Updated for tax year 2023.
Small business owners, it’s time to expand your holiday shopping list. You’re not restricted to just buying gifts for your loved ones this year — it’s likely your business could also benefit from some end-of-year purchases.
Timing is everything when making purchases for your small business and saving on business taxes. But how do you discern necessary spending from frivolous spending? When is it better to purchase now versus later? Are there other ways to save on taxes for small businesses? We’re here to help answer all your questions.
At a glance:
- End-of-the-year business purchases can reduce your taxable income.
- Consider purchasing before year-end if your income was unusually high or you have long-delayed expenses.
- Avoid unnecessary spending and focus on investing in what your business really needs.
What can I purchase for a small business tax deduction?
You can deduct a variety of business purchases on your tax return. This includes travel and vehicle expenses, cost of goods sold, employee wages, necessary supplies, and business insurance, just to name a few. For more detailed information on common small business tax deductions, check out our ultimate list.
One particular deduction to keep in mind is the Section 179 deduction, which allows you to write off the full purchase price (up to $1,160,000 in 2023) when buying, financing, or leasing qualified equipment or software for your small business. It’s a great tax break to take advantage of if you can.
Should I purchase now or wait until next year?
There are many advantages to making business purchases at the end of the tax year. For one thing, you can turn around and immediately deduct these expenses on your upcoming tax return. But that doesn’t mean last-minute purchases are a smart choice for every business owner. The right choice for you is entirely dependent on your unique financial situation.
When to purchase
Here are some possible scenarios where it would make sense to make a business purchase before the end of the year:
1. Your business income was higher than usual this year.
If your small business did really well this tax year, it may be a good idea to use that extra income to purchase any new equipment or supplies before the end of the year. This will lower your taxable income for the year and could prevent you from potentially being placed in a higher tax bracket.
2. You’ve been putting off a needed purchase for a while.
If there is a certain expense you’ve been putting off for a while — perhaps repairing your business property or replacing old equipment — now may be an excellent time to make that purchase.
If you have the funds, the end of the year is a great time to buy for a couple of different reasons. First, it lets you immediately write off that purchase on your tax return, meaning you won’t have to worry about depreciation. And second, getting that needed expense out of the way means you won’t have to worry about it next year, ultimately giving you a better idea of how to plan next year’s small business budget.
When to wait
Now let’s look at a couple of scenarios where it might make sense to put off making a business purchase until next year:
1. Income was tight this year.
If your business income was low to begin with and you don’t have the funds to spare, it’s best to put off any unessential expenses until next year. You don’t want to stretch yourself too thin, and reducing your taxable business income in every way possible shouldn’t be your main priority unless it’s genuinely a necessary purchase.
2. You don’t need anything else for your small business right now.
It’s never a good idea to throw money at superfluous upgrades simply to get a tax deduction. If you don’t anticipate any significant business expenses in the next year, saving that cash for the long term is probably best.
Putting off business purchases doesn’t mean you’re out of tax break options, though. To help you out, we’ve provided some additional ideas on how to reduce your 2023 taxable income in the next section.
How else can business owners save on taxes?
As we noted earlier, unless your business needs a specific item or asset, it’s not a great idea to make an unnecessary purchase just to get a tax break. Stick to what you need and what will improve your business in the long run.
But if you do have some extra income this year and are looking for more smart ways to pay less in small business taxes next year, you aren’t out of options. Here are some additional ideas on how to spend your money wisely while reducing this year’s taxable income:
Take advantage of Section 179.
We said it before, but it’s worth reiterating. Even if you aren’t purchasing some new equipment outright and need to finance instead, Section 179 still allows you to deduct the equipment’s full purchase price on your tax return.
Pay January’s bills early.
Do you have upcoming business bills you can afford to pay earlier than the due date? Doing so can further reduce your taxable income for the tax year. Note that depending on what accounting method you use, the 12-month rule might apply. For more information on whether this could work for your business, check out the expenses paid in advance section on the IRS guide to accounting periods and methods.
Wait to send out invoices.
If you can wait, this is another good way to defer some of this year’s taxable income to next year. Instead of sending out your invoices immediately, you can wait and send them out at the end of the year, ensuring you won’t receive that income until next year. Note that this also depends on your accounting method. If your accounting method is accrual, you may be unable to do this.
Make necessary small business purchases before end of year
Ready to add to your holiday shopping list? If your business could benefit from some upgrades, December is the perfect time to make those necessary purchases. Not only will you be improving your business, but you’ll be able to reap the tax rewards sooner rather than later.
Are you interested in learning more about the ins and outs of small business taxes? We’ve got you covered.