Business Owners & Investors: What to Do Before the End of the Year to Reduce Your Taxes

The end of the year is an important time in an overall tax strategy. Often times, there are things that must be done before the end of the year in order to receive certain tax benefits for that year.
Here are 3 items I find all business owners and investors can benefit from by reviewing them before the end of the year (and on a regular basis).
Item 1: Get Your Books in Order
Many people view bookkeeping as a necessary evil. I see bookkeeping a little differently. I see bookkeeping as a tool to boost tax deductions.

It’s one thing to know what’s deductible and how to maximize your deductions, but unless that gets reflected in your bookkeeping, it’s as if the tax planning never happened at all.

Here are a few tips on what to look for to make sure your books are in order:

Make sure your bookkeeping is current
Ideally, this means your bookkeeping is up-to-date through the end of last month, or last quarter. As time goes by, so does the likelihood of capturing deductions that have been missed – this is why keeping your bookkeeping current is so important to your tax savings.

Verify accounts are reconciled
This simply means making sure the balances that show for your bank accounts, credit cards, receivables and liabilities are accurate. Reconciling your asset and liability accounts is the first step to making sure your bookkeeping is accurate and deductions are not missed.

Look for what’s missing
It is very common to pay for business or investment expenses personally. This can result in missing these expenses in the bookkeeping for your business or investment which means missing potential tax deductions. Be sure to reimburse yourself for these expenses – the reimbursement puts the deductions on the books.

Item 2: Check Your Vehicle
The vehicle deduction is one of my favorite tax deductions because it has the ability to turn non-deductible personal expenses into legal tax deductions. This creates permanent tax savings.

To make this tax reduction strategy work, there are a few things that need to be reviewed and the end of the year is a great time to do that.

Review your mileage log
Your mileage log should tell you how many business miles versus total miles you have year-to-date.

Review your vehicle expenses
Vehicle expenses include maintenance, tune-ups, replacement parts, new tires, gas, oil, washes, car loan interest, depreciation & lease payments.

These expenses add up, which can mean big tax savings.

Understand how to actually claim your deduction
How your vehicle deduction is claimed depends on your business or investing activity and the type of entity (or entities) you have in your tax structure. You may need to be reimbursed by your business – before the end of the year – or you may claim the deduction directly. This is one to discuss with your tax advisor.

Item 3: Secure Your Home Office Deduction
The home office deduction is another great example of a deduction that creates permanent tax savings. It takes expenses you already have for your home (many of which are not otherwise deductible) and turns them into legal tax deductions.

Here are the areas to review for your home office:

Review the home office requirements
Home office requirements are very specific. It is good to review these requirements before the end of the year to make sure your home office meets the requirements.

Generally, the requirements that must be met include:

  • You own a business (if you are an employee, you must meet the “for the convenience of the employer” test)

  • You have an area set aside in your home used regularly and exclusively for specific administrative or management activities for your business

  • There is no other place of business where you conduct those activities

If you don’t think your home office qualifies, you may just need to change your facts in order to qualify it. For example, are there too many non-business items in your home office area that can be moved to another room? Or, can you modify the activities you do in your home office?

Review your home office expenses
Once you have determined you have an area that qualifies as a home office, it’s time to start tracking your home office expenses.

Allowable home office expenses include utilities, mortgage interest, property taxes, homeowners and liability insurance, repairs, maintenance and depreciation.

These expenses are then allocated based on the percentage of your home used for your home office area.

Understand how to actually claim your deduction
As with the vehicle deduction, how you claim your home office deduction depends on your business or investing activity and the type of entity (or entities) you have in your tax structure. You many need to be reimbursed by your business – before the end of the year – or you may claim the deduction directly. This is another one to discuss with your tax advisor.

                                                                                                    Written by: Tom Wheelwright                                      
Tom Wheelwright
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