A. The Home Office Deduction. Consultants that maintain an office in their home may deduct a portion of their carrying costs in relation to the size of the space that is used exclusively and regularly as the primary location where business is conducted. This deduction works nicely for many start-ups that work primarily from home and maintain a virtual office.
Tax Tip: Even if you maintain a permanent office, you can still utilize the home office deduction, if you regularly meet clients at home.
B. Travel & Auto Expenses. Consultants who use their car for travel in their practice may deduct either the actual expenses (gas, parking, repairs, and depreciation) or the standard mileage rate of 55.5 cents per mile for the business use of their personal car. The IRS requires the use of a mileage log to record business activity. An individual whose principal place of business is their home can deduct travel to their virtual office, meetings and client locations.
Tax Tip: Consultants who are considering purchasing a new car may write off up to $11,700 in accelerated depreciation in the year of purchase, provided the business use percentage is greater than 50%.
C. Meals & Entertainment (M&E). The consultant can deduct 50% of the cost of M&E with existing clients to discuss a legitimate business purpose. For potential clients, the consultant must
have more than just a general expectation of a future business benefit. Similar to the mileage log requirement, a journal of the time, place, client, and business discussed should be kept. You cannot deduct the cost of your own daily meals just because you are self-employed, unless you are traveling away from home on business. However, the consultant attending a professional association meeting may deduct the cost of his own meal as entertainment.
D. Employees vs. Contractors. As the practice grows, you will likely utilize the services of a third party. Careful consideration should be given to whether this individual should be classified as an employee (in which case taxes must be withheld) or as an independent contractor. The IRS evaluates evidence of the degree of independence and control over the relationship. Generally, if you hire an office assistant, the IRS will construe this as an employment relationship, compared to the hiring of an accountant, who exercises independence in his role.
Tax Tip: Consultants who have paid $600 or more to individuals for non-employee compensation, including other attorneys, are required to file IRS Form 1099-Misc, following the year of payment.
E. Saving for Retirement. Generally, taxpayers saving for retirement may contribute up to $5,000 ($6,000 if over age 50) to an Individual Retirement Account (IRA).
Tax Tip: Self-employed individuals seeking a greater contribution rate (as much as 18.5% of profit) may find it beneficial to establish a Simplified Employee Pension (SEP-IRA).
F. Health Insurance. Self-employed consultants may deduct the cost of premiums for medical, dental, and long-term care expenses for themselves, their spouses, and their dependents, so long as they are not eligible to participate in coverage in a spouse’s employer-sponsored plan.
Tax Tip: Younger, healthy individuals who may go months or years without visiting the doctor, may find it more cost beneficial to contribute to a Health Savings Account while enrolling in a high deductible catastrophic health insurance plan.