Common question for CPAs from service providers: The year-end equipment purchase tax myth

“I bought equipment at year-end. Why am I still getting a big tax bill?”

The misconception: A small business owner nets $80,000 in profit by November. Worried about the looming tax bill, they rush to buy a $30,000 piece of equipment in December, confident they’ve just reduced their tax burden dollar-for-dollar. Come April, they’re shocked—they still owe $15,000+ in federal taxes. The purchase didn’t solve the problem.

What they believed: “Equipment purchases = immediate, dollar-for-dollar tax deductions.”

What reality delivered: Their taxable income calculation is far more complex than purchase price equals tax savings.

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Why this year-end tax benefits misconception is dangerous

How tax math works in practice

How OBBBA changes year-end equipment purchases for tax purposes

Section 179 versus bonus depreciation: Which rule applies?

The real opportunity this creates for your clients

Checklist for tax professionals engaging clients on year-end purchases

Why this year-end tax benefits misconception is dangerous

This year-end scramble stems from two fundamental misunderstandings:

First, it treats tax deductions as one-to-one reductions in what you owe. That’s not how the math works. A $30,000 deduction doesn’t save $30,000 in taxes. It reduces taxable income by $30,000, which then gets taxed at the client’s marginal rate—typically 25-30% for mid-level business owners. So that $30,000 write-off might only save $7,500-$9,000 in taxes. The asset hasn’t disappeared from their finances; they’ve converted after-tax money into a tax-deferred investment.

Second, clients often make year-end purchase decisions based on incomplete information about their actual tax liability. They’re reacting to “I have profit” without understanding estimated tax payments, self-employment tax obligations, or how One Big Beautiful Bill Act (OBBBA) changes (more on that below) might affect their strategy. A decision made December 27th in a panic is rarely the best capital investment choice.

How tax math works in practice

Let’s walk through the numbers so you can explain this clearly to clients:

Scenario: Small business owner, $80,000 net business income, single filer, no employees

Step 1: Calculate taxable income

• • Net business income: $80,000
  • Minus: 50% of self-employment tax (roughly $5,600) = $74,400
  • Minus: Standard deduction ($14,600 for 2025) = $59,800 taxable income

Step 2: Apply tax rates

• • At 2025 rates: ~$6,800 in federal income tax

Step 3: Apply self-employment (SE) tax

• • SE tax on $80,000: ~$11,300
  • Total tax liability: ~$18,100

Now, if they’d bought $30,000 in capital assets with immediate expensing:

• • Net business income: $50,000 (after the $30k deduction)
  • Minus: 50% of SE tax (~$3,500) = $46,500 taxable
  • Minus: Standard deduction = $31,900 taxable
  • Federal income tax: ~$3,600
  • Self-employment tax on $50,000: ~$7,065
  • Total tax liability: ~$10,665

Tax savings: $7,435

That’s meaningful—but it’s nowhere near $30,000. And here’s the critical point: they still spent $30,000 in cash (or committed to debt with interest). They’ve converted cash into a depreciable asset that creates tax benefits over time, but the cash outflow is real and immediate.

How OBBBA changes year-end equipment purchases for tax purposes

Understanding the recent legislative shift is essential for strategic tax work:

The old rule (pre-2025): Bonus depreciation was phasing down—40% in 2025, 20% in 2026, eliminated by 2027. This created pressure to buy now to capture the benefit.

The new rule (effective Jan 19, 2025): OBBBA made 100% bonus depreciation permanent. Qualifying assets can be fully deducted in the year they’re placed in service, with no phase-down.

Why this is a game-changer for your practice:

• • The urgency to buy “before the benefit goes away” is eliminated. No more artificial deadline pressure.
  • The ability to defer purchases into lower-income years is now more powerful. Clients with uneven income (busy Q4, slow Q1) can time major capital investments around cash flow cycles.
  • Multi-year capital strategies become viable. Business owners who invest regularly can build stable forecasts instead of reacting year-to-year.
  • Section 179 limits increased dramatically. OBBBA raised Section 179 expensing limits to $2.5 million for 2025, indexed upward annually. More clients can immediately expense assets rather than depreciate them over time.

Important caveat: The IRS still requires assets to be placed in service in the same year claimed—no backdating.

Section 179 versus bonus depreciation: Which rule applies?

This is where many professionals see clients get confused. Both can result in immediate expensing, but they have different limits and rules:

Bonus depreciation (Section 168(k)): 100% of cost, new OR used equipment, permanent, no income limit for the deduction itself

Section 179 expensing: Up to $2.5 million aggregate for 2025, new OR used equipment, but there’s a phase-out if equipment purchases exceed $4 million, and it’s only available if the business has positive taxable income

For most service providers under $2.5M in annual equipment purchases, bonus depreciation is simpler. But Section 179 can be strategically used if you want to limit the deduction in a high-income year and carry forward the unused amount.

The real opportunity this creates for your clients

The permanence of 100% bonus depreciation means your clients should shift their mindset from “should I buy this year?” to “when should I invest to maximize my cash position and tax efficiency?”

Better questions to ask:

• • Do they actually need this asset, or are they buying it because they’re worried about taxes? (Honest answers matter)
  • If they need it, when do they need it operationally? Q1? Q2? Q4? Align purchases with business cycles.
  • What’s their income trajectory for the next 2-3 years? If they’re growing, deferring the investment to a higher-income year might be fine—they’ll have more cash to absorb it.
  • What’s their estimated quarterly tax payment situation? Many business owners underpay estimated taxes and don’t realize it until April, which changes the calculus entirely.
  • Do they have enough income left over to sustain operations after the purchase? Cash flow trumps tax deductions every time.

Checklist for tax professionals engaging clients on year-end purchases

When a client mentions year-end capital purchases, here’s what you need to gather:

Financial snapshot:

• • Current year income projection (actuals through November/December, not estimates)
  • Prior year return details (income level, deductions claimed, SE tax paid)
  • Estimated quarterly tax payments made for the current year
  • Cash position and 12-month cash flow forecast

Asset details:

• • Type and cost contemplated (and whether it truly qualifies for immediate expensing)
  • Operational need and timeline (genuine business impact)
  • Multi-year capital forecast (are they buying $30k this year and $40k next year?)

Tax structure considerations:

• • Pass-through entity status or corporate structure (matters for how the deduction flows through)
  • Income from other sources—spouse income, passive income, etc. (affects phase-outs and limitations)

Be prepared for the 2026 tax season

Year-end capital investments can be smart tax strategy—when they’re part of a comprehensive approach aligned with business goals, cash flow realities, and multi-year projections. They become costly mistakes when they’re last-minute reactions to profit anxiety.

With 100% bonus depreciation now permanent, you have the opportunity to shift your clients from reactive decision-making to proactive capital allocation. That’s the conversation that builds trust and demonstrates your value as a strategic advisor, not just a compliance provider.

Year-end tax planning for advisory clients requires a comprehensive approach that considers the full regulatory landscape, client-specific circumstances, and emerging opportunities.

Transform your year-end conversations from reactive firefighting to strategic value creation. Join our expert-led webcast: Capitalizing on quick questions, where we’ll dive further into common questions and quick wins for advisors during the tax season.

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Capitalizing on quick questions: Turn quick questions into profitable engagements

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