This article is co-authored by Heard
When you’re running your own private practice, thoroughly understanding tax deductions is a necessity. By tracking, recording, and claiming deductible expenses - you can save a major amount of money on your taxes each year. Which means more money to reinvest in your practice or on a nice vacation.
But there’s certain deductible expenses that many clinicians tend to overlook, and failing to claim them can result in missing out on hundreds if not thousands in potential write-offs. To help clinicians save money, we’ve laid out some of the most overlooked tax deductions for therapists as well as some tips that should prove helpful during tax season.
What is a tax deduction for therapists?
A tax deduction is revenue the IRS doesn’t tax. For example, if you earned $60,000 revenue as a self-employed therapist last year, but spent $15,000 on deductible expenses, you would only pay income tax and self-employment tax on $45,000. Provided you reported the expenses, of course.
The term “tax deduction” can be misleading. In casual conversation, it’s often used as an umbrella term for three different types of deduction:
- Itemized deductions
- The standard deduction
- Deductible business expenses
When you file your personal tax return, you can choose between claiming the standard deduction or itemizing your deductions.
Itemized deductions include real estate and property taxes, mortgage interest, and medical and dental fees. They’re related to you as an individual, rather than to your business, and you report them on Schedule A (Form 1040).
Instead of itemizing these deductions, you can choose instead to claim the standard deduction. It’s a flat rate, changing year to year, that’s available to all individuals.
Deductible business expenses are distinct from itemized deductions or the standard deduction. They’re expenses you incur running your business. Only self-employed individuals or businesses can file them.
If your therapy practice is a pass-through entity—a sole proprietorship or a general partnership, or an LLC electing to file as one of those entities—your personal tax return and your business tax return are one and the same. You report your deductible business expenses on Schedule C (Form 1040). S corporations, which are also pass-through entities, report their expenses on Form 1120S.
Bottom line: Schedule A and Schedule C of Form 1040 each cover different categories of expenses. And they’re not mutually exclusive: You can itemize your deductions or claim the standard deduction on Schedule A (personal expenses) and also claim business expenses on Schedule C (deductible business expenses).
The most overlooked tax deductions for therapists
Heads up: Before attempting to claim any new deductible business expenses on your tax return, consult with an accountant.
If you’re new to running your own therapy practice, there may be tax deductions you’re already familiar with—like the cost of rent, essential software, and marketing materials. But there may be others flying under the radar that you’ve missed.
Besides that, even when claiming common deductions, there may be ways to fully maximize your deduction that will save you money come tax time.
Common deductions you could be maximizing
Here are some common deductions that could significantly lower your tax bill.
The home office deduction
Rent and utilities for a therapist’s office are tax deductible. But what if you work entirely from home?
This is a must-claim deduction for therapists who are fully remote. So long as your home is your primary place of business, you can claim the cost of the space you use for work as a deductible expense.
To qualify, you must use your home office:
- Exclusively, meaning you maintain a separate area just for work. It can be a separate room in your home, or even a portion of a room. The primary use of the area should be work.
- Regularly, meaning you keep regular work hours when using the space. If you use the kitchen table on random occasions to catch up on progress notes, the area doesn’t qualify as a home office. If you sit at a desk to write progress notes every day of the week, it will.
- With precedence, meaning it’s your primary place of business. For instance, you aren’t spending 90% of your office hours somewhere else, then using your spare room for take-home work.
If you meet these requirements, you can deduct a percentage of your home’s rent or mortgage payments as well as the cost of utilities (including routine repair and maintenance) corresponding to the percentage of your home you use as an office.
There are two approaches: the home office regular method and the home office simplified method. Depending on your circumstances, one method may result in a bigger tax write-off than the other.
To calculate your home office deduction using the regular method, figure out the square footage of your office space. For instance, let’s say your office is 100 square feet.
Next, calculate the square footage of your entire home. For our example, let’s say your home is 2,000 square feet.
Divide your office’s square footage by your home’s square footage.
100 / 2,000 = 0.05 or 5%
This percentage—as a percentage of your rent or mortgage payments, plus utilities bills—is the amount you can claim on your tax return as a home office expense.
In contrast, the simplified method applies a flat rate per square foot. If you use 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.
Booking, billing, and Electronic Health Record (EHR) software
The cost of EHR software is fully tax deductible. That applies whether you purchase the software with a one-time payment or pay a monthly or annual subscription fee. Thankfully, Alma’s platform is an all-in-one solution that makes running a private practice easy for clinicians. Through Alma’s platform, users can handle all booking, billing, and EHR requirements and needs.
Therapists equipped with Alma can:
- All EHR tools are included within an Alma membership. Freeing you to spend less time navigating between different platforms and processors, and more time focused on providing care to your clients.
- Store documentation in their HIPAA-compliant member portal, and can rest assured that no one can see it aside from them.
- Evaluate symptom severity and re-assess over the course of care with PHQ-9 and GAD-7 assessments.
- Create treatment plans using a straight-forward template, write progress notes for sessions, and add chart notes when you need.
- Send new clients everything they need in a single email — including consent forms and a standardized intake questionnaire.
“I like the EHR and scheduling features as well as Alma handling credentialing and billing all so good!
- Lara Clayman, LCSW
Click here to learn more regarding Alma’s EHR tools.
Finally, if you pay for a HIPAA-compliant email account—such as Google’s G Suite—you can deduct the cost on your taxes.
Marketing
Marketing is a broad category—it’s not just ads and signage. Any marketing expense you incur in the process of spreading the word about your therapy practice and attracting new clients is tax deductible.
Some common marketing expenses for therapists:
- Ad placement online or in newspapers
- Paid promotion of social media posts and accounts
- The cost to create, launch, and host your website
- The cost of hiring an SEO consultant
- Services that help you get referrals, like Alma
- Designer and consultant fees for your brand, logo, etc.
- Business cards, pamphlets, and fliers
- Promotional items like pens, stress balls, water bottles, etc.
- Signage advertising your business
- Bus or bench ads
- The cost of hiring online influencers
Keep in mind that marketing doesn’t need to be measurably effective in order to be deductible. Your promoted social media post may not get you any new followers, but the fact you were investing money trying to grow your business makes it a deductible expense.
Overlooked tax deductions for therapists
Besides certain aspects of common deductions therapists tend to overlook, there are whole categories that are often ignored or forgotten—even though claiming them can have a major impact on your tax bill.
Professional membership fees
The cost of membership in any professional organization for therapists—like the American Counseling Association—is fully tax deductible.
You can also deduct the cost of membership in your local Chamber of Commerce, or any other business association that might benefit your practice.
Therapeutic aids
The cost of any items you use to help you work in-session with clients is tax deductible.
That includes:
- Cards, workbooks, and handouts
- Art therapy supplies
- Games and puzzles
- Fidget or calming toys
- Weighted blankets
- Stuffed animals or figurines
- Props or costumes
- Sand trays and therapy sand
If an item is not specifically designated for therapeutic use, or you did not purchase it from a supplier of therapeutic tools, make a note on the receipt about how you’re using it for therapy. That will make it easier to defend in case the IRS ever questions your deduction.
Continuing education
Student loan payments are not tax deductible; the IRS does not allow you to deduct the cost of the minimum education you need in order to qualify for your profession. Although you may be able to deduct the cost of student loan interest.
However, the cost of continuing education—so long as it helps you build upon your current practice as a therapist—can be deducted.
As a guideline, continuing education is tax deductible if it either:
- Helps you improve upon or maintain the skills you need to do your job, or
- Is necessary in order for you to obtain a license that lets you practice therapy
That includes tuition at a post-secondary institution, the cost of courses online or in-person, and workshops.
Besides instruction, you can deduct the cost of:
- Supervision
- Books, journals, and trade magazines
- Learning supplies (pens and paper, note-taking apps, etc.)
- Attending conferences for professional therapists
Personal therapy
Many therapists deduct the cost of seeing their own therapy sessions on their tax returns.
Some accountants approve, some do not. It’s a bit of a gray area, and the best way to be certain before claiming the deduction is to consult with your own accountant.
If you do decide to claim this deduction, you can learn more from this article from Heard: Is Going to Therapy Tax Deductible?
How to claim tax deductions for your therapy practice
The form you use to claim your tax deductions depends upon your business structure:
- Sole proprietorships and partners in general partnerships use Schedule C (Form 1040). So do LLCs electing status as either of these entities.
- S corporations report their expenses on Form 1120S.
Keeping records for your deductible expenses
Any expense you list as a tax deduction on your return must be backed up by a receipt. Plan to keep all receipts on file for six years. That’s the statute of limitations on tax returns.
In the event you’re audited, the IRS expects you to provide them with proof that every expense you claimed on your tax return was legitimate. If you can’t support a claim with a valid receipt, it’s considered illegitimate. You’ll be required to pay back the difference, and may also face fines.
Keep your receipts organized by year and include notes if necessary clarifying what the expense was and how it applied to your business. An expense tracking app—or a bookkeeping/accounting solution that lets you upload photos of receipts, like Heard—can save you from losing track of receipts.
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These are just a handful of the deductions therapists can claim. For a full rundown, check out The Complete List of Tax Deductions for Therapists.
Heard is an all-in-one financial solution for therapists that combines software with human support to handle bookkeeping, taxes, payroll, and more. Click here to schedule a free consultation.
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.
