Can You Write Off Therapy as a Business Expense?

Many individuals seek ways to reduce their tax obligations, and a common inquiry revolves around the deductibility of various expenses. One such expense that often leads to questions is therapy. This article explores the nuances of tax deductions related to therapy, differentiating between business and personal medical expenses. It aims to clarify the specific criteria set by tax authorities for claiming such deductions.

Defining Business Expenses

For tax purposes, a business expense must be “ordinary” and “necessary” to be deductible. The Internal Revenue Service (IRS) defines an ordinary expense as common and accepted in a particular industry or field. It is a type of expense that businesses in that field typically incur.

A necessary expense is considered helpful and appropriate for the business. This means the expense contributes to the development and maintenance of the business. Common examples include office rent, utility payments, the cost of supplies, and marketing or advertising costs, which are directly related to generating income and operating the business effectively.

Therapy as a Business Expense

In most situations, therapy generally does not qualify as a deductible business expense. Even when it benefits an individual’s ability to perform their job, therapy is typically considered a personal expense related to overall health and well-being. The “ordinary and necessary” test for business expenses requires a direct connection to the operation of the business itself, not merely an indirect benefit to an individual’s personal capacity.

For therapy to be considered a business expense, an extremely direct and specialized link to the trade or business is required. This might include highly specialized, performance-based therapy for individuals whose physical or mental state is their direct instrument of trade, such as a professional athlete. Even in such rare cases, these expenses are subject to intense scrutiny by tax authorities. General mental health therapy, while beneficial, is usually deemed personal and not directly tied to the business’s operational needs.

Therapy as a Personal Medical Expense

While therapy generally does not qualify as a business expense, it can be deductible as a personal medical expense. The IRS allows taxpayers to deduct qualified unreimbursed medical expenses that exceed 7.5% of their Adjusted Gross Income (AGI). This means you can only deduct the amount of medical expenses that is above 7.5% of your AGI.

Qualified medical expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. This broad definition explicitly includes payments for mental health services, such as visits to psychologists and psychiatrists. To claim this deduction, taxpayers must itemize their deductions on Schedule A (Form 1040), rather than taking the standard deduction. For example, if a taxpayer has an AGI of $50,000 and medical expenses of $5,000, only the amount exceeding $3,750 (7.5% of $50,000) would be deductible, which is $1,250.

Record Keeping for Deductions

Maintaining thorough and accurate records is fundamental for claiming any tax deduction, whether it is for business expenses or personal medical costs. Taxpayers are responsible for substantiating all income and deductions reported on their tax returns. This is known as the “burden of proof,” meaning you must be able to provide evidence for any claimed deduction if requested by tax authorities.

For medical expenses, this includes keeping detailed records such as invoices, receipts, and statements from healthcare providers, including those for therapy sessions. For business expenses, documentation should include receipts, canceled checks, and account statements for each expense. These records should clearly show the amount, purpose, and date of the expense. It is recommended to retain tax records for at least three years from the date you filed your return, though some situations may require longer retention periods.