Home Business Tax Deductions for Year-End Planning

Business tax deductions can go a long way toward helping you reduce your liability.

I have no problem paying taxes, but that doesn't mean I'm going to pay more than I have to—especially when so much of what I send to Uncle Sam ends up paying for priorities I disagree with. As the year draws to a close, I start casting about, looking for ways to maximize deductions, both for my home business and for my personal taxes.

What is a Tax Deduction?

Tax deductions reduce your business income. There are two main types of tax deductions:

• Above-the-line deductions reduce your income and help you determine your adjusted gross income (AGI).
• Below-the-line deductions are those that start from your AGI and reduce your income to help you arrive at what is considered your “taxable” income. Your taxable income might be tens of thousands of dollars lower than your actual income.

A tax deduction is less valuable than a tax credit, though. It lowers the amount of income you are taxed on. A tax credit acts like a gift card, directly reducing, dollar for dollar, the amount you owe in taxes. Tax deductions are useful since they reduce the amount of your income you are required to pay taxes on. With proper home business tax planning, deductions can help keep you in a lower marginal tax bracket.

Home Business Tax Deductions

When it comes to business tax planning, you don't want to skimp on business deductions. These deductions can reduce your pass-through income. Here are some common home business tax deductions:

• Home office tax deduction: Don't forget about the home office tax deduction, which can get you up to $1,500 or more. There are two methods to claim the deduction. One involves using percentages, while the other is a standard, simplified version.
• Office supplies and equipment: Ready for a new office chair? Running low on supplies? Now could be the time to buy what you need. Get what you need for your home business, and use it to reduce your income.
• Business travel: You don't have to complete the travel this year. If you know that you'll travel next year, arrange and pay for the trip—and claim that deduction.
• Training: If you take training related to your business, you can deduct the materials and the cost of the class.
• Other deductions: Don't forget about other deductions, such as trade publication subscriptions and mileage deductions.

General Tax Deductions You Might Be Able to Claim

Don't just focus on business tax deductions. You also have the opportunity to take individual deductions. Plan both business and personal deductions to achieve the best possible result.

Many homeowners know that the mortgage interest they pay can be tax-deductible. However, your mortgage interest tax deduction isn't really something you can easily ramp up to further reduce your income at the end of the year.

If you are concerned about your income, now is a great time to pile on the deductions. Many tax deductions are not directly related to home business tax planning. You can receive tax deductions for:

• Charitable contributions: Make an end-of-the-year donation to your church or to some other tax-exempt charitable organization. If you don't have the cash but still want a deduction, you can get a tax deduction for the value of goods donated. I don't usually receive a receipt for donations of goods, but this year I'm seriously considering going through my closet, donating items, and obtaining the receipt.
• Retirement account contributions: If you have maxed out your traditional 401(k) or your traditional IRA, consider making an extra contribution. You'll be better equipped to fund your retirement and increase your tax efficiency for this year. You can wait on the IRA if you want. You have until Tax Day of the following year to make contributions. You can hold off and see if it benefits you as you prepare your taxes.
• HSA contributions: If you have a Health Savings Account (HSA)  and haven't maxed out your contributions, consider putting a little more in there. I plan to max out my HSA every year (as with an IRA, you have until Tax Day of the following year to make contributions).
• Investment losses: Did you lose some money in investments this year? If so, you can “harvest” the losses and deduct them. First, use them to offset any capital gains. Next, you can offset up to $3,000 of your other income with investment losses. As long as you pay attention to the IRS wash sale rule, you shouldn't have a problem.

Bottom Line

It doesn't hurt to take a preliminary look at your taxes right now. Go ahead. Check your situation. It helps to know where you're at. Determine whether a little more spending now—on the right things—can ultimately benefit you more in the long run. This is particularly concerning if you are concerned about what happens if you end up in a higher tax bracket due to increased earnings. The right tax deductions can help you a little less this year.

Be sure to consult with a tax professional before proceeding to ensure that your paperwork is in order.