What expense category is Surety Bonds?

For many businesses, particularly those in the construction, freight, or other licensed professions, a surety bond is a mandatory requirement for operating. A surety bond is a three-party agreement that guarantees the business will fulfill its contractual obligations and comply with applicable regulations. The premium paid for this bond is a necessary cost of doing business.

For accountants and business owners, it's important to know that these premiums are deductible business expenses. This guide will clarify how to categorize surety bond premiums in accordance with IRS rules, outline the key considerations for their deduction, and provide guidance on tracking them for compliance.

Surety Bonds Category

The premiums you pay for a surety bond are an ordinary and necessary business expense. While the IRS does not list surety bonds as a specific line item, these costs fall under the general category of Insurance Expenses.

IRS Publication 535 allows for the deduction of premiums for various types of insurance that protect a business from losses and are necessary for its operation. A surety bond functions as a form of insurance that protects your clients or a government agency from financial loss if you fail to meet your obligations.

Important Considerations When Classifying Surety Bonds

While the premiums are deductible, there are several key points to consider.

Business Purpose is Essential

The surety bond must be directly related to your trade or business. For example, a performance bond required for a construction project or a license bond required by a state regulatory agency is clearly a business-related expense. A personal bond, unrelated to your business operations, is not deductible.

Distinction from Other Insurance

It is helpful to distinguish surety bonds from other types of insurance. While a general liability policy protects your business from losses due to accidents, a surety bond guarantees your business's performance and compliance with a third party (the obligee). Despite this difference, the premium paid is treated similarly to other business insurance premiums for tax purposes.

The Prepayment Rule

If you pay a premium for a surety bond that covers a period longer than one year, you cannot deduct the entire cost in the year of payment. As with other insurance premiums discussed in Publication 535, you must prorate the expense and deduct only the portion that applies to the current tax year.

Tax Implications and Recordkeeping

To deduct your surety bond premiums, you must report them correctly and maintain the required documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), premiums for surety bonds are deducted under Part II, Line 15, Insurance (other than health).

What Records to Keep

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

• The surety bond agreement document.
• Invoices from the surety company for the premium.
• Proof of payment, such as a canceled check or credit card statement.

How Fyle Can Automate Tracking for Surety Bond Premiums

Fyle helps you manage and document your surety bond payments, ensuring you have a complete and compliant record for tax time.

• Centralize All Documents: Forward your surety bond agreement and invoices directly to Fyle to keep all documentation in one place.
• Track Premium Payments: Capture every premium payment in real time using Fyle’s credit card feeds or by submitting invoices for other payment methods.
• 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 premium expense directly to your Insurance Expense account in QuickBooks, Xero, NetSuite, or Sage Intacct.