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At the end of the first year of self employment, consultants quickly discover that their income is taxed differently than that of an employee. To offset this, self-employed consultants also have the advantage of claiming far more expenses. Long before tax time arrives, talk with your accountant to learn how the tax law applies to your practice and develop a method to track these expenses as they occur. Then, tax time will become a far less painful experience.
Almost any amount spent with a client can be claimed as an expense, as long as it pertains to the job. You can claim paper, pencils or any office supplies. Rental of equipment like a computer or projector and the purchase of items for the client need to be tracked and can often be included on invoices. Food set out during presentations or meetings also can be reported, but track meals with a client separately, since different rules apply.
Airfare, hotels and car rental all qualify as business expenses. Keep all bills and receipts and credit card slips. Some meals can be reported, but talk with your accountant to determine which can be expensed. When driving to a client, whether to a distant city or just up the street, always track the miles driven. Keep a log book listing the reason for the trip, the starting and ending odometer readings, and then calculate the number of miles driven. Each year, the IRS publishes a standard mileage rate and these miles add up quickly.
If you set aside a separate room for your consulting practice, the IRS allows you to expense a percentage of your mortgage, utilities, insurance and other home expenses. There are a number of advantages and disadvantages to this practice, so discuss this with your accountant. Even if you choose to not deduct the space, keep track of the furnishings and equipment purchased for the business. Desk, chair, computers, fax and other equipment all apply. Also remember to track phone calls and consider purchasing a separate cell phone specifically for the business.
The best time to track an expense is when it occurs. Keep a notebook or Day-Timer handy to jot down expenses or tap them into your smartphone. Remember to also keep all receipts. Once you are back at home, enter them into a spreadsheet or small business accounting program. For most, a checkbook program like Quicken works well, is easy to learn and offers a variety of reports by category and time period. Buy a file box or cabinet and a stack of file folders. Then, organize the receipts, credit card slips and other paper by expense category, month or client.