If you're a self-employed consultant--whether full time or part-time--you need to know about tax deductions. Almost everything a self-employed consultant buys for his or her business is tax deductible so long as it is ordinary and necessary and the cost is reasonable. These deductions can really add up. For example, if you buy a $2,000 computer and use it 100% for your consulting business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $560 in income tax. In effect, you’d be getting a 28% discount on the computer. The catch is you must use the computer or other item you buy for the business. You can’t deduct personal expenses.
Common tax deductions taken by self-employed consultants include:
Car deductions: The cost of all driving you do for your consulting business, with the important exception of commuting, is tax deductible. Nondeductible commuting occurs when you drive from you home to a place of business. Thus, driving from your home to meet with a client would be nondeductible commuting. However, if you have a home office, you can convert such trips into deductible business trips.
If you like record keeping, you can keep track of all your car expenses to figure your annual deduction. But, if you’d rather not keep track of how much you spend for gas, oil, repairs, car washes, and so forth, you can use the standard mileage rate. When you use the standard rate, you only need to keep track of how many miles you drive for business, not how much you spend on your car.
Office expenses: The amounts you spend on your business office are deductible business expenses. For example, you may deduct the rent and utilities you spend for an office. If you work at home, you may be able to deduct the cost of your home office. This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible.
Business Travel: You may also deduct your expenses when you go out of town for your consulting business. These include airfare or other transportation costs and hotel or other lodging expenses. But, you may only deduct 50% of the cost of meals when you travel on business. If you plan things right, you can even mix pleasure and business and still get a deduction.
Subscriptions: You can deduct the cost of magazines, journals, newsletters, and other subscriptions useful for your consulting business.
Meals and entertainment: The days of the deductible three-martini lunch are pretty much at an end. To deduct the cost of a meal in a restaurant or an entertainment event like a baseball game or theater visit, you must have a serious business discussion before, during, or soon after the event. Moreover, you may only deduct 50% of your business meal and entertainment costs.
Depreciation: When you buy property for your consulting business that will last more than one year, you may deduct the cost a little at a time over a period of years. This process is called depreciation. Examples of depreciable property include cars, computers, and office furniture. However, you don’t always have to depreciate long term business property. Small businesses have the option of deducting the entire cost of such property in a single year under Internal Revenue Code Section 179 or using bonus depreciation This enables you to get a big deduction in a single year rather than spreading it out over several years.
Supplies: Supplies are business items that you use up in less than one year. They include everything from paperclips to postage stamps.
Legal and professional services: You can deduct fees that you pay to attorneys, accountants, consultants, and other professionals if the fees are paid for work related to your consulting business.
Insurance: Insurance you buy just for your business is deductible—for example, business liability insurance or insurance for business property. If you have a home office, you may deduct a portion of your homeowner's insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes.
Advertising expenses: Just about everything you spend to help promote yourself and your consulting business is a deductible business expenses. This includes the cost of designing and maintaining a website you use for consulting business, Internet hosting fees, the cost of obtaining a domain name for your business, brochures, resume costs, listings in professional directories, and similar items.
Business gifts: Gifts you purchase for clients are deductible as a business expenses--but the deduction is limited to $25 per person per year. However, the $25 limit applies only to gifts to individuals. It doesn’t apply if you give a gift to an entire company, unless the gift was intended for a particular person or group of people within the company. Such company-wide gifts are deductible in any amount, as long as it is reasonable.
Home telephone expenses: You get no deduction for a single phone in your home; but you may deduct the cost of long distance phone calls and special phone services you use for business such as call waiting or message center. You may deduct the full cost of a second phone line you use at home for business, including a cell phone.