As year end gets closer, we often hear business owners ask whether they should make purchases before December 31 to get the tax deduction. We have helped clients look at their numbers before making these decisions because spending money just to get a deduction does not automatically make it a smart business purchase. Before you start buying new equipment, software, or office furniture, here are a few things to consider.
Buy something your business actually needs
If you were already planning to replace an old laptop, purchase necessary equipment, or invest in software your business needs, making the purchase before year end may make sense. The key is that the purchase should have a real business purpose, not simply be something you are buying because you heard you need more deductions.
Do not spend $1 just to save a portion of it in taxes
A tax deduction generally reduces the amount of income subject to tax. It does not usually mean you get the entire purchase price back. For example, spending $5,000 on something your business does not need just to get a deduction can still leave you with $5,000 less cash. Before buying, ask yourself: Would I still make this purchase if there were no tax benefit?
Consider your cash flow
Before making a large purchase, look at the cash you will need for payroll, rent, taxes, debt payments, and other upcoming expenses. A purchase might make sense for your business long term, but that does not necessarily mean right now is the best time to pay for it.
Understand that not every purchase is deducted the same way
Some ordinary business expenses may generally be deductible in the year they are incurred, while certain larger purchases may need to be depreciated over time. For example, buying equipment is not necessarily treated the same way as paying your monthly software subscription. Talk with your tax professional before making a significant purchase based on an expected tax deduction.
The goal is not to spend as much as possible before December 31. It is to make smart purchases that your business actually needs while protecting your cash flow and keeping accurate records. Make sure legitimate business expenses are properly recorded, receipts are organized, and larger purchases are correctly reflected in your books.
If you are not sure where your business stands financially, start with your books. We can help get your bookkeeping accurate and organized so you have clearer numbers before making year end financial decisions. Ready to get your books organized before year end? Book a call to learn more about our services.
