Common Tax Deductions for Independent Consultants
As an independent consultant and small business, you can itemize deductions on your annual tax return. These deductions will impact your business profit or loss and consequently, how much tax you owe. These deductions are itemized on Schedule C of your Federal 1040 tax return. The more deductions you have, the less tax you have to pay!
The laws and limits change every year, so be sure to use the latest tax-prep software or talk with a CPA. Here is a listing of the most common tax deductions for self-employed professionals, but the specific details listed are likely not current.
Home Office Expenses – If you are self-employed, your home is your primary place of business, and you have a specific place in your home that is exclusively used for work, you can take a home office deduction. There are two methods for taking this deduction:
- Simplified Method - $5 per square foot of your house used exclusively for business, up to 300 square feet per year, or
- Regular Method – list all costs related to your home residence and calculate your home office deduction by applying an allocation to the total expenses. The allocation is based on work-related square footage to total home square footage. For example, you can deduct a percentage of your utility expenses, insurance, and even mortgage interest and property taxes, the
Which one you should use depends on your situation, of course, and it gets a little complicated. Most tax preparation software makes it easy to figure out which method is most advantageous for you, or ask your tax professional which method they used and why.
50% of your Self-Employment Taxes – You can deduct 50% of your Social Security and Medicare Taxes paid (see ‘What Is Self-Employment Tax?”)
Car Expenses and Mileage – You are allowed to write-off any work-related driving trips. This includes driving to meet clients, driving out of town for business and driving while working. There are two methods for tracking and deducting car expenses and mileage:
- Standard Mileage Rate – 53.5 cents for every mile driven for business purposes and covers gas, insurance, maintenance and depreciation, or
- Actual Method – list all costs related to your automobile and calculate your car expenses and mileage deduction by applying an allocation to the total expenses (allocation is based on business usage of automobile as compared to total use of your automobile)
In either of these methods, it is extremely important to keep detailed records.
Meals and Entertainment – You can deduct 50% of work-related meals, including client lunches and business development dinners. Make sure to document who attended the meeting and the business purpose of the meal or entertainment. Save the actual receipt in case you are audited; a credit card statement is not sufficient.
Travel – When traveling for business, you can deduct these expenses. Be sure to keep records and receipts of your airfare, hotel, rental car, Lyft, cabs, etc. Highway and bridge tolls may count too. If you use an automatic toll tag like FasTrak, set it up to replenish to your business account if you use it to get to/from your client.
Parking – Any work-related parking expenses can be written off. If you live in a city where parking meters are expensive, buy a parking meter card or connect the “pay by phone” app to your business account.
Continuing Education – Any costs you incur in maintaining or improving your skills for your present work are deductible. Work-related books and audiobooks come under this category too. You cannot deduct expenses incurred for learning a new line of work.
Cell Phone – If you use your cell phone for conducting business, you can deduct a portion of your cell phone bill as a tax write-off. First, make an estimate of how much time you are using your cell phone for business vs. personal. Then, apply this percentage to your total cell phone bills for the year and you have your deduction amount.
Office Equipment – Depending on the situation, a new computer, printer, or desk may be deducted as an expense or depreciated over time. Be careful though, because you can only deduct the amount you spend that is used as part of your business, not if you use it for personal reasons.
Office Supplies/Postage – Any postage or office supplies (tangible office items like pens, printer ink, paper) incurred in the operation of your business are deductible.
Fees, Dues and Subscriptions – Amounts you pay for any services, trade organizations like PICA, or publications that are used for business are tax deductible. This includes annual fees paid to maintain any certifications.
Other Deductions: These two deductions are more complicated but are quite valuable when it comes to lowering the amount of tax you’ll have to pay. We strongly recommend you read the separate articles and take advantage of the benefits.
For all of these deductions, remember to keep your receipts and documentation! If you are ever audited, a credit card statement is not sufficient evidence of the expense and the deduction will be disallowed, which will lead to you owing additional tax plus penalties and interest.
Practical Tips
- Have a dedicated credit card that you use only for business expenses. Use this card for anything you can think of related to your business, such as parking, tolls, cell phone, internet, office supplies, etc. If you can, pay your health insurance with this same card since it too will be tax deductible.
- Download the year-end summary for your business credit card so you have a spending breakdown by category. Or you can download the transactions into a tool like Quicken each month and categorize the expenses there. (You’ll have to break them out by category on your tax return.)
- You may want to try an expense tracking app that lets you take a photo of your receipts and categorize them. Expensify is the best known, but there are others.
- Ask your tax preparer if a mileage deduction or depreciating your car is the better option. For most people, deducting mileage expenses is the easiest. Try using an app like Mileage Expense Log MileIQ, or TripLog for Android. Or if you’re more old-school, add a column to your timesheet for mileage to/from your client. Use Google maps to determine the distance, then multiply it by two and enter the round-trip mileage. At the end of the year, total the column and multiply it by the standard mileage rate.