As a self-employed business consultant, you probably assume a variety of positions and titles. Your clients count on your industry knowledge to boost output and boost sales and profitability for their businesses. However, for tax deduction and reporting purposes, you also need to understand how to keep track of your income and business expenses if you’re new to working for yourself. To optimize your tax deductions for the upcoming tax year, let’s go over a few tips.

Business Structure

There are several business structures available to you when forming your company, such as a corporation or partnership. The majority of independent contractors establish themselves as sole proprietorships.

We’ll assume that you file your business taxes as a sole proprietor for the sake of this article. If you’re a sole proprietor, you record your business revenue and costs on Schedule C of Form 1040, Individual revenue Tax Return, and you take your business profits as personal income.

Keeping accurate records

It will be easier for you to file taxes on time and lower your taxable income if you take the effort to compile an orderly set of records. Maintain meticulous records of all your business outlays in order to maximize your tax advantages. In order to save time and anxiety throughout the filing process, it is crucial to keep your company and personal expenditures apart. This can be simplified by having a separate credit card or bank account for your consulting work.

Deducting business expenses

One of the nicest tax benefits of being a self-employed business owner is that you may deduct your business expenses. Let’s examine some typical company expenses that independent business consultants can deduct.

1. Business travel and car expenses

It’s possible that you will travel a lot as a business consultant to meet with clients. Thankfully, you can deduct expenses while visiting customers while on a business trip away from your usual place of employment if you frequently travel for work. The price of attending business conferences and seminars is also deductible. Travel expenses linked to work are entirely deductible, including the whole cost of lodging, airfare, and rental cars. The deduction for using your car for business purposes is more intricate, though.

You can compute the mileage deduction for your car using either the actual expenses incurred or the standard mileage rate if you use your car to commute to business meetings.

Every year, the standard mileage rate is adjusted to reflect the current cost of operating a car. Keep a daily record of the number of miles you drive, the destination, and the reason for your business trip if you decide to use the normal mileage rate to compute your car expenses.

You can deduct a portion of the actual cost of gas, insurance, repairs, and depreciation on your vehicle if you decide to use actual expenses. To substantiate your travel and vehicle charges, you must maintain meticulous documentation and retain receipts.

Consider calculating your costs with each method and selecting the one that will yield the highest tax deduction for you.

2. Business meals

Several in-person meetings with executives and managers of companies may be a part of your consulting profession, and many of these meetings may include business lunches. Fortunately, a percentage of these business lunches are deductible.

For instance, let’s say you are hosting a dinner for three managers to talk about ways to enhance the company’s production procedure. If you have a meal for business, you can write off 50% of the expense. In particular, you need to record who was there at the dinner and what was said.

3. Business insurance

Advice-giving independent business consultants may be covered by a variety of business insurance policies, including professional liability insurance (PLI). Errors and omissions insurance, or PLI, pays legal fees in the event that you are sued for carelessness. Also, it is a business expense that is deductible.

Let’s take a scenario where a client sues your consulting business for not properly implementing an employee training program. The client thinks that the incomplete training course is the reason for a high proportion of worker errors. Both the cost of defending your company in court and the cost of any awarded damages may be partially reimbursed by your PLI insurance coverage.

4. Home office

You can deduct direct and indirect costs associated with your home office by taking advantage of the home office deduction if you have a place set aside in your home for your consulting practice.

Products you buy specifically for your business are considered direct costs for your home office. These can include computer equipment, office supplies, furniture, and software subscriptions that you use exclusively for your home office. These costs are fully deducted.

Your home office may or may not incur indirect expenses, but you can still use the actual expenses technique to deduct a portion of these costs. The square footage of your office compared to the rest of your home will determine the proportion you are able to deduct. Divide the overall square footage of your home by the square footage of your home office to determine the deductible percentage.

Here are a few instances of indirect expenses related to your home office:

• Mortgage interest
• Insurance
• Utilities (including internet and phone bills)
• Real estate taxes
• Repairs
• Depreciation

Use the simpler method if you would like not to compute the precise percentages for your indirect home office expenses. The simple method lets you deduct $5 per square foot (up to 300 square feet) instead of your actual expenses.

5. Website and advertising expenses

Any fees you incur for hiring a professional to set up your website may also be deducted from your taxes. Both the cost of setting up your website and any hosting bills can be written off in the year they are incurred. Advertising expenses are expensed immediately, while other technological costs, such email fees or internet marketing charges, are expensed as you go.

The bottom line

In order to maximize your tax deductions as an independent business consultant, you must maintain accurate records, which you will then use to calculate your deductible expenses during the tax filing process. Your taxable income is decreased when you deduct your business expenses, giving you more cash to invest in expanding your enterprise.

Ready to file? PSA CPA can help you file your business taxes with ease.