according to IRS rules and how to track them for accurate tax compliance.

Bid Bond Expenses Category

The premium you pay to a surety company for a bid bond is an ordinary and necessary business expense. While the IRS does not have a specific line item for Bid Bonds, these costs are best classified under one of two general categories:

1. Insurance Expenses: A bid bond functions as a form of business insurance, guaranteeing your bid to a client. IRS Publication 535 allows for the deduction of premiums for various types of insurance that cover business risks.
2. Other Expenses: These costs can also be categorized as a general business expense and listed under Other expenses on your tax return.

Important Considerations While Classifying Bid Bond Expenses

The key to handling these costs correctly is to understand their specific purpose in the bidding process.

Purpose of a Bid Bond

A bid bond is a guarantee. It assures the project owner that if you are awarded the contract, you will sign the agreement and provide any other required bonds (like a performance bond). The premium you pay for this guarantee is the deductible expense.

Distinction from Other Surety Bonds

It is helpful to distinguish a bid bond from other bonds you might need if you win the contract:

• Performance Bond: Guarantees you will complete the work according to the contract terms.
• Payment Bond: Guarantees you will pay your subcontractors and suppliers.

While the premiums for all these bonds are generally deductible business expenses, they are associated with different phases of a project.

Deductible Premium vs. Forfeited Bond

The deductible expense is the premium you pay to obtain the bond. In the rare event that you win a bid but fail to enter into the contract, causing the bond to be forfeited, that forfeited amount would be treated as a business loss, which is handled differently for tax purposes.

Tax Implications and Recordkeeping

To deduct your bid bond premiums, you must report them correctly and maintain proper documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040):

• If categorized as insurance, the premium is included on Line 15, Insurance (other than health).
• If categorized as a general expense, it is reported under Part II, Line 27a, Other expenses, with a description like Bonding Fees.

What Records to Keep

You must have documentary evidence to substantiate the expense. Your records for a bid bond should include:

• The bid bond agreement from the surety company.
• The invoice for the bond premium.
• Proof of payment, such as a canceled check or credit card statement.
• Documents linking the bond to a specific business project or bid.

How Fyle Can Automate Tracking for Bid Bond Expenses

Fyle helps you manage and document all your bonding costs, ensuring every premium is captured, coded, and ready for tax time.

• Centralize Bond Documents: Attach the bid bond agreement and invoice directly to the expense record in Fyle.
• Track by Bid or Project: Code each bond premium to a specific project or bid number for precise cost tracking.
• Create a Clear Audit Trail: Fyle maintains a time-stamped, unalterable record of all payments and documents for easy substantiation.
• Automate Your Accounting: Sync the categorized insurance expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.