Someone recently asked me what they could do now to make tax time easier for this upcoming tax season.

The best thing you can do is to think about taxes before then year ends.  Most people wait until the tax filing deadline before they ask how they can reduce their income taxes.  Unfortunately, once 2007 ends, there’s very little you can do to minimize your taxes for 2007. 

To start your tax planning, you should review your income, deductions and withholdings before the year ends.  Which means you need to get your bookkeeping caught up!  You should use a software program, such as QuickBooks, Quicken Home and Business, or spreadsheets to keep track of your income and expenses for your business.

Once you’re bookkeeping is caught up… do you expect your home business to have a profit or a loss this year? 

If you have a profit, here are some tax planning tips to help minimize your home business taxes this year:

1.  Defer your income.  If you have a home based business and it looks like you’ll have a good profit this year, consider invoicing your clients in January instead of December, to defer the income to next year.  Or, just wait until the end of December to send invoices.  Any money you receive in January will go on your 2008 tax return, not 2007. 

2.  Accelerate expenses.  Do you need to purchase any inventory?  What about supplies?  Does your computer need to be replaced?  If you’ve got a profit for 2007, consider purchasing inventory, supplies or other items that will need to be replaced soon this year to reduce your taxable profit. 

In addition, if you itemize your tax deductions, make sure you pay all mortgage payments, property tax, medical expenses, etc. this year, even if they aren’t due til next year, to help increase your tax deductions for this year.

3.  Contribute the maximum amount to retirement plans.  As a home based business owner, you have several retirement plans to choose from.  You can setup a traditional IRA, a SEP IRA, a Simple IRA, or even a 401K.  The maximum contribution amounts vary based on the retirement plan, but these plans allow contributions from $4,000 up to $44,000 per year.  Contributing to a retirement plan is a great way to maximize your retirement savings and to minimize your taxes at the same time.

4. Give to charity.  Although charitable donations don’t reduce your business income, they do reduce your taxable income if you itemize your deductions.  Gifts of cash or goods are a great way to help reduce your tax bill this year. 

On the flip side, if you expect a larger profit next year, or if you expect to jump into a higher tax bracket next year, it’s best to report as much income this year, and to defer as many expenses as possible til next year.

Either way, year end tax planning can really help minimize your taxes.  But you have to make it a point to review your taxes before the year ends.  Once 2007 is gone, so are your tax planning opportunities for 2007.

The IRS just announced that the standard mileage rate will be 50.5 cents per mile in 2008.  This is up from 48.5 cents per mile in 2007.

If you’re not keeping track of your mileage, you need to start now!  These rates are higher than we’ve ever seen, so you should be keeping track of every business mile driven.

You can use a spiral notebook to keep track of miles, you can purchase a mileage log from any office supply store, or you can use my own mileage log, found here.

n I was catching up on my blog reading, when I ran across Bookkeeping for an eBay Business at The Auction Rebel. 

Gary has been making a living on eBay for over 8 years, and he offers some great advice for eBay sellers on his blog, The Auction Rebel.

Recently he posted a series of articles on bookkeeping for an eBay business…

Bookkeeping for an eBay Business - Part 1

Bookkeeping for an eBay Business - Part 2

In these posts, Gary shares why a good bookkeeping system is essential, some rules for a good bookkeeping system, how to keep track of automobile expenses and inventory, common expense categories for eBay sellers, and more.

As a CPA, I found these two posts very informative, and have bookmarked them for future reference.

If you are selling on eBay, and you don’t have a good bookkeeping system in place, I encourage you to read Gary’s posts.

I spoke about tax tips for small business owners at a seminar this past weekend, and one of the questions I got was ‘what are the top missed business deductions?’

This is a great question, so here goes…

1.  Automobile expenses - if you use your car for business, you can deduct a portion of your car expenses.  You can either keep track of and deduct your (business related) actual expenses, or you can keep track of your business miles and use the standard mileage rate (48.5 cents per mile in 2007).

2.  Startup expenses - business expenses incurred before you actually start the business used to have to be depreciated over 5 years.  Starting after October 22, 2004, you can now deduct up to $5,000 of startup expenses in the first year of business.  Startup expenses over $5,000 still have to be depreciated (over 15 years).  Startup expenses include advertising, hiring employees, purchasing equipment, supplies and more.

3.  Education expenses - you can deduct the cost of classes, seminars and other education costs if they are related to your current business.

4.  Travel - when you travel for business, you can deduct the cost of the airfare, taxis, hotel, meals, and other travel related expenses.  If part of your trip is for personal reasons, you may need to prorate part of the expenses.  Also, if you bring your family along, only your own expenses are deductible.

5.  Home office expense - many people choose not to take this deduction because it is considered a red flag.  If you have a legitimate home office, then you should not miss out on this deduction just because someone says it could be a red flag (being self employed is a red flag, but you wouldn’t not go into business because someone says you’re more likely to get audited as a small business owner, would you?).  Home office expenses include mortgage interest, real estate taxes, home owners insurance, utilities, and security alarm.  You can only deduct the portion that represents your home office, but this can be a substantial deduction for many home based business owners.