Buying Equipment Before Year-End? Placed-in-Service Rules

Introduction

Buying equipment before year-end may help support a current-year tax deduction, but the purchase date alone usually is not enough. In most cases, the equipment must be “placed in service”—ready and available for its assigned business use—before the tax year closes.

Buying Equipment Before Year-End? The Placed-in-Service Rule Explained

For Spokane-area business owners, year-end equipment purchases can be an important part of tax planning. A new machine, computer, vehicle, tool, or piece of furniture may qualify for immediate or accelerated deductions through Section 179, bonus depreciation, or regular depreciation.

However, ordering equipment, signing a contract, paying a deposit, or even receiving an invoice does not necessarily create a deduction for that year. The key question is whether the equipment was ready and available for its intended business function during the tax year.

What does “placed in service” mean?

Property is generally placed in service when it is ready and available for use in a trade or business or for producing income. For a vehicle, this generally means the vehicle is ready and available for its specifically assigned business use.

For other equipment, the date may depend on the facts. Consider the following examples:

• A contractor pays for a new excavator in December, but delivery does not occur until January. The excavator generally belongs in the following tax year.
• A manufacturer receives a machine in December, but installation and testing are not completed until January. The machine may not be placed in service until January.
• A retailer receives and assembles new shelving in December, and the shelving is ready for use before December 31. It may qualify as a current-year asset.
• A business purchases a computer in December, but it is still in the box and has not been assigned or made available for business use. The purchase date alone may not be enough.

Under Internal Revenue Code §168, depreciation is determined using the applicable method, recovery period, and convention. These rules generally begin when property is placed in service for business or income-producing use.

The same timing principle applies to Section 179. Section 179 allows a taxpayer to elect to deduct qualifying property in the tax year in which the property is placed in service

Does buying equipment in December qualify for a current-year deduction?

Not necessarily. The equipment generally must be both:

• Qualifying property; and
• Ready and available for its intended business use before the end of the tax year.

The purchase date still matters for some bonus depreciation rules, especially when equipment is acquired under a binding contract. But the placed-in-service date generally determines the year in which the deduction is claimed.

For example, equipment ordered in November and delivered, installed, and ready for use on December 29 may potentially qualify for the current year. Equipment paid for on December 29 but not delivered or made operational until January generally belongs in the next tax year.

The business does not always have to use the equipment extensively before year-end. The important question is generally whether the equipment was ready and available for its assigned function. Documentation should support that conclusion, including delivery records, installation records, acceptance certificates, photographs, and internal records showing when the equipment became operational.

How Section 179 and bonus depreciation use the placed-in-service date

Section 179

Section 179 allows a business to elect to expense all or part of the cost of qualifying property in the year it is placed in service, rather than recovering the cost over several years.

For tax years beginning in 2025:

• The maximum total Section 179 expense deduction is $2,500,000.
• The phase-out begins when the total cost of qualifying Section 179 property placed in service during the year exceeds $4,000,000.
• The $2,500,000 limit is reduced dollar-for-dollar by the amount above $4,000,000.
• The deduction is also limited by taxable income from the active conduct of a trade or business.
• Disallowed amounts because of the business-income limit may generally carry forward.

For tax years beginning in 2026, the inflation-adjusted amounts are:

• $2,560,000 maximum Section 179 expense deduction; and
• $4,090,000 phase-out threshold.

The $4,000,000 and $4,090,000 figures measure the total cost of qualifying property placed in service during the year—not the amount deducted under Section 179. Businesses with large equipment purchases should therefore calculate the total cost of all qualifying property, even if they do not intend to expense the entire amount.

Section 179 generally applies to qualifying tangible property, certain off-the-shelf software, and certain qualified real property. Qualified real property can include qualified improvement property and certain roofs, heating and cooling systems, fire protection and alarm systems, and security systems installed in nonresidential real property.

Section 179 has important restrictions. The property generally must be purchased for use in the active conduct of a business. Estates and trusts cannot claim the deduction. Property held for investment, used mainly outside the United States, or used by certain tax-exempt or governmental entities generally does not qualify.

Bonus depreciation

Bonus depreciation is an additional first-year deduction that applies after Section 179 and before regular depreciation. Unlike Section 179, bonus depreciation generally has no annual dollar cap and is not limited by business taxable income.

For qualifying property acquired after January 19, 2025, the federal bonus depreciation rate is generally 100% when the property is placed in service. Certain used property may qualify, but additional rules apply, including restrictions involving prior use, related parties, and carryover basis.

For qualifying property acquired after September 27, 2017, and before January 20, 2025, the rate is generally 40% for property placed in service during 2025 and 20% for property placed in service during 2026. A binding contract entered into before the relevant acquisition date can affect whether the property qualifies for the newer rate.

A business may elect not to claim bonus depreciation for a class of property. The election generally applies to all qualifying property in that class placed in service during the year, not just one selected asset. The election must be made properly and is generally irrevocable without IRS approval.

Regular MACRS depreciation

After Section 179 and bonus depreciation, any remaining cost is generally recovered through MACRS, the federal tax system for depreciating business property.

MACRS assigns property:

• A recovery period, such as 3, 5, 7, 15, or 39 years;
• A depreciation method, such as declining balance or straight-line; and
• A timing convention, such as half-year, mid-quarter, or mid-month.

For example, computers and many vehicles are generally 5-year property, while office furniture is generally 7-year property. Nonresidential buildings generally use a 39-year period, and residential rental buildings generally use 27.5 years under the general depreciation system.

What equipment may qualify?

Depending on the facts, qualifying equipment can include:

• Machinery and tools;
• Computers and peripheral equipment;
• Office furniture;
• Certain vehicles;
• Manufacturing and production equipment;
• Equipment used in farming;
• Certain portable heating and cooling units;
• Off-the-shelf computer software;
• Certain improvements to nonresidential buildings; and
• Certain property used in research, transportation, communications, utility, or storage activities.

Vehicles require additional care. A heavy SUV generally means a four-wheeled passenger vehicle with a gross vehicle weight rating above 6,000 pounds and not more than 14,000 pounds. The Section 179 cost limit for qualifying SUVs is $31,300 for 2025 and $32,000 for 2026. The vehicle must generally be used more than 50% for business.

Passenger vehicles can also be subject to annual depreciation limits. For example, the 2025 first-year limit for a qualifying passenger automobile acquired after September 27, 2017, is generally $20,200 when bonus depreciation applies and $12,200 when it does not. The limit is reduced for personal use.

Important year-end traps

Equipment is delivered but not operational

Delivery does not always equal placed in service. Installation, calibration, testing, permits, or training may still be required before equipment is ready for its assigned function.

A deposit or loan is mistaken for a deduction

Paying cash, financing the purchase, or signing a purchase agreement does not by itself create a depreciation deduction. The property generally must be placed in service.

Business use is too low

Listed property, including many vehicles and certain other assets that can easily be used personally, has special rules. If qualified business use is 50% or less, Section 179 and accelerated depreciation may be unavailable, and straight-line depreciation may be required.

Too much property is placed in service late in the year

The mid-quarter rule may apply when the aggregate basis of eligible MACRS property placed in service during the last three months of the tax year exceeds 40% of the aggregate basis of eligible MACRS property placed in service during the entire year. Residential rental property, nonresidential real property, railroad grading, and certain property disposed of in the same year are excluded from this calculation.

Washington treatment is different

This article focuses on federal income tax. Washington does not impose a broad-based corporate or individual net income tax, and its business and occupation tax is based on gross receipts rather than federal taxable income. Federal Section 179 deductions therefore do not generally determine a Washington income-tax deduction.

What records should a business keep?

A business should maintain records that show:

• What was purchased;
• Who sold it;
• The purchase price and related costs;
• The date of delivery;
• The date installation or testing was completed;
• The date the equipment became ready and available for use;
• The business purpose;
• The percentage of business use;
• Any binding contract;
• Any Section 179 or bonus depreciation election; and
• The asset’s listing on the depreciation schedule.

Form 4562 is used to claim depreciation and Section 179 deductions and to report information about vehicles and other listed property.

Organized equipment and fixed-asset records can also help a business understand cash flow, plan future purchases, and avoid duplicate or missing deductions. Businesses purchasing several assets may benefit from connecting their bookkeeping records with their tax depreciation schedules.

Conclusion

Buying equipment before year-end may support a current-year deduction, but the equipment generally must be qualified and placed in service—ready and available for its intended business use—during that tax year. The correct result may depend on installation, business use, purchase-contract dates, total equipment costs, and the elections made on the return.

If your Spokane or Eastern Washington business is planning a year-end equipment purchase, BSK Tax Advisors can help you review the timing, records, depreciation choices, and expected financial impact. Schedule a consultation with BSK Tax Advisors to discuss your equipment purchase and year-end tax planning.