What End of Year Business Expenses Are Deductible?

Strategically managing the timing of business expenses at year-end can influence a company’s taxable income. By accelerating certain expenditures into the current tax year, a business may reduce its overall tax liability. This process involves understanding which costs are eligible for deduction and the rules that govern when those deductions can be claimed.

Foundational Rules for Timing Deductions

The ability to deduct a business expense depends heavily on a company’s established accounting method. For businesses using the cash basis of accounting, an expense is generally deducted in the tax year it is paid. This means the deduction is recognized when funds leave the business’s possession, whether through a mailed check or a processed credit card transaction. The key date for a credit card purchase is the date of the transaction, not the date the credit card statement is paid.

Conversely, businesses operating on the accrual basis of accounting deduct expenses in the tax year they are incurred, a point formally known as “economic performance.” This occurs when all events that establish the liability have happened, and the amount of the liability can be determined with reasonable accuracy. Under this method, the timing of the actual payment is not the determining factor. For example, if a service is received in December but not paid for until January, an accrual-basis business would deduct that expense in the year the service was provided.

The choice between cash and accrual methods has significant implications for how a business manages its year-end financial activities. Cash-basis taxpayers have a more direct link between payment and deduction, offering a straightforward way to shift deductions into the current year by paying for items before December 31. Accrual-basis taxpayers must focus on when the legal obligation to pay for a good or service was created.

Common Year-End Expense Categories

Businesses incur a variety of ‘ordinary and necessary’ costs that are eligible for deduction. As the year concludes, purchasing essential supplies is a straightforward way to increase current-year expenses. These items are deductible in the year of purchase and include:

• Printer paper
• Toner cartridges
• Pens
• Other materials consumed in daily operations

Routine repairs and maintenance to business property and equipment also represent a category for year-end deductions. These are costs incurred to keep property in its normal operating condition, rather than to substantially improve it. Examples include repairing a broken piece of machinery, servicing a company vehicle, or performing general upkeep on an office building.

Marketing and advertising are other areas where businesses can place expenses before year-end. This includes paying for an advertising campaign or prepaying for digital marketing services. Small tools and equipment with a short useful life can also be fully expensed in the year of purchase.

Deducting Large Asset Purchases

The acquisition of significant business assets, like machinery or vehicles, is governed by the “placed in service” rule. An asset must be ready and available for its intended business use by the last day of the tax year to qualify for a current-year deduction.

One method for deducting the cost of large assets is through Section 179 of the tax code. This allows businesses to expense the full purchase price of qualifying equipment in the year it is placed in service, up to a specified limit. For the 2024 tax year, this limit is $1.22 million, though it is phased out for businesses that spend over a certain amount on equipment.

Bonus depreciation is another tool that allows businesses to deduct a percentage of an asset’s cost in the first year. For 2024, the bonus depreciation rate is 60% of the cost for qualifying property with a recovery period of 20 years or less. This percentage is scheduled to decrease in future years.

Prepaying Future Expenses and Compensation

Businesses can often accelerate deductions by paying for certain expenses in the current year, even if the benefit extends into the next. The “12-month rule” is a provision that facilitates this strategy. It allows a cash-basis taxpayer to immediately deduct a prepaid expense as long as the benefit does not extend beyond the end of the following tax year. This commonly applies to items like business insurance premiums, software subscriptions, and rent payments.

For example, if a business pays a 12-month insurance premium in December, it can deduct the entire amount in the current year rather than prorating it over the policy period.

Year-end bonuses and contributions to employee retirement plans also offer opportunities for current-year deductions. For cash-basis businesses, bonuses must be paid to employees by December 31 to be deductible in that year. Accrual-basis businesses may have more flexibility, as they can deduct bonuses declared in the current year if they are paid out within the first two and a half months of the following year. Employer contributions to qualified retirement plans are deductible in the year they are made.

Recordkeeping for Year-End Purchases

To substantiate year-end deductions, maintaining organized records is fundamental, as the burden of proof rests with the taxpayer. Every expense claimed must be supported by verifiable evidence that confirms the amount, date, and business purpose of the transaction.

Necessary documents include:

• Dated receipts
• Paid invoices
• Canceled checks
• Bank and credit card statements that clearly show the transaction date, vendor, and amount paid

In addition to proof of payment, it is wise to maintain records that establish the business necessity of an expense. This can include contracts, project plans, or notes in a business diary that explain the context of a purchase. For larger asset acquisitions, purchase agreements and proof of the “placed in service” date, such as delivery receipts or installation records, are important.