Before you rush out to take advantage of year-end tax deductions, let’s talk about what you’re actually saving.
It’s that time of year again.
My LinkedIn and Facebook feeds are filling up with tax planning advice. Buy equipment! Take advantage of bonus depreciation! Maximize deductions! Reduce your taxable income before December 31!
With the tax provisions in the One Big Beautiful Bill Act (OBBBA), there’s certainly plenty to talk about.
And don’t misunderstand me. I’m a CPA. I believe in tax planning. I believe in taking every legitimate deduction available. I believe business owners should understand the tax laws and use them to their advantage.
But I also believe in keeping the money you worked so hard to earn!
Sometimes I read this advice and wonder if we’ve forgotten why people go into business in the first place.
Does Buying Equipment Really Save You Money on Taxes? Let’s Do The Math.
Suppose your business has had a great year. You’ve worked hard, served your customers, paid your employees, and managed your expenses.
You’ve made a $100,000 profit.
Congratulations! That’s something to celebrate! Or at least I thought it was.
But now someone tells you that you should buy a $50,000 piece of equipment before December 31 to reduce your tax bill.
Let’s assume that equipment qualifies for a full deduction this year and, for simplicity’s sake, that your combined marginal tax rate is 30%.
Here’s what happens.
- You spend $50,000 on equipment.
- Assuming you can take bonus depreciation, you reduce your taxable income by $50,000.
- Congratulations! You save approximately $15,000 in taxes.
- But hold on, you just spent $50,000 to save $15,000.
That’s a net $35,000 after-tax cost in exchange for owning equipment you may not have needed in the first place.
And if you financed that equipment? You may have monthly payments to make long after you’ve enjoyed the tax deduction. What???
Now, if you genuinely needed that equipment, it improves productivity, helps you serve more customers, or replaces something that’s worn out, that could be an excellent investment. And the equipment dealership was very excited about your purchase. (Of course, now they are talking with their tax planner about what they can buy to reduce their taxable income.)
Pardon me, I digress. I have a question.
Wouldn’t you rather have the money?
Since When Did Making a Profit Become a Bad Thing?
Here’s something I wish more business owners would stop and think about.
Remember when you first started your business? Remember those early years when you were trying to find customers, watching every dollar, wondering whether you’d make enough to cover the bills? Remember when you weren’t making much money?
I remember it like it was yesterday. Oh yeah, that’s because it was yesterday… and today!
You probably weren’t paying much income tax either.
Would you really want to go back to those days just so you wouldn’t have to pay taxes?
Of course not!
You worked hard to build a profitable business. You took risks. You sacrificed time with your family. You dealt with difficult customers, rising costs, and probably (undoubtedly) a few sleepless nights.
And now that your business is making money, someone is telling you to hurry up and spend it so you won’t have to pay as much tax.
Am I the only one who thinks that’s a little backward?
Tax Savings and Cash Savings Are Not the Same Thing
This is where I think business owners sometimes get confused.
A tax deduction reduces the income on which you pay tax. It doesn’t generally reimburse you dollar for dollar for what you spent.
Spend $10,000 on a deductible expense at a 30% marginal tax rate, and you might save $3,000 in taxes.
But you’re still out $7,000.
That doesn’t mean the expense was bad. It means the expense needs to make business sense before you consider the tax deduction.
And don’t forget that an accelerated deduction may simply move tax savings into the current year rather than create additional deductions over the life of the asset.
There are also situations where buying equipment can create cash-flow problems, particularly when the business finances the purchase and deducts most or all of its cost immediately.
The deduction happens now. The payments keep coming! Wow… what the heck?
What I Wish Every Business Owner Would Ask Before December 31
Before you make that year-end purchase, ask yourself these questions.
- Do I actually need this? Would I buy this if there were no tax deductions for it?
- Can my business afford it? Can I afford the down payment, the ongoing payments, maintenance, insurance, and operating costs?
- Will it help my business make more money? Will it increase revenue, improve efficiency, or reduce other expenses?
- What will this do to my cash flow? Will I still have enough money for payroll, taxes, and operating expenses?
- Am I making a business decision or just chasing a deduction?
If the purchase makes good business sense and the tax deduction makes it even better, wonderful!
That’s smart tax planning.
But spending money you don’t need to spend, on something you don’t need to buy, just to reduce your taxable income?
That’s worth reconsidering.
And One More Thing About Tax Planning
Tax planning should involve more than finding things to buy.
There may be opportunities to review your business structure, retirement contributions, accounting methods, timing of income and expenses, and other provisions that fit your circumstances.
Some strategies save taxes without requiring you to purchase something you don’t need.
And some strategies that reduce this year’s taxes may increase taxes in a future year.
That’s why good tax planning looks at the entire picture, not just the amount owed on April 15.
Here’s My Opinion
I don’t measure the success of tax planning solely by how much you were able to reduce your tax bill.
I want to know how much money you, the business owner, get to keep, whether the business is financially healthy, and whether today’s decisions will help or hurt tomorrow.
If you’ve had a profitable year, I want you to be excited about that!
I want you to be proud of what you’ve accomplished.
And yes, I want you to take advantage of every legitimate tax benefit available.
But I don’t want you to spend $50,000 you can’t afford just so you can tell your friends you saved $15,000 in taxes.
Sometimes the smartest tax planning decision is to keep the money, pay the tax, and celebrate the fact that you made a profit.
After all, isn’t that what you were working toward in the first place?
Frequently Asked Questions
Should I buy equipment before the end of the year to save on taxes?
Only if the equipment makes good business sense. Buying equipment may reduce your taxable income, but the tax savings are generally less than the purchase price. Consider whether you need the equipment, whether it will help your business, and whether you can afford it.
Can I deduct the full cost of equipment purchased in 2026?
Certain qualifying equipment may be eligible for 100% bonus depreciation or Section 179 expensing under current federal tax law. The deduction depends on eligibility, applicable limitations, and when the equipment is placed in service. State tax treatment may differ.
Is it better to make a profit and pay taxes or spend money to reduce taxable income?
Making a profit and paying the associated taxes is generally preferable to spending money on unnecessary purchases solely to generate deductions. A deduction reduces taxes, but it doesn’t make the purchase free. The goal is to build a profitable, financially healthy business.
Paula Melton, CPA
Melton Bookkeeping & Accounting Services LLC
Tax treatment depends on the business’s circumstances, including eligibility for deductions, limitations, and applicable federal and state rules. The examples above are simplified to illustrate the difference between tax savings and actual spending.
