Many consultants are independent contractors, so they don't have an employer covering their costs or reimbursing work expenses. Instead, they can claim those business-related costs as consultant tax deductions, which can offset their income and lower their tax bill.
But it's common for consultants to file taxes without knowing everything to deduct. That's why it's wise to familiarize yourself with both common and often-overlooked tax deductions for consultants, so you can take advantage of all the tax breaks for which you're eligible.
How do tax deductions work for consultants?
When something is tax deductible, a taxpayer can reduce the total amount of taxable income by the amount of the qualifying expense. Those deductions are called write-offs. As self-employed people, consultants are able to capture a range of write-offs in the course of doing business.
Many, but not all, business costs are tax deductible. To reduce taxable income by the largest possible amount, consultants must keep track of all deductible business expenses.
“Many new entrepreneurs leave business expenses 'on the table' because they are not accustomed to running a business," Alan Salus, a CPA with Salus Consulting PC, says. “Emerging entrepreneurs inadvertently miss out on potential business deductions simply due to their unfamiliarity with business operations."
How should consultants approach tax?
While seeking free advice from friends, business colleagues, and other sources is a good place to start learning about work-related tax management, it's always a good idea to involve a professional.
But even with a pro at your side, you should be aware of the laws you're supposed to be following.
“It's important to remember that tax laws change frequently, so it's crucial to stay updated on the latest changes that could affect your tax situation," Sherman Standberry, a licensed CPA and managing partner at My CPA Coach, says.
To stay up to date, he advises “subscrib[ing] to newsletters from reputable tax sites or the IRS to keep abreast of these changes."
How to track deductions for consultants
Track all the operating expenses of your business by keeping a spreadsheet or an app-based record, saving receipts, and having a professional help you keep everything straight.
“Maintaining meticulous records and seeking guidance from tax professionals are vital to navigating evolving tax regulations effectively," says Mark Stewart, an in-house CPA for Step By Step Business, author, and financial media specialist.
Get a separate consulting business bank account
Good financial organization is an essential foundation for successful tax management. It's important to separate your personal and business finances when you operate as a consultant. All your earnings and expenses should be routed through your business account.
Common tax deductions for consultants
Here are several consultant tax deductions you should track throughout the year. Look out for any work-related activities and office costs to make sure you don't miss any write-offs when doing your taxes.
Travel expenses while doing consulting business
Many consultants spend a lot of time traveling to meet with clients and providing professional services. Some common deductible travel expenses include the cost of:
- Lodging expenses
- Airline tickets
- Rental cars
- Baggage fees
- Laundry and dry cleaning during your trip
- Taxi fares or rideshare fees to and from the airport or while on your trip
If you use your car for work activities, like travel to business meetings, to attend industry conferences or trade shows, or to run work-related errands, you can deduct the cost of using your car for business purposes.
“What is missed many times is that if you drive to the bank to deposit checks or drive to Costco to pick up office supplies, that is also considered business mileage," Dhyanesh M. Bhatt, a CPA at Bhatt & Associates, Inc., says.
You have two options for deducting those expenses:
- Standard mileage rate. Track your business miles for the year, then multiply those miles by a standard rate set annually by the IRS.
- Actual expense method. Add up all the expenses of owning and operating your vehicle for the year, such as loan interest or lease payments, car insurance, fuel, maintenance and repairs, and registration fees. Then multiply this figure by the percentage of the amount you use the vehicle for business.
Whichever method you choose, the IRS requires you to track your business miles. You can do this with an app or a manual log.
You can also deduct the cost of meals while traveling for business, taking clients to lunch or dinner, or hosting a meal for prospective clients. Business meals can't be lavish, and your deduction is usually limited to 50% of the cost of the meal. Be sure to keep records documenting the business purpose of the meal.
You may carry several types of business insurance, such as general liability, professional liability, and property coverage for your computer and other business property.
The premiums you pay for this coverage are deductible. You can also deduct self-employed health insurance premiums if you pay for your health, dental, vision, and long-term care insurance.
The cost of the desktop or laptop computer, printer, and software you use to run your consulting business is deductible. To write off the total cost of the computer equipment or software, you should use it more than 50% of the time for business. If the equipment is mainly for personal use, you can't deduct it.
Office supplies, such as pens and paper, stamps, ink cartridges, calendars, tape, file folders, and cleaning supplies, are all deductible business expenses.
Home office expenses
You can write off the cost of maintaining a home office as long as the space is dedicated solely to work. This cost is made up of direct expenses, which are costs related only to the business portion of your home, and indirect expenses, which are costs necessary for running and maintaining your entire home.
There are two ways to deduct home office expenses:
- Traditional method. Calculate the percentage of your home dedicated to your home office, then multiply the result by your associated costs. A portion of those costs, including rent or mortgage interest, real estate taxes, insurance, utility bills, maintenance, and repairs, are deductible.
- Simplified method. Deduct $5 per square foot of dedicated workspace up to a maximum of 300 square feet.
Any costs you pay to advertise your service or promote your business are deductible in the year you pay them. Deductible costs include printing business cards, setting up and hosting your website, and paying to promote your services in digital or printed ads.
Often-overlooked deductible business expenses
The list above is missing some common expenses that consultants can deduct from their taxes but often neglect to. Here are some to look out for.
Professional development costs
You can deduct any costs related to your professional development, such as attending conferences, taking work-related courses, or buying books to help you learn and grow in your field.
You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
Asset depreciation is the reduction in an asset's value over time. You can write off the depreciation of assets that you use in your business. This can get complex, so it's best to have professional guidance.
Salus says that self-employed people too often overlook tax deductions from retirement contributions to tax-advantaged accounts. You can deduct contributions that you make through the tax deadline in April as long as you assign them to the tax year in question.
“Consultants can significantly reduce their tax liabilities by implementing well-structured retirement plans," Salus says.
Official guidance on tax deductions
For more details on which payments are deductible and the rules for deducting them, check out IRS Publication 535, Business Expenses, and Publication 463, Travel, Gift, and Car Expenses.
Get a CPA to advise on consultant tax deductions
It's a good idea to work with a tax professional, such as a CPA or enrolled agent (EA). It's their job to know what tax breaks are available and help you take advantage of every available deduction and credit. LegalZoom offers LZ Tax and has licensed tax professionals (CPA and EA) who can assist as well.
Hire a CPA and/or tax attorney, and make sure the one you choose has professional certifications, charges reasonable fees, engages in continuing education, and comes with good references.
“My best advice is to don't try and tackle taxes on your own," Dana Ronald, the CEO of Tax Crisis Institute, says. “Consultants should seek the assistance of a qualified CPA to ensure they're taking full advantage of all the deductions available to them."
Find out more about LZ Books