What are the main tax deductions for therapists?
Therapists can take advantage of numerous tax deductions to reduce their taxable income. For example, the cost of purchasing therapy tools or attending professional development workshops can often be deducted. However, with so many potential deductions available, it can be confusing to determine what qualifies as a legitimate write-off and what doesn't.
Let's break down the main tax deductions for therapists and how they work:
Marketing and advertising
The costs associated with marketing and advertising your therapy practice, whether online or in physical locations, are considered deductible business expenses. This typically includes:
- Website design and maintenance
- Business cards and brochures
- Online and print advertising
- Social media marketing costs
- Professional photography for marketing materials
- Promotional items (e.g., pens, notepads with your practice logo)
- SEO tools and specialists
While most marketing and advertising expenses are deductible, there are a few exceptions:
- Advertising in political publications, such as ads placed in programs for political conventions or other political publications, is not deductible.
- Permanent signage, as these signs contribute toward depreciating assets versus temporary signage, which remain in place for up to a year before being changed.
- Recruitment signage, such as help wanted ads, as these count towards deductible business expenses.
Office expenses
Office expenses are costs incurred to maintain and operate your therapy practice, and are usually 100% tax deductible. Deductible office expenses for therapists usually include:
- Office supplies (e.g., pens, paper, folders, sticky notes)
- Printer ink and toner
- Office furniture (e.g., chairs, desks, filing cabinets)
- Computer hardware and software
- Telephone and internet services
- Cleaning supplies and services
- Rent or mortgage payments for your office space
- Utilities (e.g., electricity, water, gas)
- Artwork
- Home office space (if you operate your practice out of your home)
Legal and professional fees
Legal and professional fees are expenses related to obtaining expert advice or services to support your therapy practice. Tax write-offs for therapists in this category include:
- Attorney fees for business-related legal advice
- Accountant or bookkeeper fees for financial management and tax preparation
- Consulting fees for business strategy or practice management
- Professional liability insurance premiums
- Licensing and certification fees
Accounting and bookkeeping
The cost of accounting and bookkeeping services or software is tax-deductible for therapists. These deductions can include:
- Accounting software subscriptions
- Bookkeeping services
- Tax preparation software or services
- Financial management tools and apps
- Professional consultations
Keeping accurate financial records is essential for maximizing tax deductions and ensuring compliance with tax laws. Bench Accounting can help you streamline your bookkeeping process and prepare your financial statements, making tax time less stressful and much more efficient.
Continuing education
Continuing education is crucial for therapists to maintain their licenses and stay current within their specific area of practice. Deductible expenses related to continuing education for therapists can include:
- Workshop and seminar fees
- Online course subscriptions
- Textbooks and professional publications
- Travel expenses related to attending conferences or training sessions
- Licensing exam fees
- Professional development coaching or mentoring
- Supervision costs, if being reviewed for a certification or license
- Educational supplies, such as notebooks, textbooks, etc.
To ensure your continuing education is eligible for a tax deduction, it must meet the following criteria:
- The courses, program, or workshop is directly related to your profession and will help you maintain or improve upon the skills and knowledge needed to do your job.
- The education necessary to obtain the certifications or licensing needed to legally run your therapy practice.
Meals and transportation
Therapists can also write off meals and transportation expenses—as long as they’re considered business-related. Here are some key points to remember about meal expenses when it comes to your taxes:
- Business meals with clients, colleagues, or potential referral sources are 50% deductible
- Meals while traveling for business purposes are 50% deductible
- Office snacks or meals provided to employees and patients are 100% deductible
Regarding transportation costs, therapists can deduct expenses related to business travel but not regular commuting costs. Deductible transportation expenses include:
- Airfare, train tickets, or bus fares for business trips
- Hotel accommodations for overnight business travel
- Rental car expenses for business trips
- Mileage for driving to see clients (outside of regular commute)
- Parking fees and tolls for business-related travel
A common question that comes up during tax season is whether or not therapists can write off their cars. While you can't deduct the entire cost of your vehicle, you can deduct a portion of your car expenses based on the percentage of business use. This can be done using either the standard mileage rate or the actual expense method.
Banking and financial management fees
Therapists often incur various banking and financial management fees to run their practice. These deductible fees typically include:
- Business bank account fees
- Credit card processing fees
- PayPal or other payment platform fees
- Loan interest for business-related loans
- Financial software subscription costs
Tax write-offs for therapists that are often overlooked
Many therapists who opt for DIY tax filing often miss out on potential deductions that could lead to significant savings. These are the frequently overlooked tax write-offs for therapists:
Therapeutic tools
Therapeutic tools are items used directly in your practice to facilitate therapy sessions. These tools are generally 100% deductible in the year they're purchased. Common deductible therapeutic tools or aids include:
- Art supplies for art therapy
- Play therapy toys and equipment
- Biofeedback devices
- Relaxation aids (e.g., white noise machines, aromatherapy diffusers)
- Therapeutic games and activities
- Assessment tools and psychological tests
Professional membership fees
Therapists can deduct fees paid for professional memberships relevant to their practice. Examples of deductible professional memberships include:
- American Psychological Association (APA)
- National Association of Social Workers (NASW)
- American Counseling Association (ACA)
- State-specific professional associations
- Local therapy networking groups
Practice management software
Software used to manage your therapy practice is also 100% tax-deductible. This includes appointment booking software or apps, electronic health record (EHR) systems, and other practice management tools that help you run your business more efficiently.
Personal therapy
Therapists who seek counseling to improve their professional skills can typically deduct the expense from their taxable income. However, it's important to note that this is only an eligible tax deduction if the personal therapy is related to either bettering your own mental health or helping you do your job, such as career counseling or professional mentorship.
Personal therapy for family issues or couples counseling wouldn't qualify as a business expense.
Business start-up costs
If you're opening your own therapy practice, you can deduct many of the start-up costs involved. These deductible expenses may include:
- Incorporation fees
- Licenses and permits
- Initial advertising and marketing costs
- Office equipment and furniture
- Professional consultations (e.g., legal, accounting)
- Deposits for office space
What therapists cannot deduct from their taxes
Understanding what expenses are not tax-deductible is just as important as knowing what you can deduct. There are two items that therapists specifically cannot claim as tax deductions:
Discounts given to insurance companies (from your usual fees)
When you accept insurance, you often agree to a lower reimbursement rate than your standard fee. The difference between your full fee and the insurance reimbursement is not considered a deductible expense. This is because you never actually receive the insured portion of the income, so it can't be deducted as a loss.
Unpaid patient balances
Generally, unpaid patient balances don't qualify as tax-deductible expenses. This is because most therapists use the cash method of accounting, which means you only report income when you receive payment. Since you never received payment for these unpaid balances, they weren't included in your income and, therefore, can't be deducted.
However, one exception is the "bad debt deduction." If you use the accrual method of accounting (where you report income when you bill for it, not when you receive payment), you may be able to claim unpaid balances as bad debt. This is a complex area, so it's best to consult with a tax professional to determine if this applies to your situation.
Do therapists qualify for QBI deductions?
The Qualified Business Income (QBI) deduction is a tax break for small business owners, including self-employed individuals. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxes.
Qualifying for a QBI deduction as a therapist will depend on several factors, including your business structure, income level, and whether your practice is considered a "specified service trade or business" (SSTB). Mental health professionals are generally considered SSTBs, meaning income limitations exist for claiming the full QBI deduction.
For tax year 2023, the QBI deduction begins to phase out for single filers with taxable income over $182,100 and married couples filing jointly with taxable income over $364,200. If your income is below these thresholds, you may be eligible for the full 20% deduction on your qualified business income. Of course, it’s always best to consult with your trusted tax professional to determine how much of the QBI deduction you’re eligible to claim.
How do therapist tax deductions work?
Tax deductions for therapists work by reducing your taxable income, which in turn lowers your tax bill. It's important to understand that deductions don't provide a dollar-for-dollar reduction of your taxes. Instead, they reduce the amount of income on which you pay taxes.
Reducing your taxable income via deductions typically unfolds like this:
- Calculate your total business income
- Subtract all eligible business expenses (these are your write-offs)
- The result is your net business income
- This net income is then used to calculate your tax liability based on your tax rate
For example, let's say you're a therapist who earned $100,000 in business income and had $30,000 in deductible expenses. Your taxable business income would be $70,000 ($100,000 - $30,000). If your effective tax rate is 25%, you would owe $17,500 in taxes ($70,000 x 25%) instead of $25,000 ($100,000 x 25%) if you hadn't claimed any deductions.
How to claim tax deductions for your practice
To claim tax deductions for your therapy practice, you'll need to gather and organize the following documents:
- Form 1040 (individual income tax return)
- Schedule C (profit or loss from business)
- Receipts and documentation for all claimed expenses
- Bank and credit card statements
- Mileage log (if claiming vehicle expenses)
- Home office measurements and expenses (if claiming home office deduction)
Tips for reducing your taxable income as a therapist
Whether you’re just starting your practice or have been in practice for a while, these are the best tips for reducing your taxable income as a therapist:
Familiarize yourself with how self-employment taxes work
If you're a self-employed therapist, you're responsible for paying self-employment taxes to cover Social Security and Medicare contributions. Understanding these taxes can help you plan and save accordingly.
Here’s what you need to know if you’re a self-employed therapist:
- The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare)
- You can deduct half of your self-employment tax on your income tax return
- You’ll likely need to make quarterly estimated tax payments
Keep an accurate record of expenses
It’s a best practice to maintain detailed records of all your business expenses throughout the year. This will make it easier to claim deductions and provide documentation if you're ever audited.
Maintaining your records should involve using a dedicated business card to simplify expense tracking, saving and categorizing receipts and expenses, and keeping a running list of your deductible expenses as they apply to your practice.
Set aside enough based on your tax rate
You’ll also want to estimate your tax liability and set aside money regularly to cover your tax bill to help avoid surprises come tax time. Plan to set aside 25%-30% of your income based on your tax bracket, and be sure to keep a separate banking account specifically for your tax payments. Also, remember to factor in both federal and state tax obligations.
Use a bookkeeping service to help you stay current
Consider using a professional bookkeeping service like Bench to keep your financial records organized and up-to-date. This can save you time and ensure accuracy in your financial reporting as these types of services can offer you the professional support you need for your accounting and bookkeeping needs year-round.
Speak with a tax professional for tailored advice
Consult with a tax professional who specializes in working with therapists or small business owners. They can provide personalized advice based on your specific situation, including choosing the most advantageous business structure for your practice, such as an LLC or S-Corp. They’ll also help you stay up-to-date on changing tax laws that may affect your practice.
Learn how Bench can support your practice this tax season
Understanding your tax deductions as a therapist significantly impacts your taxable income and overall tax burden. By taking advantage of available deductions and maintaining accurate financial records, you can minimize your tax liability and reinvest more money into growing your practice and skills.
Bench can offer you the knowledge, tools, and professional support needed to impact your next round of tax deductions significantly. Team up with Bench today and see how we can help you streamline your financial management, maximize your deductions, and focus on what matters most – helping your clients and growing your therapy practice.
