As a therapist, the cost of a professional license, membership fees, and even student loan repayments can add up to a hefty financial burden. Thankfully there are a variety of tax deductions for therapists that you can leverage to grow your practice and lessen your tax burden come tax time.
In this guide, we’ll outline many of the tax deductions commonly available to therapists. Take note of all that you’re able to claim, and make sure you track all of your tax deductible expenditure throughout the year.
Journals and Reference Materials
If you subscribe to journals or other publications relevant to your profession, you are entitled to deduct the subscription cost from your income tax return.
You can also deduct the price of educational books and materials, so long as they add value to your business or improve your knowledge as a member of your profession.
Generally, you can deduct the cost of educational materials in the same year that you purchase them. For instance, if you purchase a book that retails between $100-$200, you would likely deduct the full expense in a single tax year on Schedule C of your Form 1040.
However, the cost of reference books that provide you value over several years may need to be depreciated over the course of several years. When in doubt, leave this decision to your CPA. Just make sure you keep a record of these purchases, and bring it to your CPA’s attention before you file your tax return.
Tuition and Course Costs
Many states require psychologists to pursue continuing education in order to keep their licenses. For example, the California Board of Psychology expects license holders to complete 36 hours of certified continuing education training during every two year renewal cycle.
The cost of classes that qualify you to keep your professional license is tax deductible—as are any other American Psychological Association (APA) or state board certified classes you take for your own edification.
If you’re a member of a professional organization such as the APA, your dues are tax deductible. These costs are grouped into “Professional Fees”—similar to bar membership for a lawyer.
As a self-employed individual, you can deduct your professional membership expenses in Section V, or line 48, of your Schedule C form.
Home Office Expenses
If your practice is based out of your home, it’s highly likely that you can claim the home office deduction. You can deduct the space you use for work in one of two ways.
The regular method involves calculating the percentage of your house you use for business by dividing the area you use for work by the total square footage of your home. The simpler method involves taking the square footage you use for work and applying a standardized deduction rate of $5 per square foot, to a maximum of 300 square feet.
It’s mandatory that the space you are using to run your practice is completely devoted to conducting business. For instance, if you commonly take care of paperwork while sitting at your kitchen table, you won’t be able to deduct the square footage of your kitchen (or the cost of the table).
The cost of keeping your home office habitable—heated, lit, and supplied with water—can also be deducted from your taxes, based on what percentage of your home is used for work. So, if your home office takes up 20% of your house’s square footage, you’ll be able to deduct 20% of, for example, your heating bill.
If you travel out of town for business—for instance, for a professional convention or a speaking engagement—you can deduct the cost of the trip from your taxes. In order for the expenditure to qualify as tax deductible, you must be traveling outside of your “tax home,” which is typically the community in which your business is based. And you must also be traveling for more than the length of a single working day.
Generally you can deduct the cost of transportation to and from your destination, parking and toll fees, meals, accommodation, and baggage shipping.
However, the IRS tends to scrutinize this tax deduction. Before you book your first work trip, spend a few minutes learning how to deduct the cost of business travel.
You are able to deduct your state’s fees for renewing your practitioner’s license on your federal tax return. However, you are not able to deduct initial fees for obtaining your license.
For instance, to become certified with the California Board of Psychology, you must pay a total of $1169 in application and exam fees.
After that, to keep your license in California, you must pay a biennial renewal fee of $400.
The first $1169 you pay to become established in California is not tax deductible. But two years later, when you pay $400 to renew your license, you are allowed to deduct that $400 from your federal taxes.
The cost of any software you use to run your business can be deducted under Section 179 of your tax return.
To qualify, the software must be:
- Purchased outright or leased by you
- Available to the general public
- Standard (not custom-made—you can’t hire a programmer to create it for you)
- Useful for one year or longer
- Used for income-generating activity
A common example of tax-deductible software you might use is an electronic health record (EHR) suite such as SimplePractice.
Bookkeeping and Accounting Fees
The fees you pay to a bookkeeper or certified professional accountant (CPA) to manage your business’s finances can be deducted from your tax return as “professional fees”. For instance, if you hire Bench to do your bookkeeping, the cost of the service is tax deductible.
Similarly, the cost of working with a CPA is also a tax deductible professional fee, provided you meet the following requirements:
- You itemize your tax deductions
- Your “Miscellaneous” deductions are more than 2% of your Adjusted Gross Income (AGI)
So, if your annual gross income is $100,000, and your miscellaneous expenses—including the cost of working with a CPA—are $2000 or more, you can deduct them on your tax return.
One important caveat to note is that you can only deduct the amount that your CPA charges you for filing your business’s tax return; you cannot deduct the cost of time spent doing your personal taxes.
If you run a sole proprietorship, and your CPA is completing your 1040 Form, you may only deduct the time they spend completing Section C, which pertains to your business specifically.
If you are paying a CPA to complete your tax return, be sure to get an itemized bill from them showing how much of their time on the job was spent doing taxes for your business, and how much was spent doing taxes for your individual person.
It’s always a good idea to have a lawyer on hand to support you through each stage of your business’s growth. You may engage the services of an attorney to acquire business property for long-term use. Or, you might need a lawyer to help incorporate your business—converting from a sole proprietorship to a limited liability corporation (LLC), for instance.
Similar to the cost of hiring a bookkeeper and an accountant, the cost of working with a lawyer for business-related purposes is considered a professional fee, which means it’s tax deductible. Legal fees you may typically deduct include:
- Writing or going over contracts and agreements
- Suing for breach of contract, or defending against being sued for breach of contract
- Assisting in collecting accounts payable
- Defending against claims of trade or copyright infringement
- Defending against employee claims, such as wrongful discharge
- Getting tax advice, or help with actions involving the IRS or state departments, such as an audit
Deducting the cost of legal fees isn’t always straightforward; work with your CPA to make sure you’re claiming legal fees in the correct manner.
And while it should go without saying, in order to be deductible, the legal fees you claim need to be business-related. If you hire a lawyer to help in divorce proceedings, or to press charges in a personal injury suit, the legal fees are not a deductible business expense.
Tax may not be the most interesting thing you’ll deal with as a business owner, but the more familiar you become with the tax deductions available to therapists, the better you’ll be at leveraging them to grow your practice while maintaining its financial health.