14 Electrical Tax Deductions: Checklist for Contractors

1. Home Office Deductions

Electrical contractors or business owners who use a dedicated home office for administrative and management tasks are eligible for home office deductions. This write-off only covers the portion of the home expenses used for business purposes.

To calculate your home office deduction, you must find the percentage of your house used for business purposes. To do that, divide your home office space by the total size of the entire house and multiply the result by 100 (to convert it into a percentage). 

Then, apply the percentage to all expenses with overlapping business and personal applications. This includes home expenses such as homeowners’ insurance, rent, mortgage interest, HOA expenses, utilities, and property taxes.

Here’s an example. Let’s say you live in a 2,000 sq. ft. home, with 500 sq. ft. dedicated for business purposes. Your percentage of home expenses that are eligible for deduction will be:

500/2,000 * 100 = 25%

So, if you incur $5,000 in home expenses, your home office deduction will be:

25/100 * 5000 = $750

If this method seems complicated, use the simpler alternative of deducting $5 per square foot, up to 300 square feet. Therefore, if your home office spans 100 square feet, your home office deduction would be $500 ($5 * 100).

2. Vehicle Expenses

The IRS allows you to write off expenses for a vehicle partially (if it's used for personal and business purposes) or completely (if used only for business). Two methods can be used to calculate this tax deduction:

The standard mileage method

To use this method, maintain detailed records of your business miles and multiply the result by the annual standard mileage rate of 67 cents per mile.

Suppose you accumulate 100 miles when using your car for business in a calendar year. Your deductible will be $67 (100 * 0.67).

Actual expense method

This involves writing off all expenses incurred on your vehicle based on the number of miles you drove for business purposes like meetings, service visits, and supply runs. Such costs include maintenance, repairs, gasoline, tire changes, lease fees, and depreciation (if the vehicle belongs to you).

For instance, let’s say you accumulated 100 miles on your car, of which 30 miles were for business tasks. Since you use the car for business 30 percent of the time, you can write off 30 percent of the vehicle expenses.

However, to use this method, you must keep accurate records of all car expenses, business trips undertaken with the vehicle, their dates and reasons, and documents substantiating the claim that the trip occurred.

To pick the best deduction method, consult a tax expert to determine the method that will result in the larger deduction. You must also have a solid accounting system to record all business expenses regardless of the vehicle tax deduction method used.

Electrical companies use ServiceTitan’s Accounting Platform to log all expenses, including those on company vehicles. The platform syncs with other accounting solutions, making it easy to calculate vehicle tax deductions and access all the necessary documentation to defend against potential IRS audits.

ServiceTitan’s Accounting Platform also has reports that provide a snapshot view of all outstanding invoices (accounts receivable) and payments (accounts payable).

This lets you know the exact state of your company’s finances, reducing the possibility of tax errors, financial mismanagement, and tax penalties.

3. Employee-Related Expenses

You can deduct the costs of paying anyone for services rendered to the business. 

This includes contractor fees, the cost of hiring accountants for audits, and other employee-related expenses such as wages, benefits, bonuses, overtime, 401k account contributions, and commissions.

To qualify for this deduction, ensure you have W4 forms for all employees and W9 forms for contractors delivering one service or another. Also, issue 1099 forms to contractors so they know you’ll report their payments as a deductible in your subsequent tax filing.

Instead of tracking labor expenses via spreadsheets, consider using ServiceTitan’s Contractor Payroll software to record employee-related expenses and claim tax deductions.

The software documents employee drive time, wrench time, overtime, and vendor runs. This makes it easy to compute employee salaries and determine the amounts to record on W2 forms when filing taxes.

Electrical contractors also use ServiceTitan’s Contractor Payroll to apply special performance add-ons when creating payment structures and see the cost of a project in labor hours.

This detailed job-costing data ensures you remain profitable when offering discounts, pay raises, or special payments to motivate electricians.

4. Equipment and Supplies

You need equipment and supplies, which sometimes cost a lot, to deliver optimal electrical services. Fortunately, electrical companies can get a tax deduction on all electrical equipment and supplies, such as pliers, circuit testers, drills, and electrical outlets.

However, the IRS only allows you to write off the entire expense for equipment worth $2,500 or less. 

Those items above $2,500 with a lifespan of over one year must be added to your balance sheet and depreciated over five to seven years. You can also use the Section 179 deduction to deduct the entire lump sum in one year.

That means if you bought a power-quality analyzer for $20,000, you can depreciate it for $4,000 over five years or use the section 179 deduction to expense it all at once.

Of course, you need to record the time you purchase supplies and equipment and have detailed documentation to enjoy this tax deduction. That’s where ServiceTitan’s Inventory Management software comes in.

The software has a report that provides a detailed breakdown of every item’s quantity, unit cost, and total value. Electrical companies also use it to create purchase orders when items’ stock levels are low, arrange delivery, and pay the vendor without leaving the platform.

Such a centralized inventory management process makes it easy to access the documents required to claim write-offs correctly and avoid the IRS's ire.

5. Uniforms and PPE

Money spent on apparel unsuitable for non-work functions and safety equipment is deductible. This includes coveralls, safety goggles, specialized shoes, gloves, and hard hats.

6. Insurance

Paying for insurance is a smart way to protect your business from liabilities and demonstrate professionalism. It falls under the group of expenses the IRS considers necessary for running an electrical company, qualifying it as a deductible expense.

Per IRS guidelines, this tax deduction covers 11 business insurance policies, including workers’ compensation, general liability, vehicle, and business interruption insurance.

7. Business-Related Meals and Travels

From 2021, all business owners can legally deduct 100 percent of all business-related meal expenses and travel-associated expenses such as lodging, car rentals, airfares, and parking fees. 

However, the discussions and activities at such meals or travels must directly impact your business. 

You must eat meals and discuss business issues with a business associate, prospect, employee, or customer. Travel must also exceed one workday and have a clear business impact.

Therefore, detailed records should be kept proving that the meals or travels were business-related. This includes receipts, meeting logs, conference tickets, and transportation invoices. You would need these records to answer potential IRS inquiries.

8. Permits and Licensing Fees

Every cent spent in acquiring electrical licenses and project permits can be fully deducted from your taxable income. This increases the profit margin generated from each project and lowers the financial burden of acquiring key electrical licenses.

9. Business Loan Interest

Electrical companies with debt can deduct their associated interest expense during tax season. 

However, you can only write off the interest the lender earns from the loan, not the principal (the actual cash received from the lender). Plus, only the business-related portion of the debt that covers personal and company expenses is eligible for a write-off. 

10. Memberships and Fees

Electrical companies pay membership dues to industry associations and subscribe to trade publications to keep in touch with the latest trends, technologies, and market shifts.

Such dues and subscription fees are considered tax-deductible expenditures since they are ordinary and necessary electrical company expenses.

11. Employee Education and Training

Continuous development via ongoing education is compulsory for electricians who want to stay relevant, move up the career ladder, and retain their licenses. Besides, you also need it to expand into specialized niches such as solar, electrical system design, and smart grid technology.

This tax deduction writes off all that’s spent on seminars, career advancement courses, and workshops. It also applies to their associated costs, such as registration fees, transportation, and course materials.

12. Sales and Marketing

Marketing activities such as radio jingles, television adverts, brochures, paid ads, and social media marketing make up a significant portion of electrical companies’ operational budgets.

However, since the IRS considers them necessary operational expenses, you can deduct their cost from your taxable income to lower your tax bill. This provides extra cash for investing in growth.

13. Self-Employment Taxes

All pass-through entities—sole proprietors, LLCs, and partnerships—pay a self-employment tax of 15.3 percent, covering Medicare (2.9 percent) and Social Security (12.4 percent).

Since this is a necessary business expense, electrical contractors registered under any pass-through entity enjoy a 50 percent tax deduction on their reported self-employment tax amount.

For example, an electrical contractor with an aggregate gross income (income remaining after tax deductions) of $150,000 is supposed to pay a self-employment tax of $22,950. However, the amount reduces to $11,475 after the 50 percent deduction is applied.

Note: Owners of S corps don’t have to pay self-employment taxes. However, they must pay a payroll tax on the salary they’re mandated to pay themselves.

14. Utilities

Electrical companies operating from an exclusive business location can deduct every dollar spent on utilities, including phones, electricity, internet, water, and property taxes from your income.

This is completely different from home office utilities, which we explained are subject to partial deductions.

What Are The Benefits of Tax Deductions for Electricians?

Here are the benefits you enjoy after enduring the hassle of calculating your aggregate net income (income remaining after tax deductions).

• Lowers tax bill: Tax deductions reduce the amount you pay to the government.

• Secures finances for investing in growth: Taking advantage of tax deductions gives companies extra cash to invest in growth and promotional activities. This gives them a competitive edge over others that ignore or fail to utilize tax write-offs.

• Boosts profitability and cash flow: Companies with lower tax bills enjoy a healthier cash flow, boosting profitability.

Do Electrician Tax Deductions Differ in Each State?

States offer different sets of deductions and credits according to their respective budgetary requirements, definition of taxable income, standard living costs, and public preferences.

The Bottom Line

Tax deductions are a great way to decrease your tax liability without falling afoul of tax laws or suffering penalties. Remember to do the following to maximize your tax deductions:

• Separate business expenses from personal ones to make it easier to pass audits and apply the right deductions.

• Keep accurate and well-arranged books so accountants can quickly prepare tax returns and determine deductibles.

• Have source documents to substantiate business expenses you’ve written off and pass IRS audits. This includes W9 and W4 forms, invoices, and receipts.

You can use ServiceTitan as a centralized filing system to track all financial transactions and easily claim deductions during tax season.

ServiceTitan is an all-in-one software program that increases home service providers’ efficiency and growth trajectory. It also prevents financial mismanagement by providing marketing performance insights and centralizing financial transaction data. Many electrical companies using the software report a revenue increase of up to 25 percent within one year.