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Tax Deductions for Independent Business Consultants

Business Finance Self-Employment Credits & Deductions

Independent business consultants often wear many hats and take on multiple roles. Your clients rely on your industry expertise to increase productivity and improve company sales and profits.

Independent business consultant presents a business plan to a client.

To grow your business, you must market your services and pitch your skill set to prospects and new clients. Independent business consultants also need to track their income and expenses for tax purposes. Use these tips to maximize your allowed tax deductions.

Your business structure

When you form your business, you have the option of choosing from a variety of business structures, including a corporation or partnership arrangement. Most self-employed workers set up their businesses as a sole proprietorship. Assume for this discussion that you file your business taxes as a sole proprietor.

If you choose this business structure, you file your taxes by completing Schedule C of Form 1040, Individual Income Tax Return.  You post your business revenue and expenses on Schedule C, and the profit or loss from your business is included on your personal tax return.

Travel and auto expenses

As a business consultant, you probably frequently travel to meet your clients. Fortunately, if you’re often on the road or in the air traveling for work, you can deduct the costs you incur visiting customers and attending business meetings away from your regular workplace. You can also deduct the cost to attend seminars and conferences.

The total cost of hotel stays, air travel, and rental cars are fully deductible as a work-related travel expense. The deduction for the use of your car, however, is more complicated.

If you use your car to travel to business meetings, you can choose to use either the standard mileage rate or actual expenses incurred to calculate the auto deduction. Consider computing your expenses using both methods and choose the option that creates the largest deduction. The standard mileage rate changes each year so that the rate reflects the current cost of operating a vehicle.

If you choose to use actual expenses, you can deduct gas, insurance, repair costs, and depreciation expense. You’ll need to keep excellent records to support your travel and auto expenses. In particular, keep a mileage log, so you can accurately calculate the percentage of your total mileage used for business. Also, save receipts for all of your actual expenses.

If you choose to calculate your auto deduction using the standard mileage rate, keep a daily log of your miles driven, the destination, and the business purpose of your travel.

Meals and entertainment

Your consulting practice likely involves dozens of in-person meetings with company managers and executives. Many of those meetings may include meals and entertainment.

Assume, for example, that you host a dinner with three managers to discuss improvements to the firm’s manufacturing process. You can deduct 50 percent of the cost of a meal if the meal is business-related. Specifically, you must document who attended the dinner and the business that was discussed at the meal.

The same goes for sporting events, concerts, or another type of entertainment. If it is business-related, the cost is deductible.

Business insurance

Independent business consultants that provide advice may carry several types of business insurance, including professional liability insurance (PLI) coverage. PLI, or errors and omission insurance, cover legal costs if the policy owner is sued for negligence.

For example, assume that a client sues your consulting firm for failing to implement an employee-training course fully. The client believes that a high rate of worker errors is due to the incomplete training course. The PLI insurance policy can help cover the legal costs incurred to defend your firm and the cost of any legal damages awarded. PLI insurance is a deductible business expense.

Tech equipment, office supplies

In addition to desktop and laptop computers, you may purchase printers and industry software to manage your consulting business.

When you buy an asset that you plan on using for more than a year, add the description and the cost of the asset to a spreadsheet. The IRS provides depreciation schedules for assets, which explain the number of years used to post depreciation expense. You can use the spreadsheet to calculate total depreciation expense each year.

Office supplies, such as business cards and stationery, are typically used up over a period of months. If you purchase items that will be used up in a year or less, the entire cost of the item is expensed in the year of the purchase.

Website and advertising expenses

Any costs you pay for an expert to set up your website are expensed in the year incurred, as well as any fees to host your website. Other technology costs, such as email fees or online marketing costs are expensed as you incur them. Finally, advertising costs are expensed immediately.

Keep accurate records

Make an effort to carefully track all of the expenses for your consulting business so you can take advantage of each possible deduction. It’s also important to separate your business expenses from your personal expenses.  And you should have a separate business bank account for your consulting work.

Investing time to create a set of organized records can help you reduce your taxable income and make filing taxes on time easy.

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