Welcome back to The 2x2 - the ultimate newsletter for executive consultants!
You could be missing out on $20K in tax deductions every year.
If you’re not sure what’s deductible— and what isn’t— this guide is for you.
Read on…
⏰ Today in 5 minutes or less:
There are expenses you should deduct without hesitation — and then there's a gray zone where the IRS expects you to prove the business purpose.
The gray zone isn’t as scary as it sounds. It just requires an extra step.
Document the details behind every business expense. It will save you hours of organization during tax season.
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What the IRS Will and Won't Let You Write Off as a Consultant
You've done everything right. LLC? Check. S-Corp election? Done.
Then tax season hits.
You stare at your expense list and wonder: Do I deduct this? What about that? Am I being too aggressive? Too conservative? Am I leaving money on the table or setting myself up for an audit?
Understanding business expenses isn't about squeezing out deductions. It's about knowing exactly where you stand.
When you understand the rules, you stop hesitating on purchases that grow your business.
The Core Test: Ordinary and Necessary
The IRS keeps it simple, so two words solve 90% of your deduction questions.
Ordinary means common in your industry: would other consultants recognize this expense?
Necessary means it serves your business. Not essential, not critical—just helpful.
Laptop for client work? Ordinary and necessary.
A high-end ergonomic chair that costs $1,000+ because it feels nice to sit on? Nice try, but you’ll need to prove it’s for your home office specifically—not personal comfort.
The Easy Wins: Deduct These Without Hesitation
Before you lose your mind over the expenses, I suggest starting with items that are straightforward and defensible:
Home office expenses. Dedicated space used exclusively for business? Deduct your rent, mortgage, utilities, and internet proportionally. The key word is "exclusively." Your kitchen table doesn't count, but a spare bedroom converted to an office does.
Technology and software. Laptops, monitors, subscriptions, cloud storage, project tools. These are the tools of your trade.
Professional development. Conferences, courses, certifications, books. Investing in your expertise is investing in your business.
Marketing and business development. Website hosting, LinkedIn Premium, business cards, email tools. Anything that helps you find and serve clients falls here.
Professional services. Accountant, lawyer, business insurance.
Travel for client work. Flights, hotels, rental cars, and meals on the road.
Document the business purpose and keep your receipts organized.
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The Gray Zone: Document Everything Here
Next, we sort the items that could be deductible, but need strong proof for the IRS:
Client meals. Deduct 50% when you discuss business. Write down who, where, and what you discussed. The receipt alone won't save you.
Your phone. Business and personal mixed? Deduct only the business percentage. Track your usage or estimate conservatively. Better yet – just get a separate work phone.
Coworking spaces. Monthly memberships are fully deductible, but the two coffees you bought to camp at a cafe for four hours are hard to defend.
Networking events. Mixers, chamber meetings, association dues. These are deductible when they serve a clear business development purpose.
Client gifts. $25 per person, per year. Maximum. Yes, that's the same limit from 1962 – and obviously not enough for your clients paying $36k monthly. Personally, I don’t mind spending more than $25 per client and simply treating the excess as a personal expense. It’s part of building strong client relationships.
Anything beyond that is generally considered a personal expense by the IRS.
How to Track Your Tax Deductibles Better
If you plan to claim the business deductions, you need to prepare documentation to defend them. The IRS expects you to keep all the receipts, so you need a system:
Separate your finances. One business bank account and one business credit card (for this, we love Ramp). No mixing it with your personal books. This will save you hours at tax time.
Use accounting software. QuickBooks is still the gold standard, but it’s a little challenging to operate without basic accounting knowledge. I also suggest pairing it with another fintech platform like Ramp to organize better and overcome QuickBooks’ limitations.
Go digital with receipts. Most fintech platforms now automatically read your receipts when you upload them as photos. This makes keeping and organizing receipts so much easier than stashing them in your desk.
Note the business purpose. Some deductibles sit in the gray area, where they only count depending on the purpose and who it’s for. Aside from the receipts, it also helps to note the details of every expense in a calendar entry, quick email, or something dated.
Review every quarter. Waiting until April might be too late. Better to catch errors early and adjust estimated payments before they’re due.
What This Means for You
When you know what's deductible, you stop second-guessing investments in your business.
You attend the conference. You upgrade your tech. You take prospects to lunch. You focus on building relationships and growing revenue instead of obsessing over receipt math.
The goal is understanding what legitimately serves your business. Then documenting it properly.
Find a tax professional who specializes in consulting businesses—their fee pays for itself for avoided mistakes, strategic planning, and ultimately, your peace of mind.
Your expense report tells a story. Make it the story of a professional building something real.
When the IRS reviews your deductions, they should see a legitimate business – not a lifestyle subsidy.
What a mess…
🚨 Chart crimes!
Strip all the text and numbers – and it looks like an abstract expressionist painting...
This is rough.
