If you’re living the independent consultant life, you probably think it’s pretty sweet that you don’t have a boss over you, telling you what to do. But aside from your mini-bosses (AKA clients), you still have one more entity to which you report: The IRS.
The IRS watches consultants closely, and every tax dollar that is owed has to be accounted for. The good news is that the money you spend on your business can often become “yours” again through tax savings.
Here are some tax-saving tips for consulting firms to minimize what they owe to the IRS at the end of the fiscal year.
Internet, Phone, & Business Utilities
Whether you work from a home office or rent a separate building that you commute to, the cash you spend on the necessities of doing business can often be deducted.
Keep track of your basic operational overhead, including internet costs, your cell phone minutes, electricity bills, and any other utility costs that come about in the normal course of business.
Don’t forget about the software you use. If you have any subscriptions for programs like Microsoft Office or Adobe Suite, they might just be deductible expenses. Although it can be a pain to subscribe for software instead of purchasing it outright, as far as your tax returns are concerned, they’re the gift that keeps on giving!
Perhaps you have a home office. Congrats! Working from home means your commute is simply a few steps that you can take in your slippers and robe. But is it a source of tax savings?
The IRS lets you deduct the expenses related to this space as long as it is solely used for your consulting duties. For your home office, there are two ways to write off costs for your tax return:
Actual Expense Method
The total expenses for your office include “direct expenses” for things like supplies and repairs, as well as “indirect expenses,” which might account for portions of your utilities, mortgage, and insurance.
The Simplified Option
Take the standard rate (which is currently set at five dollars) and multiply it by the square footage of your office (as long as it’s less than 300 square feet). If you take this option, you can still write off your office supplies, too!
If you commute to a separate fixed location office, know that you can’t deduct your mileage to and from that office. You can, however, deduct any business insurance you pay, as well as rent or any utility bills.
Entertainment and Meals
Be prepared to defend your entertainment, travel, and meal expenses to the IRS! They’ll want to ensure that these costs were truly necessary for doing business, like meeting a client at a restaurant to talk shop or taking them to a show.
Unfortunately, you can’t deduct a meal that came with entertainment, thanks to the Tax Cuts and Jobs Act, unless the meal was a separate expense from the entertainment portion.
You can deduct 100% of your travel fees, airfare, gas, and hotels, while you can also deduct 50% of your meal costs.
Deducting anything that could (to an outside observer) look like pure fun, rather than work is where you’re going to need impeccable accounting and bookkeeping. It would be wise to keep a journal of your travel activities should the IRS have any questions for you.
Educational Materials and Courses
Whether you’re starting your consulting career right out of school or you’re a lifelong learner, your thirst for knowledge can come with some serious tax savings.
Education tax credits and the Lifetime Learning Credit can earn you tax breaks if you’re taking courses at a recognized institution of higher learning. If you’re paid for any seminars, lectures, conferences, or even any certifications, write those costs off, too!
Not only can education lower your taxes, but anything that could be considered to be education is most likely deductible, too!
Your magazine subscriptions and books (related to your industry), as well as research services, allow you to stay on top of the latest developments in your field.
As a short aside, this is the kind of thing your clients will want to see, too. Positioning yourself as an expert that keeps abreast of trends and news for your area of expertise proves you’re worth your customers’ money and time!
If you take the standard mileage deduction, it does reduce your upfront work when it comes to keeping track of vehicle-related expenses. However, you won’t be able to write off your gas, repairs, maintenance, or insurance.
If you want to get the biggest possible tax savings, go the extra mile and track your mileage!
Let’s say you choose to keep track of work-related car use. Remember that you can’t deduct mileage to and from your house and your permanent office location, even if you’re meeting with a client.
You can write off your mileage when you’re commuting to meet clients at other locations, as well as when you run work-related errands. Write down your odometer readings or find an app that lets you track mileage.
Look around your desk. That stapler? Those pencils and pens? The paper in the printer? Post-It Notes? Stamps? Write them off! You can also deduct printing services.
Any consumable materials you use in the course of your work in your office, as long as they are being used for work, count as expenses you can deduct.
Marketing and Advertising
Building your brand will require getting your name and logo in front of as many eyes as possible. Your web hosting service, graphic design, and any ads you run, regardless of the medium, are deductible expenses.
Now, if you’re savvy and able to do some of the work yourself, like photoshopping a logo or building your website, unfortunately, you can’t deduct what you would have spent for someone else to do the work for you!
You might be able to create graphic designs worthy of tens of thousands of dollars, but unless that’s what you spent to have someone else do it, just consider it to be upfront savings, as it’s not a deduction.
As an independent consultant, you will have to pay for your own health insurance, but the good news is that it is a deductible cost. All health, dental, and vision coverage you purchase for yourself and your family can be written off. However, if you’re covered under your spouse’s plan, you can’t deduct those costs.
Write off expenditures of up to $25 for any client gifts. The more clients you have, the more you can give. The more you can give, the more you can write off.
However, if you choose to buy a client a solid rosewood dining table that costs as much as a new car — sorry, you’ll only be able to write off $25 of what you spent!
Keep in mind that the IRS will frown on you giving multiple $25 gifts to the same client at the same time. These don’t count as separate gifts — they’ll be considered to be one lump expenditure.
Be Your Own Boss (and Spend Less Doing It)
As you try to figure out what is the best business structure for consultants, you might feel alone as you gain your footing. Know that it’s a path that many others have walked before you. The IRS will be watching you closely, but your friends at Xendoo are watching them right back!
We help consultants every day with bookkeeping and tax preparation services. Going out on your own doesn’t mean going it all alone. Contact us today and give yourself the best start you can as you forge your path to being a successful independent consultant.