What contractors can actually deduct

Most contractors do not overpay tax because they missed a clever deduction. They overpay because the ordinary ones were never recorded properly, or because they took something they could not evidence and lost it later.

The list below is not exotic. It is the everyday spending that goes unclaimed when nobody is keeping the books.

The ones that get missed

Vehicle costs. Usually the largest deduction a contractor has and the most commonly under-claimed, because the records are not kept. Worth its own decision — see mileage or actual expenses.

Tools and equipment. Small tools are typically expensed. Larger equipment is capitalised and depreciated, with elections available that can change the timing significantly. Either way it has to be recorded as a purchase, not lost in a card statement.

Supplies bought on personal cards. Extremely common on emergency runs. The expense is legitimate; it just never reaches the books because the transaction is not in a business account.

Phone and internet, to the extent used for the business.

Licensing, permits, bonds, continuing education — recurring and routinely forgotten.

Insurance — general liability, commercial vehicle, workers compensation, tools.

Subcontractor payments, which also carry a 1099 obligation. See 1099 or W-2.

Software and subscriptions — field service, accounting, dispatch. Small individually, meaningful annually.

Uniforms and branded clothing, where genuinely not suitable for ordinary wear.

Bank and merchant processing fees, which quietly add up on card-heavy service businesses.

Home office, where a space is used regularly and exclusively for the business. Real, and worth getting right rather than avoiding.

The ones that get disallowed

Anything without a record. This is the whole game. A deduction you cannot support is one you lose the moment somebody asks, with interest on top.

Personal spending run through the business. Groceries, family phone lines, the truck the household drives. It is not a deduction, and once it is in there it also undermines the entries that were legitimate.

Commuting. Travel from home to a regular place of business generally is not deductible, while travel between job sites generally is. The distinction is specific and worth understanding rather than assuming.

The full loan payment on a truck. Only the interest is deductible; the principal reduces debt. This one appears in most contractor books we open.

Meals treated as fully deductible when they are not, and entertainment, which is broadly no longer deductible.

What the records actually need to be

This is the part that decides whether a deduction survives contact with a question.

Contemporaneous. Recorded when it happened, not reconstructed in March. Reconstruction is where accuracy dies and where credibility dies with it.

Business purpose captured. For anything that could be personal, a note saying what it was for. Ten seconds at the time, impossible a year later.

Separated. Business spending in business accounts. Mixed accounts make every entry arguable, even the honest ones. See separating business and personal money.

Categorised consistently. The same kind of expense in the same account every month, so the year is comparable and anomalies stand out.

The practical version

You do not need a system. You need three habits:

1. Business spending goes on business accounts, every time
2. Photograph receipts at the point of purchase, coded to the job where relevant
3. Someone closes the month and asks about anything unclear while you still remember

Do those and the deductions look after themselves, because the record already exists when the question is asked.

Related

• Mileage or actual expenses?
• What your CPA needs from you at year end
• The chart of accounts a contractor actually needs

General information about categories of business expense, not tax advice. What is deductible in your situation, and in what amount, depends on your circumstances — confirm it with your CPA.