Year-End Deduction Timing:
Cash vs. Accrual, Economic Performance, and “Placed in Service”

“Saving tax” by making advance purchases or paying expenses before year‑end depends primarily on your accounting method (cash vs. accrual), the timing rules for when a deduction is taken, and whether an outlay must be capitalized instead of deducted. Key authorities include the general method of accounting rules, the taxable year of deduction rules, and specific timing concepts like economic performance and the recurring item exception. In addition, purchasing depreciable property has distinct “placed in service” requirements, and certain expensing elections (for example, section 179) can accelerate cost recovery if conditions are met. These rules apply at the federal level for U.S. taxpayers IRC § 446; IRC § 461.

Cash vs. Accrual: Why It Matters

• Cash method: Generally, deductible expenses are taken in the year paid. However, expenditures that create an asset with a useful life substantially beyond the close of the taxable year are capitalized (for example, improvements or certain prepayments), and prepaid interest must be allocated to the period to which it relates 26 CFR § 1.461-1(a)(1); IRC § 461(g).

• Accrual method: A liability is taken into account when all events have occurred to fix the liability, the amount can be determined with reasonable accuracy, and economic performance has occurred. For many liabilities (e.g., services provided to you), economic performance occurs as the services are provided; for payment liabilities (e.g., tort settlements, rebates), economic performance occurs only when payment is made to the person to whom the liability is owed 26 CFR § 1.461-1(a)(2); 26 CFR § 1.461-4.

• Recurring item exception: Accrual taxpayers may take certain recurring items in the current year if the all‑events test is met by year‑end, economic performance occurs within 8½ months after year‑end (or by return filing), and the item is immaterial or better matches income. This can allow year‑end accruals to be deducted even if performance occurs shortly after year‑end 26 CFR § 1.461-5.

Prepayments and Capitalization

• Capitalization requirement: Even for cash method taxpayers, if an expenditure results in an asset with a useful life extending substantially beyond year‑end, you may need to capitalize (rather than deduct) the cost (e.g., leasehold improvements, construction costs). Leasehold improvements are generally recovered over time, not immediately deducted 26 CFR § 1.461-1(a)(1).

• Uniform capitalization rules: For production or resale activities, certain direct and indirect costs must be capitalized into inventory or asset basis. Small businesses may be exempt under gross receipts thresholds; otherwise, capitalization is required rather than immediate deduction. See IRS guidance on basis and capitalization in Publication 551.

• Prepaid interest: For cash method taxpayers, prepaid interest must be capitalized and treated as paid in the period to which it is allocable, rather than deducted entirely in the prepayment year IRC § 461(g).

Year‑End Purchases of Depreciable Property

• “Placed in service” is essential: You only begin depreciation (or claim special expensing) when property is placed in service in your business, not merely purchased or delivered. To benefit in the current year, ensure the asset is ready and available for use by year‑end Publication 946.

• Section 179 expensing: Taxpayers can elect to expense eligible property up to statutory limits. Under the One, Big, Beautiful Bill Act (OBBBA), the maximum expense is increased to $2,500,000, with a phase‑out beginning when total placed‑in‑service costs exceed $4,000,000 for 2025 and later years (amounts are indexed after 2025). Section 179 requires the property to be placed in service by year‑end and is subject to taxable income limits. See Publication 946 and OBBBA adjustments summarized in IRS inflation procedures for 2026 (section 2.10).

• Bonus depreciation: For property meeting bonus criteria, additional first‑year depreciation may be available. Bonus applies only to property placed in service, and elections to forgo bonus must follow guidance. Confirm the percentage and eligibility for your tax year in Publication 946.

Business Meals and Travel Near Year‑End

• Meals: Business meals are generally 50% deductible (subject to substantiation and “ordinary and necessary” standards). Buying meals before year‑end doesn’t change the 50% limitation; ensure the expense relates to bona fide business activities Publication 463.

• Travel: Only deduct travel expenses that meet “away from home” rules and are ordinary and necessary. Timing of travel and whether the trip is for business vs. personal purposes controls deductibility; paying early doesn’t create a deduction if the trip is not business‑related or does not meet travel criteria Publication 463.

Accrual Method Year‑End Planning (Economic Performance)

For accrual taxpayers, consider whether economic performance can be satisfied by year‑end or shortly thereafter:

• Services provided to you: Deductible when provided; if services will be rendered after year‑end, you typically wait until performance (unless the recurring item exception applies) 26 CFR § 1.461-4(d).

• Use of property (rent): Economic performance occurs ratably over the rental period; paying rent early doesn’t accelerate the deduction beyond the period of use 26 CFR § 1.461-4(d)(3).

• Payment liabilities (torts, rebates, awards): Economic performance is only when payment is made to the person to whom the liability is owed; year‑end payment can accelerate deduction for these categories 26 CFR § 1.461-4(g).

• Taxes: Generally, deduct when paid, unless a valid election or exception applies; special rules exist for real property taxes and certain foreign taxes 26 CFR § 1.461-4(g)(6); 26 CFR § 1.901-1.

Inventory and Cost of Goods Sold

Purchases of inventory before year‑end affect cost of goods sold, not an immediate expense. Capitalization rules and inventory accounting govern timing:

• Inventory purchases are capitalized and deducted through cost of goods sold when sold; year‑end buying increases ending inventory rather than current‑year deductions Publication 551.

• Some small taxpayers may be exempt from certain capitalization rules, but inventory principles still apply; check your eligibility under current thresholds Publication 551.

Accounting Method Consistency and Changes

• Adopted methods must be applied consistently. You cannot simply change how you recognize expenses at year‑end without proper consent; a change in method of accounting generally requires IRS consent (automatic or non‑automatic) IRC § 446(e).

• Formal method change: Use Form 3115 and comply with revenue procedure procedures. Automatic changes exist for many items, while non‑automatic changes require a ruling and user fee; timing and filing procedures are strictly prescribed. See Instructions for Form 3115 and the form itself at Form 3115.

Practical Year‑End Checklist

• Identify your accounting method (cash vs. accrual) and confirm that your targeted deductions align with method rules IRC § 446.

• For cash method taxpayers, paying bona fide, ordinary and necessary expenses by year‑end generally secures current deductions, but watch for capitalization (e.g., improvements) and prepaid interest limits 26 CFR § 1.461-1; IRC § 461(g).

• For accrual method taxpayers, ensure all‑events test and economic performance are met by year‑end or consider the recurring item exception when appropriate 26 CFR § 1.461-4; 26 CFR § 1.461-5.

• For depreciable assets, make sure they are placed in service before year‑end if you intend to claim depreciation or an expensing election; consider section 179 and bonus depreciation eligibility Publication 946; IRS inflation procedures for 2026 (section 2.10).

• Apply the 50% limit to business meals; pay attention to travel qualification rules—only ordinary and necessary business travel is deductible Publication 463.

• Inventory purchases are not immediate deductions; they affect cost of goods sold when inventory is sold Publication 551.

• Do not make informal method changes to accelerate deductions; if you need a method change, follow Form 3115 procedures Instructions for Form 3115.

Summary

• Cash method taxpayers can often accelerate deductions by paying ordinary and necessary expenses before year‑end, but capitalization rules and prepaid interest limits still apply 26 CFR § 1.461-1; IRC § 461(g).

• Accrual method taxpayers must satisfy the all‑events test and economic performance; consider the recurring item exception for items performed shortly after year‑end 26 CFR § 1.461-4; 26 CFR § 1.461-5.

• Year‑end purchases of depreciable assets require “placed in service” to claim depreciation or expensing; section 179 and bonus depreciation can accelerate recovery when applicable Publication 946; IRS inflation procedures for 2026 (section 2.10).

• Meals, travel, and inventory follow specific limitations and timing rules—prepaying doesn’t override those limits Publication 463; Publication 551.

• Changing how you time expenses at year‑end typically requires a formal method change; follow Form 3115 procedures IRC § 446(e); Instructions for Form 3115.

This essay is not tax advice. Always consult a qualified tax professional for your specific situation.