The most useful tax planning strategies for small businesses in 2026 come down to a handful of decisions made before December 31: how the owner is paid, when income and expenses land, whether equipment is expensed right away, and how much goes into a retirement plan. The One Big Beautiful Bill Act (OBBBA) made several of these levers larger and longer lasting, so the numbers below reflect the 2026 rules.
This guide walks through each of those tax planning strategies for small businesses with the current IRS figures, a worked example on equipment expensing, and the points where a federal choice changes your state bill. It is written for owners of sole proprietorships, partnerships, LLCs and S corporations, and for the CPA firms that advise them.
Tax preparation reports on a year that has already ended, while planning happens during the year, when most of the useful moves are still available. An S corporation owner cannot add payroll for 2026 in February 2027, and a machine bought on January 3 does not count toward the prior year.
Planning also depends on accurate numbers. A projection built from books that are three months behind will misjudge the bracket, the qualified business income (QBI) threshold and the estimated payments still due. Owners who keep a small business tax compliance calendar and close the books monthly can run a real projection in October or November and still have time to act on it.
The table below collects the federal figures that drive most small business planning this year. Every figure comes from IRS guidance issued after the OBBBA was signed.
| Provision | 2026 figure | Source |
|---|---|---|
| Section 179 expensing limit | $2,560,000 | Rev. Proc. 2025-32 |
| Section 179 phase-out begins | $4,090,000 of property placed in service | Rev. Proc. 2025-32 |
| Bonus depreciation | 100% for qualified property acquired after Jan. 19, 2025 | Notice 2026-11 |
| QBI deduction threshold | $201,750 (single), $403,500 (joint) | Rev. Proc. 2025-32 |
| QBI phase-in range ends | $276,750 (single), $553,500 (joint) | Rev. Proc. 2025-32 |
| Excess business loss threshold | $256,000 ($512,000 joint) | Rev. Proc. 2025-32 |
| Cash method gross receipts test | $32,000,000 average annual gross receipts | Rev. Proc. 2025-32 |
| 401(k) employee deferral | $24,500 | IRS IR-2025-111 |
| 401(k) catch-up, age 50 and over | $8,000 | IRS IR-2025-111 |
The inflation figures come from Revenue Procedure 2025-32, which the IRS publishes each autumn for the following tax year.
Entity choice sets the base for every other strategy. A sole proprietor pays self-employment tax on the full net profit. An S corporation owner who works in the business takes a salary subject to payroll tax and can receive the remaining profit as distributions that are free of payroll tax. The trade-off is the cost of running payroll and filing a separate return, along with IRS scrutiny of the salary figure. Our comparison of sole proprietorship vs S corp structures covers when the switch tends to pay off.
For owners already taxed as an S corporation, the year-end task is to confirm that salary is defensible. The IRS expects a figure in line with what the business would pay someone else for the same work, and the factors are covered in our guide to reasonable compensation for S corp owners. Salary also matters for retirement plan contributions and for the W-2 wage limit on the QBI deduction, so the number should be set with those effects in view.
Most small businesses use the cash method, which recognizes income when it is received and expenses when they are paid. For 2026, a corporation or partnership passes the gross receipts test for cash method eligibility if its average annual gross receipts for the prior three years do not exceed $32,000,000, according to Rev. Proc. 2025-32.
Cash method businesses have two simple timing levers:
Timing works best when it is based on a two-year projection. Shifting income only to land in a higher bracket next year raises the total tax over both years.
The OBBBA changed two depreciation rules that matter for any business that buys equipment, vehicles, computers or qualifying building improvements. The IRS summary of the law for businesses states that it "Increased the total amount a Taxpayer can elect to expense under IRC § 179 from $1,000,000 to $2,500,000," and that it "Provides taxpayers with a permanent 100-percent additional first year depreciation deduction" (IRS: Working Families Tax Cuts for businesses). With inflation, the 2026 Section 179 cap is $2,560,000, reduced dollar for dollar once property placed in service during the year exceeds $4,090,000.
For bonus depreciation, the acquisition date controls. IRS Notice 2026-11 explains that the law provides a permanent 100 percent deduction "for qualified property acquired and placed in service" after January 19, 2025, and that property is not treated as acquired after the date a written binding contract is signed. Our explainer on Notice 2026-11 and permanent 100% bonus depreciation covers the transition rules for property bought around that date.
The two provisions behave differently. According to IRS Publication 946, the Section 179 deduction is limited to "the taxable income from the active conduct of any trade or business during the year," and any cost disallowed by that limit carries to the next year. Bonus depreciation has no such income limit, so it can create a loss. Bonus depreciation applies automatically by class of property unless the business elects out. State treatment also varies: some states decouple from federal bonus depreciation, so the state return may show a smaller deduction than the federal one.
Consider a single sole proprietor with $180,000 of net profit before depreciation and no other income. In December 2026 the owner buys and places in service a $50,000 machine that is 7-year property. The table compares regular depreciation (half-year convention, 14.29% in year one) with a full write-off under bonus depreciation or Section 179. The owner takes the 2026 standard deduction of $16,100, and self-employment tax is computed at the combined 15.3% rate on 92.35% of net profit. That rate applies in full because net earnings in both columns ($159,632 and $120,055) stay below the 2026 Social Security wage base of $184,500 listed in IRS Topic 751.
| Line item | Regular depreciation | Full write-off |
|---|---|---|
| 2026 depreciation deduction | $7,145 | $50,000 |
| Net profit | $172,855 | $130,000 |
| Self-employment tax | $24,424 | $18,368 |
| Deduction for half of SE tax | $12,212 | $9,184 |
| QBI deduction (20%) | $28,909 | $20,943 |
| Taxable income | $115,634 | $83,773 |
| Federal income tax | $20,350 | $13,142 |
| Total federal income and SE tax | $44,774 | $31,510 |
The full write-off lowers 2026 federal tax by $13,264. Two details are easy to miss. The QBI deduction falls by $7,966 because the depreciation also reduces qualified business income, so the income tax saving is smaller than a simple bracket calculation suggests. And the saving is mostly a timing benefit: the owner gives up depreciation deductions in later years, and a sale of the machine can trigger recapture taxed as ordinary income.
The Section 199A deduction lets owners of pass-through businesses deduct up to 20% of qualified business income. It was scheduled to expire after 2025. The OBBBA kept it in place, and Rev. Proc. 2025-32 notes that Section 70105 of the law "amended § 199A(i) to add a minimum deduction of $400" for taxpayers with at least $1,000 of qualified business income, effective for tax years beginning after December 31, 2025.
Below the 2026 threshold of $201,750 for single filers and $403,500 for joint filers, the deduction is usually 20% of QBI, capped at 20% of taxable income before the deduction. Above the threshold, the wage and property limits phase in, and specified service businesses such as consulting, law, health and accounting lose the deduction gradually until taxable income reaches $276,750 for single filers or $553,500 for joint filers.
That phase-in range is where planning has the most effect. A retirement contribution or a December equipment purchase that brings taxable income back under the threshold can restore part of the deduction. Our 199A deduction guide works through the wage limit and the specified service business rules with examples.
Retirement plans reduce taxable income now and build savings for the owner. For 2026, the IRS announced that the employee deferral limit for 401(k), 403(b) and governmental 457 plans "is increased to $24,500, up from $23,500 for 2025" (IRS IR-2025-111). Owners aged 50 and over can add an $8,000 catch-up, and those aged 60 to 63 have a higher catch-up limit of $11,250.
The plan type decides how much an owner can put away and when the plan must exist. A solo 401(k) suits an owner with no employees other than a spouse, because the owner can contribute both as employee and as employer. Businesses with staff often compare a SEP IRA with a SIMPLE IRA, and our guide to SEP IRA vs SIMPLE IRA sets out the employee coverage and contribution rules for each. Plan setup deadlines differ by plan type, so this decision belongs in the October or November review.
From 2022 through 2024, businesses had to capitalize and amortize research and experimental spending over five years, which raised taxable income for many software companies and product developers. The OBBBA restored immediate expensing for domestic research. According to the IRS, "For taxable years beginning after Dec. 31, 2024, taxpayers may deduct domestic research or experimental expenditures," and a business can instead elect to amortize them over at least 60 months (IRS: Working Families Tax Cuts). Foreign research spending still has to be amortized.
The research credit is a separate benefit that can apply to the same activities. Owners who develop software, formulas, processes or prototypes should read our guide on how small businesses can maximize R&D tax credits before the year closes, since the credit depends on contemporaneous records of who worked on what.
Many states offer a pass-through entity tax (PTET) election, where the partnership or S corporation pays state income tax at the entity level and deducts it federally. The election can work around the individual cap on state and local tax deductions, and our explainer on the pass-through entity tax covers how it works and where the state deadlines fall.
Large losses need a check as well. For 2026, an individual can deduct net business losses against other income only up to $256,000 ($512,000 on a joint return), and anything above that becomes a net operating loss carryforward. A year with heavy bonus depreciation can hit this limit, which our guide to the excess business loss limitation explains with Form 461.
Every strategy above changes the tax owed, so the fourth-quarter estimated payment should be recalculated once the year-end moves are settled. Underpaying can bring a penalty even when the return is filed on time. Our guide to quarterly estimated tax payments covers the deadlines and the safe harbor methods for individuals and corporations.
Use this list in October and November to apply the strategies above:
What are the best tax planning strategies for small businesses in 2026? The strategies with the largest effect for most owners are reviewing entity choice and owner salary, timing income and expenses, expensing equipment under Section 179 or 100% bonus depreciation, managing taxable income around the QBI thresholds, and funding a retirement plan. The right mix depends on the business's income, entity type and state.
Is 100% bonus depreciation permanent? Yes. Under the OBBBA, qualified property acquired and placed in service after January 19, 2025 qualifies for a permanent 100% first-year deduction, as described in IRS Notice 2026-11. Property acquired under a written binding contract signed before that date follows the older phase-down rules.
What is the Section 179 limit for 2026? The 2026 limit is $2,560,000. It is reduced dollar for dollar once the cost of Section 179 property placed in service during the year exceeds $4,090,000, and the deduction cannot exceed taxable income from active business activity.
Did the QBI deduction expire after 2025? No. The OBBBA kept the 20% deduction for pass-through business income and added a $400 minimum deduction for taxpayers with at least $1,000 of qualified business income, starting with 2026 tax years.
When should a small business start year-end tax planning? Most owners should start by October, once third-quarter books are closed. That leaves time to adjust payroll, buy and place equipment in service, set up a retirement plan and recalculate the final estimated payment before December 31.
Madras Accountancy supports US CPA firms and small businesses with bookkeeping, tax preparation and CFO-level financial support, which gives owners and their advisors accurate numbers to plan from before the year closes. To talk through your year-end planning workload, contact our team.
The section 4960 excise tax is 21% of nonprofit pay over $1M. From 2026 it covers all employees. See the medical carve-outs, Form 4720 and a worked example.
The paid family and medical leave tax credit is permanent from 2026. See the 12.5% to 25% rates, the premium option, the 6-month rule and how Form 8994 works.
Opportunity zones become permanent in 2027 under the One Big Beautiful Bill. See the new deferral, rural bonus, and the 2026 handoff.
