Tax deductions can save you money on your taxes, but how do you know what qualifies as a deductible expense for your therapy practice?
It’s not always convenient to whip out our complete list of tax deductions for therapists every time you fill up your gas tank or buy a business associate coffee.
But if you understand the criteria for deductions, you’ll have a general idea which receipts you need to save and which expenses you can earmark as deductions.
Here’s how to tell which expenses are likely to be deductible, some common pitfalls to avoid, and best practices for claiming your deductions.
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The standard deduction vs. itemized deductions vs. deductible expenses
There’s a lot of confusion among new business owners when it comes to claiming the standard deduction or itemizing your deductions, and how that relates to deductible business expenses. Many believe that, if they claim the standard deduction on their tax return, they can’t claim business expenses. Luckily, that isn’t true.
You claim either the standard deduction or itemized deductions when you file your personal taxes (Form 1040).
If you choose to itemize, you’ll list each deductible expense on Schedule A. Typical itemized deductions include:
- Charitable donations
- Mortgage interest
- Medical expenses
- Property taxes
- Insurance premiums
As an alternative to itemizing each of these—and retaining records to support your claims in case of an audit—you may choose to take the standard deduction. It’s a flat rate that typically changes one year to the next. An estimated 90% of individual filers claim the standard deduction rather than itemizing.
Deductible expenses are different from itemized deductions and the standard deduction. You can only report these expenses if you are self-employed. They include expenses you incur in the course of running your business, and you report them on Schedule C (Form 1040).
What does “ordinary and necessary” mean?
In the words of the IRS:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
“Ordinary and necessary” is a good rule of thumb when determining whether an expense is deductible. Ask yourself two questions:
- Do other therapy practices typically incur this expense? Is it ordinary?
- Does incurring this expense tangibly help your business in some way? Is it necessary?
Whether expenses are ordinary and necessary depends upon the specifics of your business.
For instance, if you purchase a weighted blanket to use with clients during therapy sessions, you can likely deduct the expense, because it’s considered ordinary for your line of business. If a landscape contractor purchased a weighted blanket, it’s unlikely they’d be able to deduct it from their taxes.
Similarly, if you have an office, you can deduct the cost of chairs to furnish your waiting room. If you work from home, on the other hand, and don’t see clients in person, it’s unlikely you’d be able to deduct the same expense, since the chairs wouldn’t be used by waiting clients. The purchase doesn’t help you do business.
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Business deduction pitfalls to avoid
If you hire a qualified accountant or use Heard to file your taxes, rest assured that any deductions you claim will be valid. If you file your own taxes, on the other hand, you run the risk of making an error. Here are the most common deduction mistakes new business owners make when filing taxes.
Miscalculating expenses
Some expenses, such as rent, are fairly straightforward to claim: You simply add up the total amount spent on that particular expense during the course of the year, and report it on Schedule C.
Others are less straightforward. For instance:
- Business meals could once be claimed at 100% of their value, but now some of them (meals with coworkers and associates) can only be claimed at 50%, while others (meals purchased for staff events) can still be claimed at 100%.
- The standard mileage deduction changes from one tax year to the next.
- The home office deduction can be calculated in two different ways—as a flat rate deduction, or based on the percentage of your home devoted to work. Try our home office deduction calculator.
Calculating each of these requires doing a little arithmetic. If you make an error—or use out-of-date deduction rates, as with the standard mileage deduction—you could overcalculate or undercalculate your deduction.
Mixing up itemized deductions and deductible expenses
Hopefully the section above on the standard deduction versus itemized deduction versus deductible business expenses clears up any uncertainty you may have had about different types of tax deductions. Because, when you get them mixed up, it can lead to serious errors.
Two common ones:
- Double dipping. For instance, claiming the standard deduction, then listing personal health expenses on your Schedule C. This is really two different errors in one: Listing a personal deduction as a business deduction, and trying (ineffectively) to claim the same deduction twice. If you itemized your deductions rather than claiming the standard deduction, the expense would go on Schedule A.
- Taking the standard deduction in lieu of business deductions. You can’t take the standard deduction instead of claiming your business expenses, because one is not a substitute for the other. The standard deduction only applies to personal expenses. You’re entitled to take the standard deduction as well as deduct business expenses on Schedule C. Making this mistake can have a serious impact on your tax bill.
If you plan to do your own business taxes, it’s essential you’re 100% clear on the difference between these different types of deductions.
Copying and pasting the same expenses year after year
Some expenses remain the same one year from the next. For instance, so long as your internet bill doesn’t increase, the total amount you spent on your business internet connection in 2022 should be the same in 2023.
Other expenses are variable. Business travel is a good example. If you drive to three different business conferences in 2022, but drive to none in 2023, the amount of business mileage you claim from one year to the next is liable to differ considerably.
It may be tempting each year to report the same amount for certain deductions. For instance, on your last tax return, suppose you claimed a $112.56 office supplies expense. This year, you forgot to keep good records, so you just guesstimate, and report $112.56 again.
Two problems with this:
- You’re providing false information to the IRS, which will land you in trouble if you’re audited
- You’re potentially drawing IRS attention to yourself and increasing your chances of being audited by reporting the same deduction for a variable expense year after year. How likely is it that any business would spend exactly the same amount on office supplies one year after the next?
To be fair, it’s unlikely the IRS has formed a secret task force dedicated to the misreported office supplies deductions of small therapy practices. But unchanging, cut-and-copy deductions still have the potential to land you in hot water.
Failing to keep records
Any deduction you claim for any amount must be supported with records. If you’re audited, the IRS wants proof you actually spent (for instance) $1,567.89 on a new laptop in 2022, and that you’re not just trying to avoid paying your taxes.
It doesn’t matter if you show the IRS agent your laptop, or even the credit card statement showing you paid for it. They want to see a receipt.
The statute of limitations on business deductions is six years. Meaning, if you’re audited, the IRS could request records of all your deductible expenses going back six tax years. If you don’t have the information, you could face penalties.
What happens if you mess up reporting your business deductions?
If the IRS believes you made an error on your tax return, they may penalize you. There are two types of penalty:
- Negligence or Disregard of the Rules or Regulations
- Substantial Understatement of Income Tax
In both cases, the amount you’ll be penalized is a flat 20% of the tax amount you failed to pay (plus the tax amount itself).
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Negligence or Disregard of the Rules or Regulations
You’re expected to make a reasonable attempt to follow tax laws and file an accurate return. If the IRS believes you failed to do so, you’ll be penalized. Common errors that lead to this penalty include failing to keep records supporting your claims, or failing to check the accuracy of your deductions.
Substantial Understatement of Income Tax
In the eyes of the IRS, you’ve made a substantial understatement of your income if you understate your income by either 10% of the total amount you owe, or $5,000—whichever is greater.
For more information on IRS penalties, see our article What to Do if you Get a Tax Notice as a Therapist.
Common deductible expenses for therapy practices
You can’t always look at a business expense and, based on the “ordinary and necessary” rule of thumb, determine whether it’s a legitimate deduction. Here are some of the most valuable tax write-offs for therapists:
- Office rent
- The home office deduction
- Internet, phone and other utilities
- Business travel
- Therapeutic books and toys
- Business insurance
- Accounting and legal fees
- Continuing education
- Membership dues for professional organizations
- Office furniture and supplies
For a complete guide, see our Complete List of Tax Deductions for Therapists.
If you plan to claim business deductions, get help from a professional
The surest way to avoid IRS penalties while making sure you don’t miss out on any tax deductions is by working with a tax professional. Any qualified accountant or tax advisor you hire should be able to help you identify the deductions you qualify for and take advantage of them.
Not every accountant or tax advisor is an expert on therapy practices, however. For that, you can trust Heard. We exclusively work with small therapy practices, so we’re familiar with the ins and outs of tax deductions for therapists. Learn more about how Heard can help with your taxes.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult their own attorney, business advisor, or tax advisor with respect to matters referenced in this post.
Bryce Warnes is a West Coast writer specializing in small business finances.
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