What is “insurance” for income tax purposes? In the absence of a generally applicable definition in the Internal Revenue Code (IRC) and Treasury Regulations, taxpayers, the Internal Revenue Service, and the courts have struggled to define the term on a case-by-case basis.
The tax stakes involved are significant. Property and casualty “insurance” premiums incurred in the course of a trade or business or other activity engaged in for profit are generally deductible currently, under the same rules as are applicable to other business and investment expenses,1 while the cost of other forms of risk management may have to be capitalized. At the same time, “insurance companies” benefit from special rules in the computation of their taxable income and expenses.2
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