Buying Equipment Before Year-End: Does It Cut Your Tax?

If I buy equipment in December, can I deduct it this year?

Capital equipment is deductible this year only if it is placed in service by the last day of your tax year, which is December 31 for most businesses. Placed in service means ready and available for its specific use, even if you have not used it yet. Ordering the item or paying for it does not count (Publication 946).

So delivery and setup are the real deadline. A machine delivered one year but not working until the next is placed in service in the next year.

A case is not simple if delivery or setup could slip past December 31, the item is a vehicle or has personal use, a partnership or S corporation is buying it, or the purchase is large next to the year's profit. Gather the invoice and contract date, the delivery receipt, the date the item was ready for use, the business-use percentage and a year-to-date profit and loss.

The usual rule is to deduct a capital purchase over several years. Section 179 and bonus depreciation, below, allow the full cost in the first year (Topic 704). The cost includes freight, installation and testing, and usually sales tax, not only the price.

What does the deduction really save once I count the cash I spend?

The deduction saves your tax rate times the cost, not the cost. The full price leaves your bank account; tax falls by a share of it. A high-profit year raises your rate, so each dollar of deduction saves more, but never a full dollar. Your rate on the next dollar of deduction is roughly the sum of the parts below that apply to you.

Cost after tax = price minus (deduction times combined rate). Full expensing also moves deductions earlier without adding to them: over the equipment's life they add up to its cost either way, so the gain is getting the saving sooner. That helps most when this year's rate is higher than later years' rates.

How much can I write off in the first year: Section 179 and bonus depreciation?

Most business equipment can be deducted in full in the year it is placed in service, in one of two ways: Section 179 or bonus depreciation. Used equipment qualifies for bonus only if neither you nor a predecessor had an interest in it during the five preceding calendar years and you did not buy it from a related person. Qualifying equipment includes machinery, computers, office equipment, furniture and off-the-shelf software (Publication 946).

Section 179 leaves out land and land improvements, gifts and inheritances, property bought from a related person, property bought only for investment or for a rental that is not your business, and equipment a non-corporate owner leases to others unless it made the equipment or meets the short-lease and expense tests (Publication 946). Like-kind treatment now covers only real property, so an equipment trade-in is generally a sale of the old item and a purchase of the new one at its full cost, including the trade-in allowance (26 U.S.C. 179(d)(3)). Publication 946 still states a cash-only rule for Section 179 in its like-kind discussion, so confirm the cost with your preparer.

Delivery sets the deduction year, but the contract can set the bonus rate. For a written binding contract, the acquisition date is the latest of the signing date, the date it is enforceable, the end of any cancellation period and the date any contingency is met. An item bought under a contract that lands before January 20, 2025 gets the older rate of 20% (Notice 2026-11). See writing off equipment in the first year.

You do not have to choose by December 31. The Section 179 election is made on Form 4562 with the return for the year the item is placed in service, even a late original return, or on an amended return (Form 4562 instructions). What has to happen by December 31 is the in-service date.

Electing out of bonus is made by statement on the timely return, extensions included, for a whole class of property. If you filed on time without the election, an amended return can add it within 6 months of the original due date, not counting extensions; write "Filed pursuant to section 301.9100-2" on it (Form 4562 instructions).

For which method to use item by item, see writing off equipment in the first year. Small items such as laptops, phones and tools may be deductible outright under a de minimis safe harbor election (IRS); see expense or capitalize small purchases.

Does my business income limit the deduction?

Section 179 is capped by business income; bonus depreciation is not. The Section 179 deduction cannot be more than taxable income from the trades or businesses you actively run, figured after your other business deductions but before the Section 179 deduction itself. Wages count as income for this limit, and on a joint return the spouses' incomes are combined. Any amount over the cap carries to the next year (Publication 946; Form 4562 instructions).

Bonus depreciation has no income cap, so it can create or enlarge a business loss. Whether the loss helps this year depends on owner-level limits applied in order: for a partner or S corporation shareholder, basis in the entity first (Publication 925); then at-risk, then passive activity, then the excess business loss limit (Form 461 instructions). See business losses.

For a partnership or S corporation, the dollar and income limits apply to the entity and again to each owner, and the deduction is allocated to each owner on the Schedule K-1 (Publication 946). The Section 179 cap is only one limit; the loss limits above can still apply.

You must usually own equipment to depreciate it (Publication 946), so an item you buy personally is not your corporation's; see reimbursing owner expenses.

What if the item is also used for personal things?

Only the business share of the cost is deductible. Section 179 is available only if business use is more than 50% in the year the item is placed in service. Multiply the cost by the business-use percentage and work from that business cost (Publication 946).

Bonus depreciation also works on the business share. A computer used half or less for work cannot take Section 179, but its business share can still be depreciated. Computers and related peripheral equipment are not listed property (Topic 704).

Listed property is stricter. It includes cars and other transportation property, and property generally used for entertainment or recreation, which includes photographic and video-recording equipment (Publication 946). Photographic or video equipment used exclusively in your business, or exclusively at your regular business establishment, is not listed property (Form 4562 instructions).

• For listed property, Section 179 and bonus need business use of more than 50%, measured by miles for vehicles and by hours of use for other items.
• At 50% or less, depreciation is spread evenly over a longer period (straight line).
• If business use falls to that level or below in a later year, part of the earlier deduction is added back to income. This add-back also applies to Section 179 on other property.

Keep a log of miles or hours from the day the item is placed in service. For cars and trucks, see buying a vehicle through your business and standard mileage or actual car expenses.

Does it matter if I finance the purchase?

Not for the timing of the deduction. You own equipment even if it is subject to a debt, and its cost includes the debt you take on. The full cost is deductible in the year the item is placed in service, not as you make payments (Publication 946). The publication's own example is a van bought with payments spread over five years: the owner can depreciate it.

That creates a cash trap: a large deduction this year while the cash goes out over several years. Loan interest is not part of the equipment's cost. It is a separate business expense and may be limited (Topic 505).

Leasing is different. A business that leases equipment generally cannot depreciate it unless it keeps the incidents of ownership, such as bearing the loss as the equipment wears out (Publication 946), and lease payments follow separate rules.

If I wait until January, what do I lose?

Under current law, waiting moves the deduction to next year's return, so what you lose is mainly timing: the tax saving arrives a year later. The IRS describes the bonus rate as permanent for qualified property acquired after January 19, 2025, and the Section 179 limits are adjusted for inflation each year, but Congress can change either (IRS business provisions).

What decides whether waiting costs you anything:

• Your rate. A deduction is worth more in the year your rate is higher. If next year's profit is expected to be higher, the same deduction may be worth more then.
• Whether the item is fully expensed. An item that takes full bonus or Section 179 is deducted in year one, so a December date costs nothing extra. For an item that does not (you elected out of bonus for its class, or it does not qualify), a late-year purchase can force the mid-quarter convention. That applies when more than 40% of the year's depreciable basis is placed in service in the last three months, and first-year depreciation on five-year property then falls to 5% of the cost. Section 179 reduces the basis in this test; bonus does not (Publication 946).
• Whether it is ready. An item that arrives or is set up in January moves a whole year, however early you ordered.

The in-service date must be a real date supported by delivery and setup records. It cannot be chosen after the fact.

What happens if I sell the equipment later?

Gain on a sale is ordinary income up to the greater of the depreciation claimed or allowable, including Section 179 and bonus; skipping a deduction does not avoid it. Any gain above that is generally long-term capital gain if you held the item more than a year, though recent Section 1231 losses can make part of it ordinary income. Form 4797, Part III, figures the ordinary part (Publication 544).

Equipment deducted in full has no tax basis left, so a sale for no more than the amount deducted is generally all ordinary income. The deduction moved tax to later; it does not erase it if the item keeps its value.

Replacing an item, by selling it, trading it in or scrapping it, is its own tax event. A trade-in is treated as a sale at the trade-in allowance, because like-kind treatment now covers only real property (Publication 544). Record the old item's date, selling price and costs of sale, and the Section 179 and depreciation taken on it.

Keep an asset record for each item: how and when acquired, price, Section 179 and depreciation taken, how it was used, and how it was disposed of (Publication 583). If an upgrade adds to an item you keep, whether it is a repair or must be capitalized is a separate question; see expense or capitalize small purchases.

Is it smart to buy or upgrade equipment just for a write-off?

A purchase made only for the deduction costs more cash than it saves in tax: the whole price leaves the bank and tax falls by a share of it. The deduction lowers the after-tax cost of equipment the business needs; whether the purchase pays depends on its use, the cash it ties up and next year's profit.

What else lowers tax in a very good year?

Compare the other year-end moves before spending. Legal ways to lower your business tax covers retirement plan contributions, owner health insurance and state pass-through entity tax elections, which have their own deadlines. For paying a bill or prepaying a cost in December, see prepaid expenses at year-end.

Every one of these starts from a year-to-date profit and loss that matches your bank. If the books are behind, catch them up first.

Example

All amounts are US dollars. The 30% combined rate is illustrative, not a real rate.

A video editor buys a camera

A self-employed video editor's net profit this year is $120,000. The editor buys an $8,000 camera, uses it only for client work, and has it in use by December 31. It is placed in service this year, so the deduction can be up to $8,000. At 30%, that saves about $2,400. The camera costs about $5,600 after tax, and $8,000 left the bank. Because the camera is used only for client work, it is not listed property and needs no use log. A camera also used for personal shoots could be listed property.

A contractor orders a machine in December

A contractor orders a $40,000 machine on December 20. It arrives and is ready to run on January 10.

The order date does not set the deduction year; the in-service date does. The order is placed after January 19, 2025, so the full bonus rate applies. At 30%, the $12,000 saving lands on next year's return.

A consultant buys computers used 40% for work

A consultant buys $12,000 of computers and screens and uses them 40% for business. The business cost is $4,800 (40% of $12,000). Section 179 needs business use above half, so it is not available for these items. Computers and screens are not listed property, so the $4,800 business share can still be depreciated, and bonus applies to it unless the consultant elects out. At 30%, a $4,800 deduction saves about $1,440. The other $7,200 is personal and never deductible.

Different for you?

• You expect a large profit and are weighing a purchase of several thousand dollars or more, or the item is a vehicle, partly personal, or bought through a partnership or S corporation: the in-service date, the business-use share, the owner-level limits and your combined rate each change the number, and so does whether another year-end move fits better. The rate and the cap depend on all your income, not only this business, so have a year-to-date profit and loss that matches your bank, your other income, last year's return, the invoice and the delivery date ready. A large purchase, mixed use or a partnership or S corporation can need a year-end review even when the books are current; if they are not, bookkeeping help gets them there before you decide.
• The item is a car, truck or SUV: vehicles have their own caps and records. See buying a vehicle through your business.
• The items are small, such as laptops, phones or tools: see expense or capitalize small purchases.
• You are choosing among Section 179, bonus and regular depreciation: see writing off equipment in the first year.
• Your asset list is missing, or it does not match your books: see rebuilding a missing depreciation schedule and get bookkeeping help to rebuild it before the return is prepared.
• The equipment is for a rental property: Section 179 is available only if renting is your trade or business, and depreciation follows the rental rules. See rental property taxes.
• The deduction could create a loss: see business losses.
• You want other ways to lower this year's tax: see legal ways to lower your business tax.
• The equipment will be used mostly outside the United States, or you have a Canadian business: property used mostly outside the United States generally does not qualify for Section 179 or bonus depreciation, and Canada uses a different system. See buying equipment before year-end in Canada.