If you are a self-employed consultant, you can claim most business-related expenses against your revenues from clients. There are several allowable deductions that can help you save on your income taxes at the end of the year. If they create a net loss, you may even be able to claim the loss against other sources of income.
Home Office Expenses
If you operate your consulting practice from your home, you may be able to claim some of your house expenses, such as mortgage interest, property taxes, insurance and utilities. You can claim home office expenses if your home office is your only one or if you regularly meet with clients there. The portion you can claim is based either on how many rooms the practice takes out of all the rooms of the house or how much square footage is used versus the entire livable square footage of the house. For example, if you used one room (100 square feet) out of 8 in total (1,200 square feet) for your home office, you could either claim 1/8th of your eligible house expenses based on number of rooms or 100/1,200, or 8.3 percent, based on square footage. You can use the calculation that provides you the largest benefit so, in the above example, you would use the number of rooms formula. If your home office expenses would create or increase a net loss, you can carry them forward to use in future years.
If you use your personal vehicle partly for your consulting business, you can claim a portion of its usage as a business expense. If you are incorporated, you can track all of your business mileage by date and purpose and allows you to claim a cents-per-mile rate for all of that mileage. The detailed method requires that you total up all of your vehicle’s expenses, such as financing interest, repairs, gas and insurance, and allows a deduction for the portion of those expenses related to the business versus total mileage in the year. For example, if you drove 20,000 miles in total in a year and 4,500 of them were for business purposes, you could claim 22.5 percent of your total vehicle expenses.
Research Materials and Subscriptions
This is an often-missed consultant tax deduction. If you buy books, CDs or DVDs, downloads, and other research materials that are business-related, you can deduct them in full as a business expense. This is also true for magazine and other subscriptions. For example, if you subscribe to a trade magazine that helps you keep up with news and current trends in the industry, you can deduct the total subscription amount paid in the year. Keep all receipts and credit card statements to be able to back up your claim. You can also claim educational courses, conferences and other continuing education programs that are directly related to your consulting practice.
Meals and Entertainment
Many consultants buy meals for and entertain clients, potential clients, referral sources and business advisers. The IRS allows a deduction for these expenses at 50 percent of the actual cost, including taxes and tips. The reason for the partial deduction is that the IRS assumes that you would have had to eat anyway, so part of the expense is deemed personal. The meal or entertainment must be connected to business purposes or occur directly before or after a business event. These are often-audited expenses, so keep all receipts filed and mark on the back who was there and how it related to your business.
Consultants, like other business owners, can deduct all directly business-related expenses from their revenues. This includes travel expenses, the business portion of phone expenses, office supplies and advertising expenses.