The right kind of insurance is essential to sound financial planning. Some of us may have some form of insurance, but very few really understand what it is or why you need to have it. For most Indians, insurance is a form of investment or a great way to save on taxes. If you ask the average person about their investments, they will proudly list an insurance product as part of their core investments.
Of the 5% or so of Indians who are insured, the percentage of those who are adequately insured is much lower. Very few of the insured see re insurance as a pure product. There is perhaps no other financial product where there has been such massive mis-selling by agents who sell products with excessive zeal, linking insurance to investments, which earns them fat commissions.
What is insurance?
Insurance is a way of spreading a significant financial risk of an individual or business over a large group of individuals or businesses in the event of a pre-determined, unfortunate event. The cost of insurance is the monthly or annual indemnity payments to the insurance company.
In the purest form of insurance, the money paid as compensation is not recovered if the pre-determined event does not occur by the specified time period. Insurance is basically a means of spreading risk among a group of insureds and reducing their financial burden in the event of a shock.
Legal Fees — When Are They Deductible?
Amounts paid for legal and other professional services may have the following tax consequences, depending on the actual circumstances and the taxpayer’s ability to meet the applicable statutory requirements for the deduction:
(1) As a deductible expense or as one of the three categories of deductible nonbusiness expenses:
(2) as a nondeductible personal expense;
(3) as a nondeductible capital expenditure, but which may be written off;
(4) as a deductible loss; or
(5) as a combination of the foregoing.
To be deductibles as a trade or business expense, legal and consulting expenses must be
(i) incurred in the conduct of a trade or business;
(ii) ordinary and necessary;
(iii) reasonably incurred;
(iv) paid or incurred in the taxable year in which the taxpayer seeks to deduct them; and
v) paid by the person for whom the services are performed. These requirements are discussed briefly below.
A taxpayer may not deduct legal and professional fees paid or incurred in a taxable year (even if they are shown to be ordinary, necessary, and reasonable and meet the other requirements discussed herein) unless the taxpayer can establish that the expenses were paid or incurred in the course of carrying on a trade or business. Whether the taxpayer’s activities amount to the conduct of a trade or business is a question of fact.
The Code does not contain a specific definition of “trade or business.” However, there are literally hundreds of conflicting cases interpreting the term in different ways. In general, a taxpayer must engage in an activity continuously and regularly (rather than occasionally or sporadically) to be considered engaged in a trade or business. One indication that a taxpayer is engaged in a trade or business is that he or she devotes a substantial amount of time to the trade or business.
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