As 2026 comes to a close, small-business owners have opportunities to reduce federal tax liability and strengthen long-term financial plans. Recent legislation extended and enhanced several taxpayer-friendly provisions, creating planning opportunities around retirement contributions, asset purchases, income timing, deductions, and business structure.
Establish a Tax-Favored Retirement Plan
A retirement plan can provide meaningful deductible contributions while supporting future financial security.
- SEP plans: Self-employed individuals may contribute up to 20% of net self-employment income, up to a $72,000 deductible maximum for 2026. Owners employed by their corporations may contribute up to 25% of salary, subject to the same maximum.
- 401(k) plans: These can be especially attractive for self-employed individuals and small corporations. In addition to employer contributions of up to 20% or 25% of compensation, plans may allow matching contributions. The 2026 employee elective-deferral limit is $24,500. Participants age 50 and older may make catch-up contributions up to $8,000, while eligible participants ages 60–63 may qualify for a higher $11,250 catch-up limit.
- SIMPLE IRAs: Businesses with more modest income may benefit from a SIMPLE IRA. The 2026 contribution limit is $17,000, plus a $4,000 catch-up contribution for employees age 50 and older. Eligible participants ages 60–63 may qualify for a $5,250 catch-up contribution. SIMPLE IRAs are often less expensive and easier to administer than SEPs or 401(k) plans.
Even when multiple plans are adopted, the total contribution limit is $72,000 per participant.
It May Still Be Possible to Make a Deductible Contribution for 2025
In many cases, a tax-favored retirement plan may be established and funded by the extended due date of the return for the year of the deductible contribution.
Use First-Year Write-Offs for Business Assets
Current rules provide substantial first-year deductions for qualifying assets placed in service during 2026.
Section 179 Expensing
Businesses may expense up to $2.56 million of qualifying property placed in service during 2026. Eligible property generally includes equipment and off-the-shelf business software.
Section 179 may also apply to certain qualified improvement property (QIP), with the deduction phasing out beginning at $4.09 million of qualifying purchases and fully phasing out at $6.65 million. QIP generally includes improvements to the interior of a nonresidential building, excluding building enlargements, elevators or escalators, and internal structural framework.
Qualified improvements can also include roofs, HVAC equipment, fire-protection and alarm systems, and security systems for nonresidential property, provided the building was already in service.
100% Bonus Depreciation
Full bonus depreciation is available for qualified new and used property acquired and placed in service during 2026. Depending on timing, a business may be able to deduct 100% of the cost of eligible asset additions this year.
Qualifying property can include personal property, certain real property such as QIP, and land improvements. With full bonus depreciation available for the foreseeable future, businesses can consider multiyear asset-acquisition strategies rather than limiting planning to year-end purchases.
Qualified Production Property
Businesses engaged in manufacturing or production may qualify for 100% depreciation on certain nonresidential real property used directly in qualified production activities. This provision includes detailed construction, placed-in-service, election, and recapture requirements that should be reviewed before beginning a major facility project.
Time Income and Deductions Strategically
For sole proprietors and pass-through business owners, including partners, S corporation shareholders, and certain LLC owners, business income is generally taxed at individual rates.
Individual federal income-tax rates remain unchanged for 2026, although inflation adjustments increase bracket thresholds. The 2025 Act made the Tax Cuts and Jobs Act rate brackets permanent. C corporation income continues to be taxed at 21% in 2026 and 2027.
The traditional approach is to defer income into 2027 and accelerate deductions into 2026 when the owner expects to be in the same or a lower tax bracket next year. This postpones tax and may cause deferred income to be taxed at a lower rate.
If a higher tax bracket is expected in 2027, the reverse may be more appropriate: accelerate income into 2026 and postpone deductions until 2027. Cash-basis taxpayers may consider billing timing, while potential strategies for deferring income can include like-kind exchanges of appreciated real estate and installment sales of property.
Plan the Timing of Year-End Bonuses
Cash-basis taxpayers generally should pay bonuses by year-end to maximize a 2026 deduction when they expect the same or lower tax rate next year. If a higher 2027 tax rate is expected, waiting until January 2027 may produce a deduction against higher-taxed income.
Accrual-basis taxpayers may deduct bonuses in the year when the related obligations are established with reasonable certainty, but the bonuses must generally be paid within 2½ months after the tax year ends. For calendar-year businesses, this means payment by March 15, 2027, to deduct the bonus in 2026. Businesses seeking to defer the deduction to 2027 should consider adjusting bonus-plan payment terms before year-end.
Expense Domestic Research Costs
Eligible small businesses may fully expense domestic research and experimental costs in 2026. Businesses with qualifying research activities should review their expenditures and documentation before year-end.
Consider the Pass-Through Entity Tax Election
For 2026, the state and local tax deduction cap is $40,400 for most filers, including single and married joint filers, and $20,200 for married taxpayers filing separately. The cap rises by 1% annually through 2029 before reverting to $10,000 in 2030.
The limit is reduced for taxpayers with modified adjusted gross income above $505,000, or $252,500 for married taxpayers filing separately, though it won’t fall below $10,000, or $5,000 for married taxpayers filing separately.
Owners above the cap may consider a state-level Pass-Through Entity Tax (PTET) election. Under this election, a partnership or S corporation pays state income tax at the entity level rather than leaving that liability with individual owners. The individual SALT limitation doesn’t apply to the entity-level tax payment.
Potential benefits include:
- Reduced pass-through income to partners, which may also reduce self-employment tax.
- A greater chance to use the standard deduction if remaining itemized deductions fall below that amount.
- Potential use of the new above-the-line charitable contribution deduction: $1,000 for most individual taxpayers, or $2,000 for married taxpayers filing jointly, who don’t itemize.
C corporations should also consider a new limitation: beginning in 2026, charitable deductions are limited to 10% of taxable income and are available only to the extent aggregate contributions exceed 1% of taxable income.
Maximize the Qualified Business Income Deduction
Eligible owners may claim a Qualified Business Income deduction of up to 20% of qualified trade or business income, in addition to eligible REIT dividends and publicly traded partnership income.
The deduction may apply to income from sole proprietorships, single-member LLCs, partnerships, S corporations, and qualifying LLCs. However, it can be limited by W-2 wages, the unadjusted basis of qualified property, taxable income, and the nature of the business.
For 2026:
- For joint filers, limits begin to apply when taxable income exceeds $403,500 and are fully phased in at $553,500.
- For other filers, limits begin at $201,750 and are fully phased in at $276,750.
- The applicable limitation phase-in range is $150,000.
- Beginning in 2026, active qualified businesses with at least $1,000 of aggregate QBI may qualify for a $400 minimum deduction.
Service businesses such as law, accounting, health care, and consulting can face additional limits. Tax decisions such as claiming substantial first-year depreciation may reduce QBI and lower the available deduction, so QBI should be considered alongside other year-end planning strategies.
Review Qualified Small Business Stock Opportunities
The 2025 Act expanded the gain-exclusion rules for Qualified Small Business Stock (QSBS), making C corporation status more attractive for certain businesses, including manufacturers, producers, and sellers of tangible personal property.
For stock issued on or after July 4, 2025:
- A 50% gain exclusion may be available after a three-year holding period.
- A 75% exclusion may be available after four years.
- A 100% exclusion may be available after five or more years.
The aggregate asset threshold for qualified small business corporations increased from $50 million to $75 million. The per-shareholder, per-issuer exclusion limit increased from $10 million to $15 million for qualifying stock issued after July 4, 2025.
Employ Family Members When Appropriate
Hiring family members can reduce overall tax liability when the family member is a bona fide employee and the arrangement follows standard payroll and employment practices.
Wages and benefits, including medical benefits, may be deductible business expenses. Wages paid to a child under age 18 may not be subject to federal employment taxes, while remaining deductible to the business. For 2026, an unmarried child’s standard deduction may offset up to $16,100 of income.
The arrangement must be legitimate: duties should be real, pay should be reasonable for the work performed, time records should be maintained, and payroll reporting requirements must be met. A SIMPLE IRA may also be an option for an eligible employed child.
Plan Before December 31
Year-end planning works best when strategies are evaluated together. Retirement contributions, asset purchases, bonus timing, income deferral, QBI, PTET elections, charitable giving, and entity choice can affect one another. A coordinated review before year-end can help identify the options that best fit the business’s projected income, tax position, and long-term goals.
Related reading: 2026 Year-End Tax Planning Opportunities for Individuals
