If you work as a consultant—whether that’s a financial consultant, health consultant, human resources consultant, or any other area—you’re likely an independent contractor or self-employed. In that case, you don’t have an employer reimbursing your work expenses. This means you’ll be able to claim business-related costs as consultant tax deductions which can potentially lower your taxable income.
Read on to understand tax deductions for consultants to take advantage of the tax breaks you’re eligible for this year.
Who Can Claim Consultant Tax Deductions?
Freelancers, independent contractors, self-employed individuals, and business owners are all eligible for business expense deductions. If you work as a consultant as a full-time employee for a company and receive a W-2, you usually won’t be eligible to claim business tax deductions.
However, most consultants are self-employed or work as contractors who could benefit from creative tax deductions. In addition, there are LLC tax benefits you can take advantage of as a small business owner.
Common Tax Deductions for Consultants
If you’re preparing business taxes for the first time, understanding tax write-offs for the self-employed or small business owners can help save time and protect your hard-earned revenue. Read on for possible business expense deductions as a consultant.
Business Startup Costs
You can deduct the startup costs if you launched your consultant business during the tax year. If you use an LLC formation service, that’s also a deductible business expense. Additionally, a registered agent service, legal advice, and any other professional fees to launch your business qualify as necessary business expenses to start the business.
If you maintain an office for your consultant business and pay rent for the space that is not in your home, you can deduct the amount paid as rent. In addition, you can deduct the cost of large office furniture or equipment, like a desk, chair, computer, printer, or phone for the consultant business on a depreciation basis.
Education and Certifications
Educational expenses related to your consulting business can be deductible. These expenses may include yourself or your employees if necessary for the business. However, the education must be directly related to your consulting business or the type of consulting you do to qualify as a business deduction.
Advertising costs are deductible if you market your consulting business online or through periodicals, professional journals, or other media. To take this deduction, you’ll need to keep accurate records of costs with receipts.
As a consultant, you may need to travel to work sites or take overnight trips. These out-of-pocket travel expenses qualify for tax-free reimbursements. Possible travel deductions include transportation by plane, car rentals, lodging expenses, and meals.
If driving to new work locations, you may deduct actual costs or take the IRS standard deduction of 65.5 cents per mile for 2023 and 67 cents per mile in 2024. However, you cannot take this deduction for regular travel to your office.
Insurance necessary for the business, including worker’s compensation insurance, if you have employees, and liability insurance are deductible business expenses. Likewise, if you’re self-employed, your health insurance expenses are deductible.
To be deductible, the health insurance must:
- Be for yourself, your spouse, and any dependents
- Isn’t paid through any kind of pre-tax program
- You were not eligible to participate in a health insurance program by your employer or your spouse’s provider
Health insurance premiums are considered an adjustment to income rather than an itemized deduction. You can deduct the amount you paid for health insurance from your gross income.
Meals can sometimes be a deductible business expense if you have to stay away from home overnight. Generally, the IRS allows deductions of 50% of business meals. If you choose to deduct the actual expense, you must keep track of all meal expenses, including tips and tax. Or, you may be able to take a per diem allowance.
Contractor or Employee Expenses
If you hire other independent contractors to perform work for the consulting business, you may deduct their wages from your business income. If you have employees, you may also deduct other payments you make related to their work, like Social Security payments.
Retirement Savings Deduction
If you are self-employed, contributions to a one-participant 401(k) plan are deductible business expenses. Like a traditional 401(k), you can contribute pre-tax dollars as both employee and employer with a salary deferral of up to $22,500 in 2024 plus a $7,500 catch-up contribution if you’re aged 50-plus. You can add approximately 25% of net self-employment income, not exceeding $66,000 in 2023.
With a simplified employee pension (SEP), you can contribute up to 25% of your net earnings from self-employment, up to $66,000 for 2023.
Professional and legal fees for your normal business operations may be deducted as a business expense. These include:
- Accounting services
- Legal services
- Any other necessary software, including account or tax preparation software and scheduling software
- Other professional fees
Expenses That Consultants Cannot Claim as Tax Deductions
While normal business expenses are deductible for consultants, there are a few categories of expenses that you cannot deduct. According to the IRS, these include:
- Regular commuting mileage: The mileage for commuting to work for an office away from home is not a deductible business expense.
- Reimbursed expenses: For example, if clients reimburse you for travel expenses, they’re not deductible as a business expense.
- Fees from legal violations: You cannot deduct parking tickets, court fees, or other fees related to any legal violation.
- Life insurance premiums: If you’re the beneficiary, you cannot deduct life insurance costs.
How to Prepare for Tax Filing and Monitor Tax Deductions for Consultants?
To prepare tax filings and track deductions as a consultant, planning can save you a lot of time. Here are steps to take to ensure you’re organized at tax time:
- Start early: You can save time preparing deductions by setting up clear accounting systems or using accounting software like doola Books.
- Create digital files: You can request electronic receipts or scan physical receipts and save them into a single folder or cloud-based drive to save time preparing eligible deductions.
- Track everything: Keep receipts and file them carefully for all business expenses. Tracking software or accounting apps can make this easier.
- Get help: A certified public accountant or tax professional can help you prepare taxes, double-check accounting records, and ensure correct filing.
How to Claim Write-Offs as a Consultant on Your Tax Return?
As a business owner or self-employed consultant, you usually report income and expenses on Form 1099 Schedule C. You can also use Schedule C to claim all business tax deductions or expenses.
After subtracting business expenses from income, you will input the difference on Schedule 1 of Form 1040. In addition, Section 179 of the IRC allows businesses to take an immediate deduction for business expenses of depreciable assets like computers, office furniture, equipment, company vehicles, and software.
Tax preparation or accounting software will often fill out these forms automatically after inputting the relevant income and expenses, saving you significant time. You can also learn more about filing self-employment tax or deductions you can claim without a receipt.
Expanding Your Consulting Business
Building your consulting business can be an exciting opportunity to make a difference while building your income. However, tax preparation can take valuable time from other business initiatives. Preparing and correctly filing taxes with allowed deductions takes time you could use for other purposes.
That’s why excellent tax preparation software can be so valuable. Consider doola Books to simplify bookkeeping and free up time to focus on your business goals. Or, get doola’s tax package to ensure compliance and online filings for worry-free tax filings!
Are there limits to how much I can deduct for certain expenses as a consultant?
There are no limits on how much you can deduct as a consultant. However, according to the IRS, the expenses must be necessary and ordinary for the business and industry.
What records should I keep to support my consultant tax deductions?
To support your consulting business expense deductions, you should keep all business receipts. An online filing system or tax preparation software can make it easier to keep all receipts organized.
How do tax deductions affect my overall taxes owed as a consultant?
Business expense deductions can affect your total taxable income and, thus, how much you’ll owe on taxes. You can save more by accurately tracking business expenses. A certified public accountant or tax professional can help to ensure that you’ve filed and tracked all expenses correctly.