As the year comes to a close, now is the time to take advantage of tax-saving opportunities that can reduce your 2025 tax bill. One of the most effective strategies is prepaying or making key purchases before December 31.
Here’s how it works — and what to keep in mind before the year ends.
1. Supplies and Materials
If you pay for business supplies before year-end, you can usually deduct the cost this year, even if you will not use them until next year.
Example: Buying $2,000 worth of office supplies in December can be deducted on your 2025 return.
Tip: Make sure the amount is reasonable for your business needs.
2. Prepaid Services and Insurance
If you pay in advance for insurance, software subscriptions, or other business services, you can typically deduct the full amount this year if the coverage or service:
- Does not last more than 12 months, and
- Does not extend past the end of next year.
Example: Paying $1,200 in December 2025 for a 12-month insurance policy covering January–December 2026 can be fully deducted in 2025.
3. Equipment Purchases (Section 179 and Bonus Depreciation)
If you buy and start using new equipment, tools, or technology before December 31, you may be able to deduct the full cost this year.
For 2025, Section 179 allows you to deduct up to $1,220,000 in qualifying equipment purchases, as long as you place them in service before year-end. Bonus depreciation may also apply to certain assets.
Example: Buy a $3,000 computer in December and begin using it immediately — you can deduct the full amount this year.
4. Prepaid Rent
You can only deduct the portion of prepaid rent that applies to this tax year. Any payment for future months must be deducted in later years.
Example: If you pay three months of rent (December through February), only December’s portion is deductible in 2025.
5. Real Estate Investors
For rental property owners, paying for repairs, maintenance, and supplies before year-end can increase deductions for this year.
Remember, repairs are deductible now, but improvements (like a new roof) must be depreciated over several years.
Example in Action
Let’s say your small business uses the cash method of accounting. In December 2025, you:
- Buy $2,000 of office supplies
- Pay $1,200 for a 12-month insurance policy (January–December 2026)
- Purchase a $3,000 computer and begin using it immediately
Your 2025 deductions would be:
- Office Supplies: $2,000
- Insurance: $1,200
- Computer: $3,000 (Section 179 deduction)
Total Deduction: $6,200
Quick Tips:
- Only prepay for what you will reasonably use within the next year.
- If you use the accrual method of accounting, different rules apply.
- Property improvements must be depreciated, not deducted all at once.
Bottom Line
Year-end purchases and prepayments can be a powerful way to reduce your taxable income and prepare for a successful 2026. Just make sure your timing and documentation align with IRS rules.
If you are unsure which expenses qualify, consult your tax advisor before making major purchases or prepayments. A few strategic decisions now can lead to real savings later.
Ready to plan your year-end strategy?
Schedule a consultation today to review your options and maximize your 2025 tax savings.
