Tax Deductions for Consultants

If you're a self-employed consultant, whether full- or part-time, you need to know about tax deductions. Almost everything a self-employed consultant buys for their business is tax deductible as 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 24% federal income tax bracket, this would save you $480 in income tax. In effect, you'd be getting a 24% 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 Deductions for Consultants

The most important tax deductions for self-employed consultants include the following.

Pass-Through Deduction

The vast majority of consultants operate as pass-through businesses. A "pass-through" business is any business in which the profits are taxed on the owner's individual tax return at their individual tax rates. Most consultants are sole proprietors (a one-owner business in which the owner personally owns all the business assets), but some have formed limited liability companies, S corporations, or are members of partnerships.

The Tax Cuts and Jobs Act established a brand new deduction that allows owners of such pass-through businesses, including consultants, to deduct an amount equal to up to 20% of their net income from the business. For example, if you earn $100,000 in profit from your consulting business and qualify for the pass-through deduction, you may deduct $20,000.

However, you're entitled to the full 20% pass-through deduction only if your taxable income from all sources after deductions is less than a certain limit, which changes annually. The deduction is phased out if your income exceeds the limit.

This deduction began on January 1, 2018 and is scheduled to last through December 31, 2025.

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 your home to a place of business. So, 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 out 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 might 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 might also be able to 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.

Long-Term Property

Consultants often purchase tangible personal property that lasts for more than one year, such as computers, office furniture, and business-related books. The full cost of such property can usually be deducted using bonus depreciation, Section 179 expensing, regular depreciation, or the de minimis safe harbor (applicable to property that costs $2,500 or less).

Supplies

Supplies are business items that you use up in less than one year. They include everything from paper clips to postage stamps. All of these items used for your business are deductible.

Legal and Professional Services

You can deduct fees 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, including 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 expense. 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 expense, 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.

Telephone Expenses

You get no deduction for the monthly charges for a single phone in your home, whether a landline or cell phone. But you may deduct extra costs for 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 you use for business, including a cell phone. If you use a second phone both for personal and business calls, you're required to document your business use.

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