As the year wraps up, it’s a great time for small business owners to do some targeted spending.
For cash-basis taxpayers*, year-end spending can help lower your tax bill this spring. But watch out! You need to know which expenses will give you immediate tax savings and which ones might not. In this guide, we’ll talk about how to make the most of year-end purchases, prepay essential expenses, and understand the kind of spending that doesn’t create instant tax benefits. With a little planning, you can finish the year strong!
*Most small businesses are cash-basis taxpayers, and you can check for this on your 1040 Schedule C or your 1120S Schedule B.
Invest in Necessary Small Business Equipment
One of the easiest ways to lower your taxable income before the end of the year is by purchasing equipment that your business needs. Purchases of less than $2,500 can be deducted immediately, so buying items like computers, machinery, or office furniture can provide immediate tax savings.
For larger purchases, the Section 179 deduction is a powerful tool that lets you write off the full cost of qualifying equipment in the year you buy it, rather than spreading the deduction over several years. If you’re considering buying a vehicle, be aware that your deduction may be limited depending on the type of vehicle and how it’s used in your business. Most vehicles that have a gross vehicle weight of less than 6,000 lbs. will only give you a partial deduction this year.
It’s also important to focus on items that your business truly needs. Stick to a plan by listing essential equipment or tools that will improve your efficiency and be used consistently. If it’s something you know you’ll need by this summer, then it’s probably a solid choice. Don’t get caught up in buying a piece of equipment that would be cheaper to rent because you only need it once a year.
Prepay Expenses and Stock Up on Supplies
Another effective way to reduce taxable income is by prepaying certain expenses or purchasing supplies your business will need in the near future. When prepaying expenses, it’s important to understand the IRS rule for cash-basis taxpayers. This rule says that prepaid expenses are generally deductible in the year they’re paid, as long as you aren’t paying for anything beyond the end of the next tax year. This means that you should only prepay up to one year of insurance premiums, rent, advertising, and similar costs.
You can also stock up on supplies your business regularly uses, such as office materials or packaging. For example, at Bearden Stroup, we stock up on toner cartridges for our printers at the end of each year. These purchases can create immediate tax benefits, but it’s wise to avoid overbuying inventory items that might sit unused for long periods of time.
By focusing on necessary expenses and supplies, you can maximize your tax savings without overextending your budget. This approach also helps you stay prepared for smoother operations in the new year.
Watch out for spending that will not create a tax deduction
While many year-end expenses can help lower your taxable income right away, it’s important to recognize that some spending may not offer immediate tax savings for cash-basis taxpayers. Knowing the difference can help you make better financial decisions.
For example, making an extra principal payment to pay down a loan is not deductible. Similarly, inventory purchases can’t be deducted until those items are sold. Additionally, improvements to buildings—such as renovating an office or upgrading facilities—often need to be capitalized and depreciated over time instead of being deducted in the year you make the payment.
These types of spending aren’t necessarily bad choices—they may still provide long-term value to your business. However, they shouldn’t be relied on for immediate tax savings. If your goal is to lower this year’s taxable income, focus on deductible expenses like supplies, equipment, or prepaid services.
By understanding which expenditures won’t yield immediate deductions, you can plan your year-end spending with confidence and avoid surprises at tax time.
Takeaways
As the year comes to a close, taking the time to review your spending and make thoughtful decisions can lead to significant tax savings and set your business up for success. The first step is to get professional bookkeeping and tax planning so you will know whether you are heading for a big tax bill. Once you know where your business stands financially, you can take action by investing in necessary equipment and prepaying eligible expenses.
If you’re unsure about the best moves year-end moves for your business, we’d love to talk to you about becoming a client. Schedule a meeting with us today. Then we will be able to give you advice that is tailored to your specific needs. We would love to help you maximize your financial position while staying compliant with IRS rules.
Planning out your year-end spending doesn’t just help reduce your tax bill; it also gives you a head start on the new year. With the right strategies in place, you can finish the year strong and start the next one even stronger.