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 benefit from some end-of-year purchases as well!
Timing is everything when it comes to 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.
What can I purchase for a small business tax deduction?
There are a variety of business purchases you can deduct on your tax return. This includes expenditures such as 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.
Another deduction to keep in mind is the Section 179 deduction, which allows you to write off the full purchase price (up to $1,050,000) 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 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 situation.
Here are some possible scenarios where it would make sense to make a business purchase now:
1. Your business income was higher than normal in 2021.
If your small business did really well in 2021, 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 2021 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 a good time to make that purchase. If you have the funds, end-of-year is a great time to buy for a couple different reasons. First, it allows you to immediately write off that purchase on your 2021 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 your 2022 small business budget.
Now let’s look at a couple scenarios where it might make sense to put off making a business purchase until next year:
1. Income was tight this year.
If your 2021 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 truly 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 for the sake of getting a tax deduction. If you don’t anticipate any big business expenses in the next year, it’s probably best to save that cash for the long term.
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 2021 taxable income in the next section.
How else can business owners save on taxes?
Like we noted earlier, unless your business has a need for 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 that you can afford to pay earlier than the due date? Doing so can further reduce your taxable income for 2021. Note that depending on what accounting method you use, the 12-month rule might apply. For more information on if 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 a bit of this year’s taxable income to next year. Instead of sending out your invoices right away, you can wait and send them out at the end of 2021, 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 not be able 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.