Working as a business consultant can be a rewarding career. You get to take on new challenges regularly and, as an independent contractor, you get a lot of control of when and how you work. This makes the field attractive to many people. Less attractive, however, is handling your taxes. The rules are complex and can be hard to navigate if you aren’t an expert. However, there are actually a large number of deductions available to consultants if you know where to look. In fact, tax laws are one of the things that can make working as an independent contractor so much more profitable than working as an employee.
Of course, seeking the advice of a tax professional is the best way to ensure your taxes are prepared properly. Nonetheless, it is helpful to know what you can claim. Here are five tax deductions you can claim as a consultant that you may not know about:
1) Travel and Transportation
Travel is a familiar experience for most business consultants. When you are visiting clients, you may be racking up significant travel and accommodation expenses. Fortunately, some or all of these expenses may be tax deductible.
In general, trips you take between meetings or for other business-related reasons can be deducted. However, commute travel between your home and work is generally not tax deductible.
If you are using public transportation or commercial flights, tracking the expenses is fairly simple. However, if you are driving, especially in a personal vehicle, it can be a little more complex. There are two ways to calculate the deductible expenses for this type of travel:
- Actual Expenses: In this method, you keep track of exactly what you spend on travel. This is typically the method used if you aren’t driving because the cost is limited to your ticket price. If you are driving, this can get challenging if you ever use the vehicle for non-deductible travel. In particular, maintenance and depreciation can be complicated to calculate.
- Standard Mileage: An alternative deduction system is to track the number of miles you travel for business. You can deduct a standard rate for these miles. This number changes from time to time but was 53.5 cents in 2017. For many situations, this is the preferable method. However, it may be insufficient depending on the expense of operating your vehicle.
Tolls and parking are also deductible, provided they are for business-related purposes. If you take a break and drive to lunch during a business trip, the parking near the restaurant is not deductible. Learn more about travel deductions.
Services like Everlance, which track your mileage and business expenses, can make this process much simpler, and provide a record to present to the IRS should you ever be audited.
If you have purchased property and/or equipment for your business, you can deduct its depreciation, or loss in value over time. While this may seem insignificant for a business consultant, it can add up over time. With the current rate of technological innovation, even small appliances like smartphones and laptops can depreciate significantly far before they stop working. For example, the iPhone 6S launched with a retail value of $1,338. One year later, it sold for $1,048, and a used model was worth only $650. While the quality of the phone may not have gone down, the high depreciation rate can work in your favor.
Protecting yourself and your business is essential as a management consultant. While your line of work may not be high risk, it is important to be prepared for any financial liability you may incur. Your business insurance premiums are tax-deductible, including coverages like property insurance, general and professional liability insurance, and workers compensation. However, personal health, auto, homeowners or other insurance do not follow the same rules.
Health insurance, if you are self-employed, is tax deductible. This has some specific requirements different from those for business insurance:
- You must be claiming a profit for your business.
- You must not be eligible for health insurance through an employer. This is relevant for anyone who consults as a side gig.
- You can only claim the deduction for months that those conditions were met. So, if you were eligible for seven months, you cannot claim the whole year, only those seven months.
It’s always a good idea to consult an insurance advisor about the coverages you need for your business, and how to properly deduct them from your taxes. For a free consultation, reach out to Bunker at anytime at 877-968-9108 or live chat at www.buildbunker.com
4) Professional Services
As a business consultant, chances are you sometimes need help with certain aspects of running a business, such as legal advice, bookkeeping and advertising. The good news is, your expenses for professional services are tax deductible.
In fact, if you get professional help filing some of these tax deductions, you can deduct the cost of those services. However, if you employ someone to perform these services for you, that would count as a wage expense rather than a professional service expense.
5) Home Office and Equipment
Many management consultants use home offices as their primary places of business. Expenses related to this space are often tax deductible. However, there are some important requirements.
In order for your home office expenses to be tax deductible, the space must be used only for work and must be either your primary place of business or somewhere you regularly conduct business. The space does not need to be a separate room. It can be part of a room, provided that there is a clear division between business and personal space.
The IRS is quite serious about the exclusive-use requirement. There is some leniency – you do not need to leave to take an occasional personal phone call, for example – but you must follow the spirit of the exclusive-use rule. For many people, this is the greatest roadblock to deducting a home office. Read the IRS rules for home office deductions here.
Beyond the actual space, you can deduct the expenses from all your office supplies and equipment that are used for business-related purposes. If you purchase pens, paper, printer ink or other supplies, keep the receipts so you can deduct them. While each purchase may be small, the total for the year can be a sizable deduction.
Equipment you use in your office is also deductible. These may not need to be exclusively used for business because you can deduct based on the percentage of business use.
However, if you plan to do this, it is best to confer with a tax accountant.
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