I've done tax prep for a lot of contractors over the years and the thing that still surprises me is how consistently the same deductions get missed. Not because the rules are complicated, but because nobody is keeping an eye on things during the year. By the time tax season rolls around, the receipts are gone, the records are fuzzy, and a lot of money gets left on the table.
Here are the ones that get missed most often, and what to do about it.
Vehicle and Equipment Use
If you're driving a work truck, van, or any vehicle for business, that's a deduction. Either through the standard mileage rate or actual expenses like gas, insurance, maintenance, and depreciation. A lot of contractors have two or three vehicles being used for work and are only deducting one, or none at all because they never kept a mileage log.
The IRS requires a log with the date, destination, business purpose, and miles for each trip. That sounds like a pain, but there are apps that handle it automatically. Set it up once and it runs itself. The deduction on a work truck driven 20,000 business miles a year is several thousand dollars. That's real money.
Tools and Equipment
Everything you buy to do the job is deductible. Hand tools, power tools, safety gear, measuring equipment, ladders, trailers, generators. If it's used for work it belongs on your tax return. The issue is that most of these purchases get made throughout the year and either don't get receipts kept or get expensed to a generic account that nobody reviews at tax time.
Section 179 lets you deduct the full cost of qualifying equipment in the year you buy it instead of depreciating it over several years. For big purchases like a new skid steer or a work trailer, that's a significant tax savings in year one. But you have to track the purchase and know the rule exists to use it.
Home Office
If you run your business out of your home and have a dedicated space for it, whether that's a room, a converted garage, or a shed you use as your office, you may qualify for a home office deduction. This covers a proportional share of your mortgage or rent, utilities, insurance, and repairs based on the square footage of the space.
Contractors tend to skip this one because they're nervous about it or they think it's not worth the hassle. For a lot of them it's worth $1,500 to $4,000 a year. It's worth doing correctly.
Phone, Internet, and Software
Your cell phone is probably used for work a significant portion of the time. Scheduling, customer calls, looking up job specs, GPS. The business portion of your phone bill is deductible. Same with your internet if you use it for business. Estimating software, scheduling apps, accounting software, project management tools. All deductible. These are small individually but they add up.
Subcontractor Payments
Every dollar you pay a sub is a deductible business expense. The catch is it has to be documented properly. This circles back to the 1099 conversation. If you're paying subs in cash and not tracking it, you're not only missing the deduction, you're also potentially creating a compliance problem. Keep records of every sub payment, every invoice, and make sure it's coded correctly in your books.
Retirement Contributions
This one is almost universally missed by self-employed contractors and small business owners. A SEP-IRA lets you contribute up to 25% of your net self-employment income with a maximum around $69,000 for 2024. Every dollar you put in is a deduction. For a contractor netting $150,000, that could be a $37,500 deduction. That's not a rounding error.
You don't have to set this up before year-end either. SEP-IRA contributions for the prior tax year can be made up until your filing deadline, including extensions.
Why These Keep Getting Missed
The honest answer is that most contractors aren't tracking these things throughout the year, and whoever is doing their taxes at the end of the year is working with incomplete information. Tax planning isn't a once-a-year exercise. It's something you have to keep an eye on regularly so you can make moves before December 31st when your options close.
If you're meeting with your accountant only in tax season, you're already too late to fix most of it. The goal is to know what your tax situation looks like in October so you actually have time to do something about it.