When To Deduct Premiums ERROR MSGYou can usually deduct insurance premiums in the tax year to whichthey apply. Cash method.If you use the cash method of accounting, you must generally deductinsurance premiums in the tax year in which you actually pay them,even if you incurred them in an earlier year. Accrual method.luxury hotels in TorquayIf you use an accrual method of accounting, you cannot deductinsurance premiums before the tax year in which you incur a liabilityfor them, even if you paid them in an earlier year. For moreinformation about accrual methods of accounting, see chapter 1. Cash or accrual method prepayments.You cannot deduct in one year the entire premium for an insurancepolicy that covers more than one year. You can deduct only the part ofthe premium that applies to that year. For each later tax year, youcan deduct the part that applies to that tax year. Example.You operate a business and file your returns on a calendar-yearbasis. You bought a fire insurance policy on your building effectiveOctober 1, 1999, and paid a premium of $1,200 for 2 years of coverage.On your 1999 return, you can deduct only the part of the total premiumthat applies to the 3 months of coverage in 1999. For 2000 and 2001,you can deduct the part of the premium that applies to each of thoseyears. Since the total policy premium is $1,200 for 2 years, theyearly rate is $600 and the monthly rate is $50. For the 3-monthperiod in 1999, you can deduct $150; for 2000, you can deduct $600;and for the 9-month period in 2001, you can deduct $450. If you use the cash method of accounting and you pay the $1,200premium in January 2000, you cannot deduct any amount on your 1999return. However, you can deduct $750 (the $150 that applies to 1999plus the $600 that applies to 2000) on your return for 2000. Dividends received.hotels in LuzernIf you receive dividends from business insurance and you deductedthe premiums in prior years, part of the dividends are income. Formore information, see Tax Benefit Rule Gran hotel Ennisin Publication 525.