If you’ve already checked out our complete list of tax deductions for therapists, you already know there are many opportunities to lower your tax bill by tracking reporting deductions.
But it’s just as important to understand what is not a tax deduction. If you try to claim invalid deductions on your tax return, it leads to lots of extra back-and-forth with the IRS—and sometimes even penalties.
Here are the invalid tax deductions newly self-employed therapists most commonly try to claim on their tax returns.
Vehicle expenses for the commute to work
Business travel is certainly tax deductible. But costs associated with your trips to the office are not.
For business travel expenses to qualify as deductible, you need to be traveling outside of your tax home. Your tax home is the area—usually the city or town—where your business is based.
Since your office is smack dab at the epicenter of your tax home, your trips there do not qualify as business travel.
So the cost of fueling, insuring, and maintaining your vehicle is not a tax deductible expense—not until you travel outside your tax home for business purposes.
Your entire phone bill
Many newly self-employed therapists are overjoyed to learn that their phone bills are tax deductible expenses.
One major caveat: You can only deduct a portion of your phone bill equivalent to how much you use it for work.
For instance, if you buy a phone exclusively to be used for work, and set it up with a service plan that is also 100% dedicated to work, then all the associated costs are tax deductible: The phone itself, any care plans or insurance you buy with it, and your monthly usage fees.
However, if you use your personal phone for work purposes, only a portion of its cost is tax deductible. The IRS only wants you to deduct the portion of your phone usage that applies to work; they’re not going to give you a tax break for watching TikToks.
If 75% of your phone use is personal, and the remaining 25% is for work, you can write off 25% of your phone bill on your tax return. If you’re not sure exactly how much of your phone usage is professional as opposed to personal, consult with an accountant—they can help you settle on a percentage that reduces your tax bill without raising IRS red flags.
Prior to the Tax Cuts and Jobs Act (TCJA) of 2018, self-employed individuals could deduct the cost of entertainment for business purposes.
For instance, if you had a contract facilitating employee mental health workshops for a local business, and you treated the business owner to a night out at the opera, the cost would be 50% tax deductible.
Thanks to the TCJA, entertainment expenses are no longer deductible. Sorry, opera fans.
The good news is that some entertainment expenses for staff are still tax deductible. If you have employees and you throw a party for them, you can deduct 100% of the cost from your taxes.
Student loan payments
When many newly self-employed therapists learn about the education expense deduction, the first thing they think of is student loans.
If you’re still paying for the cost of your education, the idea that you could write off the expense—and take some of the sting out of those monthly payments—is attractive.
Unfortunately, you can’t fully deduct the cost of student loan payments. The cost of the education required to enter your field—in this case, typically a degree in psychology or social work—does not qualify as tax deductible.
Later on, if you decide to pursue a more advanced degree relevant to your practice as a therapist, or upgrade your skills with additional courses or diploma programs, the cost is tax deductible. But your current student loan payments are not.
There’s a silver lining, though. While the principal of your student loans is not deductible, you may be able to write off the interest.
If you pay over $600 in interest during the course of the year, you can claim the expense on your tax return. Learn more from our guide to the education expense deduction for therapists.
Health insurance premiums
When you start your own business as a sole proprietor, you add an exciting new form to your tax return: Schedule C.
Schedule C of Form 1040 is where you report your business expenses. All the write-offs covered in our complete list of tax deductions for therapists, you report on Schedule C.
But Schedule C isn’t the be-all and end-all of tax deductions. When you’re a sole proprietor, your personal taxes and your business taxes are one and the same. Meaning, when you fill out Form 1040, you’ll also list your personal write-offs. And health insurance premiums are one of them.
The cost of your personal health insurance lowers your tax bill, but it is not a business deduction. Meaning, you don’t report it on Schedule C.
It’s an above-the-line deduction—one which adjusts your gross income, or your income before business deductions are taken into account.
To write off your health insurance premiums, calculate and report them on Part II of Schedule 1 of your tax return. Then use that information to make an adjustment to your gross income on page 1 of Form 1040.
You can write off health insurance premiums regardless of whether you itemize your deductions or take the standard deduction.
The important thing is that you don’t try to report your health insurance premiums as a business expense. If you do, you’re bound to get a notice from the IRS.
What happens if you try to claim an ineligible expense?
When you claim an ineligible expense on your tax return and the IRS detects it, they’ll adjust your reported net income for the year, as well as the amount you owe in taxes.
For instance, suppose you fill your tax return and, after deductions, your net income for the year is $70,000. That means you’ll owe income tax and self-employment tax on that $70,000
But you made the mistake of claiming $3,000 in vehicle expenses for which you aren’t eligible. The IRS detects the mistake after you file, adjusts your net income, and notifies you.
Now you owe the IRS income tax and self-employment tax on $73,000 net income for the year. Depending on whether you paid your taxes in advance with quarterly tax payments or whether you’re paying your taxes after filing, you’ll either:
- Receive less of a tax refund than you would otherwise (or get no refund at all) after paying quarterly taxes
- Owe the IRS more money after paying quarterly taxes
- Owe the IRS a larger tax bill that you expected when you filed (if you’re paying taxes after filing)
The IRS will typically alert you by sending a notice CP2000 in the mail. It’s a letter telling you how much you owe, and asking you to respond either confirming or contesting the changes to your tax return. You can learn more from our guide to IRS notices for therapists.
If you end up owing the IRS unpaid taxes, you’ll be charged the failure to pay penalty. This amounts to 0.5% of what you owe, charged monthly, to a maximum amount of 25% of your total owed taxes.
For a quick desk reference to check when tracking your expenses, try our tax deduction cheat sheet for therapists.
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.