Tax deductions can save your therapy practice a significant chunk of change. But if you don’t know what qualifies as a deductible expense, you’ll miss out.
That’s because, even if you track your deductible expenses, you need to keep receipts on hand in order to report them. In case of an audit, the IRS will demand receipts for your tax deductions. Reporting expenses without keeping proof of purchase in your files puts you on shaky ground, and could one day result in serious fines.
The best thing to do is review all the deductible expenses you may qualify for, and start tracking them—and saving your receipts—now. Our comprehensive list of tax deductions for therapy practices will get you started.
Itemized vs. standard deductions
If your private practice is a pass-through entity—meaning you report income and expenses on Form 1040, your personal tax return—you have the choice between filing for a standard tax deduction or itemizing your expenses.
The standard deduction is a flat rate deducted from your taxes, based on your income tax bracket. You can opt for the standard deduction instead of itemizing each of your business expenses.
When you itemize your expenses, you list all of your eligible business expenses on Schedule C of your tax return, and deduct that amount from your taxable income.
So, which method is best? It depends on how many expenses you have. Put simply, if your itemized expenses add up to a larger amount than the standard deduction, you should choose to deduct your itemized expenses. If you’d save more on taxes by claiming a standard deduction, you should claim the standard deduction.
The catch is that you won’t know which method will reduce your tax bill the most unless you itemize your deductions and make the comparison with the standard deduction. If you want to save money on taxes, there’s no way to avoid tracking your deductible expenses.
Advertising and marketing
The cost to market or advertise your therapy practice is tax deductible.
Eligible purchases include:
- Mail and print ads
- Online advertising
- Website design and maintenance
- Professional headshots
- Logo design
- SEO tools or consultation
- Business cards
- Promotional items like pens or notepads
- Monthly fees for directory listings (e.g. Psychology Today)
There are a few exceptions to be aware of, however:
- Signage. Temporary signs (those used for one year or less) can be deducted as advertising expenses, but permanent signs must be depreciated as assets.
- Vehicle ads. While you can deduct the cost of putting promotional materials for your practice on your vehicle, you can’t deduct other vehicle-related expenses (like mileage) as an advertising expense.
- Recruitment. The cost of placing help wanted ads is a deductible business expense, but it is not an advertising expense.
Accounting and bookkeeping
The cost of accounting and bookkeeping for your private practice is tax deductible. That includes any money you spend on:
- An accountant (on retainer, or for tax prep)
- A bookkeeper
- A tax advisor
- Accounting software
As a tax deductible expense, business meals have a long and colorful history. There’s a lot of debate among business owners (and their accountants) about what constitutes a business meal. The Tax Cuts and Jobs Act (TCJA) of 2017 only further muddied the waters.
The TCJA effectively eliminated tax deductible entertainment expenses. Since meals were often lumped in with entertainment expenses, this created a lot of anxiety among business owners who typically deducted it.
But recent statements from the IRS have clarified matters somewhat. Here’s what you need to know to deduct meals as a business expense:
- Current rules for business meal deductions apply for the tax years 2020 to 2023.
- Meals that qualify as an expense may be 100% deducted.
- The meal must be purchased from a qualifying establishment. Generally, this means a restaurant with either takeout or sit down service. Ingredients for meal prep, or food purchased for anything other than immediate consumption, do not qualify.
- To qualify, a meal must be purchased during a business trip or shared with a business associate. (More on business travel deductions below.)
- According to the IRS, business associate “means a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”
- The meal must not be “lavish or extravagant under the circumstances.” (Think “soup and a sandwich,” versus “lobster and champagne.”)
When deducting a business meal, make sure to keep the following information for your records:
- The total cost
- The date of the meal
- The location
- The business purpose of the meal
- Who was present at the meal
In the unlikely case of an IRS audit, this information is essential for justifying your tax deduction.
If you travel for business—for instance, to a conference, or in order to give a talk or facilitate a workshop—you can deduct most of the costs. And you may even be able to squeeze in some vacationing while you’re at it.
So, what’s the difference between a vacation and a business trip? In order to qualify as business:
- Your trip must take you outside your tax home. Your tax home is the place your therapy practice is based.
- You must be away for longer than one work day.
- Most of your time should be spent doing business. If you are away for four days, and you spend three of those days at a conference, and the fourth day sightseeing, it counts as a business trip. Reverse that—spend three days sightseeing, and one day at a conference—and it’s not a business trip.
- The trip should be “ordinary and necessary.” If you have the choice between flying First Class and Economy, choosing First Class may put you outside the bounds of “ordinary and necessary.” So would opting for a jacuzzi suite, rather than a regular hotel room.
- You need to be able to prove the trip was planned in advance. The IRS wants to avoid having business owners tack on professional activities to recreational trips in order to turn them into business expenses at the last moment. Preparing a written itinerary and travel plan, and booking transportation and lodging well in advance, helps to show the trip was primarily business related.
You can deduct the cost of travel to your location, and the cost of lodging once you get there. You can also deduct:
- Baggage fees
- Rental car costs
- Laundry and drycleaning
- 100% of business meals from qualifying establishments
- 100% of meals eaten, while traveling, at qualifying establishments
There are two types of bank fees you can write off as tax expenses:
- Overdraft fees
- Maintenance fees
Overdraft fees are only incurred when you overdraw an account. Maintenance fees are charged monthly. You can record them in your books as a regular expense.
If you frequently use your personal car for business purposes, you can deduct some of the cost of fueling and maintaining it.
“Business purposes,” in this case, do not include your regular commute to work. You need to be driving somewhere other than your office (or wherever you normally hold appointments) in order to qualify for this expense. An example might be commuting once a week to do contract work at a mental health facility, driving to a professional conference, or driving to a venue where you’re giving a talk, doing a reading, or participating in a panel.
There are two ways you can calculate your tax write-off: by mileage rate and by actual expenses.
To deduct your vehicle expenses using the mileage rate, you take the total number of miles you traveled for work, and multiply it by the IRS mileage rate for the tax year.
For the 2021 tax year, the mileage rate is $0.56. For 2022, it’s $0.585.
When using the mileage rate, you don’t include any other expenses—such as oil changes or routine maintenance and repairs. The only additional vehicle costs you can deduct are parking fees and tolls.
If this is your first year owning your vehicle, you must calculate your deduction using the mileage rate. For all subsequent years, you have a choice between the mileage rate and actual expenses.
To write off actual expenses, you calculate how much of your time on the road is devoted to business, then multiply it by all your vehicle expenses for the year.
For instance, if you drove 10,000 miles last year, and 1,000 of those miles were to attend conferences or deliver workshops, you could deduct 10% of your vehicle expenses.
These expenses include:
- Lease payments
- Oil and other fluids
- Parking fees
- Garage or parking space rental
- Tire replacement
- Licenses and registration
- Depreciation on the vehicle
Whatever method you use to deduct vehicle expenses, be sure to keep detailed records.
The cost of membership in a professional organization, like the American Counseling Association, is tax deductible.
You can also deduct the cost of membership in your local chamber of commerce, as well as membership in any public or civic organizations related to counseling.
You can deduct the cost of courses, workshops, and certification programs related to your profession as a therapist, but it needs to meet at least one of two criteria:
- The education helps you improve upon or maintain the skills you need to do your job
- It’s necessary in order for you to obtain a license that lets you practice therapy
You can’t deduct the cost of any education necessary to meet the minimum requirements of your profession, or any education undertaken in order to change professions.
Some additional education costs you can deduct:
- Supervision costs
- Books, journals, and trade magazines related to your field
- Learning supplies (stationery, note-taking apps, etc.)
Office rent (including your home office)
If you practice in an office outside your home, the cost of rent is fully deductible. The cost of utilities (heat, water, electricity, internet, phone) is also deductible.
If you work from home—whether remotely, or by working with clients on site—you can deduct a portion of your mortgage payments or rent, as well as your utilities.
In order to qualify for this deduction, you must use your home office
- Exclusively, meaning you have a separate area where you work. This can be a separate room in your home, or a portion of a room. Your primary use of the area should be for work.
- Regularly, meaning you keep recurring work hours in the area. If you use your desk on random occasions to catch up on progress notes, the area doesn’t qualify as a home office. If you sit at it to write progress notes every day of the week, it will.
- With precedence, meaning it’s your number one place of business. For instance, you don’t spend 90% of your working hours at a different office, then use your spare room for take-home work.
If you qualify, you can deduct a percentage of your home’s rent or mortgage payments, plus the cost of utilities (including routine repair and maintenance), that corresponds to the percentage of your home you use as a home office.
There are two ways to do so: the home office regular method and the home office simplified method. It’s good to try out both on paper first. Depending on your circumstances, one method may result in a bigger tax write-off than the other.
The home office regular method
To calculate your home office deduction using the regular method, first determine the square footage of your office space. For the sake of an example, let’s say your office is 100 square feet.
Next, calculate the square footage of your entire home. Let’s say your home is 2,000 square feet.
Divide your office square footage by your home’s square footage.
100 ÷ 2,000 = 0.05 or 5%
The resulting percentage is the amount you can claim on your tax return as a home office expense. Following our example, you can deduct 5% of your combined mortgage payments/rent and utilities for the year.
The home office simplified method
Rather than calculating what percentage of your home you use for work, the simplified method applies a flat rate per square foot.
Using the regular method you can deduct $5 per year for each square foot of your home you use as office space, up to a maximum of 300 feet.
Any supplies you purchase for your office qualifies as a tax deductible expense.
- Computers, printers, photocopiers, phones, etc.
- Printer or photocopier ink or toner
- Printer paper
- Small furniture items
- Storage bins
Books and therapeutic aids
Any item you use in order to conduct sessions with clients qualifies as a tax writeoff. This includes:
- Therapeutic toys and games
- Art therapy supplies and equipment
- Pressure vests and weighted blankets
- Prompt cards
- Instruments for music therapy
- Therapeutic books (including work books)
- CDs and DVDs used in therapy
Personal therapy gives you the support you need to maintain your own mental health, which means you can continue doing your job as a therapist. For that reason, so long as it isn’t covered by medical insurance, personal therapy for self-employed therapists is 100% tax deductible.
Square, Stripe, and other payment processor fees
If you use Square, Stripe, or similar services to collect payments from clients, those fees are 100% tax deductible.
This applies to both flat monthly fees you pay to use these services, and any percentages of your revenue they collect.
Check the app for the service you use. It may offer yearly reports, telling you how much you paid in fees each year.
Booking and billing software
The subscription costs of software you use for booking client appointments is 100% tax deductible. So is the cost of any software you use to invoice clients or provide them with receipts.
Some invoicing software, such as Freshbooks, collects a percentage of your revenue when clients pay by credit card. This fee is also tax deductible.
We created a list of the most valuable tax write-offs for therapists. The best way to ensure you’re taking advantage of every possible tax deduction is to have a comprehensive bookkeeping and accounting solution in place.
When you use Heard, all of your expenses are tracked and categorized for you—so you never need to worry about missing out on tax savings.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her 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.