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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.
Expenses While Consulting
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.
On
the Road
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.
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Home
Office
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.
Tracking
Expenses
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.
