Key Takeaways

Tax planning happens in October. Tax preparation happens in April. The difference is tens of thousands of dollars.

The OBBBA made the QBI deduction permanent for 2026, with expanded income ranges up to $544,600 (MFJ).

S-Corp owners with $150K+ income typically save $15,000-$50,000 annually through proper salary and retirement optimization.

Section 179 increased to $2.56M and 100% bonus depreciation is restored for 2026.

The best tax planning strategies combine entity structure, retirement maximization, and timing decisions.

Your CPA calls you in March. Asks for documents. Sends a PDF in April. That’s not planning. That’s data entry.

Tax planning is what happens before December 31st, when you can still change the outcome. Tax preparation is what happens after, when you’re documenting history. The first saves money. The second just reports it.

Most small business owners only think about taxes during filing season. By then, the deductions they could have taken, the retirement contributions they could have made, the entity restructuring that would have saved thousands are all locked in. Gone.

This guide covers the tax planning strategies that actually move the needle for small business owners in 2026. Not theory. Specific numbers, current law changes, and the exact moves that reduce what you owe.

What Is Small Business Tax Planning?

Tax planning is the year-round analysis of your financial situation to minimize taxes through legal strategies. It’s forward-looking. Proactive. And it happens in October, not April.

Here’s the distinction:

Tax preparation files your return correctly based on what happened. It’s backward-looking.
Tax planning changes what happens so you owe less. It’s forward-looking.

Preparation asks: “What do I owe?” Planning asks: “What can I do to owe less next year?”

The SDO CPA client who saves $47,000 annually doesn’t get there by filing returns faster. They get there because we’re running projections in October, making decisions in November, and executing strategies before December 31st.

If your CPA only contacts you during tax season, you’re missing the planning window entirely.

2026 Tax Law Changes That Affect Your Strategy

The One Big Beautiful Bill Act (OBBBA), signed in July 2025, made significant changes to small business taxation. Every strategy in this guide reflects these updates.

QBI Deduction Now Permanent

The Qualified Business Income deduction was temporary. Set to expire. Not anymore.

Under OBBBA, the 20% pass-through deduction is now permanent. That’s long-term planning stability you didn’t have before.

But the changes go further:

Phase-in range expanded: The income threshold where limitations begin moved to $150K-$544.6K for married filing jointly
New $400 minimum deduction: If you have $1,000+ of QBI, you’re guaranteed at least $400 in deduction regardless of income
2026 thresholds: $203,000 (single) and $406,000 (MFJ) before the wage limitation applies

If you’re an S-Corp or partnership owner, this permanence changes how you think about multi-year planning. You can now build strategies around the QBI deduction knowing it won’t disappear. Learn more in our QBI deduction guide.

Section 179 Increased to $2.56M

The Section 179 deduction lets you expense qualifying equipment purchases immediately rather than depreciating them over years. For 2026, the limit increased to $2.56 million.

That’s significant for businesses buying vehicles, equipment, or furniture. Instead of spreading the deduction across 5-7 years, you take it all in year one.

The phaseout threshold also increased, meaning more businesses qualify for the full deduction. See our complete Section 179 deduction guide for qualifying property lists.

Bonus Depreciation Restored to 100%

Bonus depreciation was phasing down. It hit 60% in 2024, was headed to 40% in 2025. OBBBA reversed that.

For 2026, 100% bonus depreciation is back. You can immediately expense the full cost of qualifying property placed in service during the year. New or used. The only requirement is it’s new to you.

This applies to:

Business equipment and machinery
Qualified improvement property
Computer systems and technology
Certain vehicles (with limits)

Combined with Section 179, you have powerful tools for timing large purchases.

SALT Cap Raised to $40,000

The State and Local Tax deduction cap increased from $10,000 to $40,000. For business owners in high-tax states, this changes the PTE (Pass-Through Entity) election calculus.

The PTE election lets S-Corps and partnerships pay state tax at the entity level, effectively bypassing the SALT cap. With a higher cap, some owners may find the PTE election less beneficial. Others will still benefit. The math depends on your state and income.

R&D Expenses Immediately Deductible (Domestic)

The painful 60-month amortization rule for R&D expenses is gone for domestic research. Under OBBBA, domestic R&D expenditures are once again immediately deductible in the year incurred.

If you’re developing software, products, or processes, this restores immediate tax benefit to innovation spending.

Entity Structure Strategies

Your business entity affects everything: self-employment tax, QBI deductions, retirement contributions, and audit risk. Getting the structure right is often the single largest tax planning opportunity.

S-Corp Election for Self-Employment Tax Savings

The S-Corp election is one of the most powerful strategies for self-employed business owners with consistent income above $75,000.

Here’s why it works:

As a sole proprietor or single-member LLC, you pay 15.3% self-employment tax on your net business income (up to the Social Security wage base of $176,100 for 2026, then 2.9% on income above that).

As an S-Corp, you split your income between reasonable salary (subject to FICA) and distributions (not subject to self-employment tax).

Example: $200,000 net business income

Sole proprietor: $200,000 × 15.3% = $30,600 in self-employment tax
S-Corp with $80,000 salary: $80,000 × 15.3% = $12,240 in FICA taxes

That’s $18,360 in annual savings from the entity election alone.

But S-Corp salary isn’t “set it at zero and take distributions.” The IRS requires reasonable compensation for the services you perform. Set it too low, and you risk reclassification of distributions as wages, plus penalties.

The optimization is finding the right balance: low enough to minimize FICA, high enough to support QBI deduction wage limitations and satisfy IRS requirements. Our S-Corp tax guide covers this in detail.

Partnership Special Allocations

Unlike S-Corps (which must allocate income pro-rata to ownership), partnerships can make special allocations of income, deductions, and credits.

This flexibility is powerful when partners have different tax situations:

Partner A is in a high tax bracket and needs deductions
Partner B is in a lower bracket and can absorb income
Depreciation can be allocated to Partner A
Capital gains can be allocated to Partner B

The allocations must have “substantial economic effect” under tax law, but the flexibility is significant. If you’re in a partnership and everyone gets exactly their ownership percentage of everything, you may be leaving optimization on the table.

For the full picture, see our complete guide to partnership taxation.

Multi-Entity Coordination

Business owners with multiple entities often overpay because nobody coordinates the pieces.

Common structures that benefit from coordination:

Holding company + operating company: Asset protection and income splitting
Real estate separated from operations: Rent payments create deductions for operating company, rental income for real estate entity
Multiple operating businesses: Aggregation for QBI, combined retirement plans

The key is treating your entities as a coordinated system, not isolated boxes. See our real estate entity selection guide for property-specific strategies.

Retirement Plan Strategies

Tax-advantaged retirement plans are the most powerful wealth-building tools available to small business owners. They provide immediate deductions, tax-deferred growth, and often higher contribution limits than employees enjoy.

Solo 401(k) Maximization

For self-employed individuals with no employees (other than a spouse), the Solo 401(k) offers the highest contribution limits:

2026 limits:

Employee deferral: $24,500 (plus $7,500 catch-up if 50+)
Employer contribution: 25% of W-2 wages (S-Corp) or ~20% of net self-employment income (sole prop)
Total maximum: $69,000 (plus catch-up)

That’s a potential $69,000+ deduction in a single year.

The Solo 401(k) also offers a Roth option, allowing after-tax contributions with tax-free growth. And you can take loans from the plan if needed.

Setup deadline: The plan must be established by December 31st of the year you want to contribute. Contributions can be made until your tax filing deadline, but the plan itself must exist by year-end.

Our Solo 401(k) guide covers setup, contribution calculations, and strategy.

SEP-IRA for Simplicity

If you want retirement savings without the complexity of a 401(k), the SEP-IRA is simpler to administer:

Contribution limit: 25% of net self-employment income, up to $69,000 for 2026
Setup deadline: Can be established and funded until your tax filing deadline (including extensions)
Administration: No annual reporting requirements

The trade-off: no employee deferral component and no Roth option. But for business owners who want “set it and forget it” retirement savings, the SEP-IRA works well.

See our SEP-IRA guide for contribution calculations.

Defined Benefit Plans for High Earners

If you’re over 45 with consistent high income ($300K+), defined benefit plans allow contributions of $265,000 or more annually.

These are complex to administer and require actuarial calculations. But for the right situation, they provide massive deductions that dwarf 401(k) limits.

Cash balance plans offer a middle ground between defined benefit complexity and 401(k) simplicity.

QBI Deduction Optimization

The Qualified Business Income deduction gives pass-through business owners a 20% deduction on qualified business income. It’s now permanent under OBBBA, making it a cornerstone of long-term planning.

The 20% Pass-Through Deduction Basics

If you operate as a sole proprietor, S-Corp, or partnership, you may deduct 20% of your qualified business income on your personal return.

2026 thresholds:

Full deduction (no limitations): Income below $203,000 (single) or $406,000 (MFJ)
Phase-out range: $203,000-$272,300 (single) or $406,000-$544,600 (MFJ)
Full limitations: Income above the phase-out

Below the threshold, you get the full 20% deduction. Above it, limitations based on W-2 wages and property may reduce the deduction.

Use our QBI calculator to estimate your deduction.

Wage Limitation Strategies

Once your income exceeds the threshold, your QBI deduction is limited to the greater of:

50% of W-2 wages paid by the business, OR
25% of W-2 wages + 2.5% of the unadjusted basis of qualified property

This creates a counterintuitive planning opportunity: sometimes increasing your S-Corp salary increases your total deduction.

Example: You’re above the threshold with $400,000 of QBI.

With $60,000 salary: QBI limited to $30,000 (50% of wages)
With $100,000 salary: QBI limited to $50,000 (50% of wages)

The extra $40,000 in salary costs ~$6,000 in additional FICA but unlocks $20,000 more in QBI deduction. At a 37% tax rate, that’s $7,400 in tax savings. Net benefit: ~$1,400.

The math isn’t always favorable. But if your CPA hasn’t run these numbers, you don’t know.

SSTB Considerations

Specified Service Trade or Businesses face stricter QBI rules. SSTBs include:

Health, law, accounting
Actuarial science, performing arts, athletics
Consulting, financial services, brokerage

If you’re in an SSTB and your income is above the phase-out threshold, you get zero QBI deduction on that income.

Strategies for SSTB owners:

Income management: If you’re near the threshold, retirement contributions and other deductions can keep you below
Business separation: Non-SSTB activities can be separated into different entities
Timing: Defer income in high years, accelerate in low years

Depreciation and Asset Strategies

Equipment and asset purchases offer significant tax planning opportunities. The combination of Section 179 and bonus depreciation makes timing decisions powerful.

Section 179 Immediate Expensing

Section 179 lets you deduct the full purchase price of qualifying equipment and software in the year purchased, rather than depreciating over time.

2026 limits:

Maximum deduction: $2.56 million
Phaseout threshold: Begins at $3.22 million in total purchases
Complete phaseout: At $5.78 million

Qualifying property includes:

Business equipment and machinery
Office furniture
Computers and software
Certain vehicles (see our Section 179 vehicles list)

Critical: The equipment must be placed in service by December 31st. Ordered or paid for isn’t enough. It must be delivered and operational.

100% Bonus Depreciation (Restored)

Bonus depreciation allows first-year expensing of qualifying property. Under OBBBA, it’s back to 100% for 2026.

The difference from Section 179:

No dollar limit on bonus depreciation
Applies to new and used property (new to you)
Can create a loss (Section 179 cannot)

For large equipment purchases, bonus depreciation often provides more flexibility than Section 179.

Cost Segregation for Real Estate

If you own commercial real estate, cost segregation studies can accelerate depreciation on building components.

Instead of depreciating everything over 39 years, cost segregation identifies components (lighting, flooring, parking lots) that can be depreciated over 5, 7, or 15 years.

Combined with bonus depreciation, this can generate significant first-year deductions on property purchases.

Income and Expense Timing Strategies

For cash-basis businesses, when you receive income and when you pay expenses matters for tax purposes. This creates planning opportunities.

Cash Basis Flexibility

Cash basis accounting means you recognize income when received and expenses when paid. This gives you control over timing:

Accelerate expenses before year-end:

Pay outstanding bills in December
Prepay certain expenses (with limits)
Purchase supplies before year-end

Defer income to next year (when beneficial):

Delay invoicing until late December (payment arrives in January)
Delay billing until project completion crosses year-end

This strategy works best when you expect to be in a different tax bracket next year, or when pushing income to next year keeps you below a threshold (like QBI phase-out).

Prepaid Expenses

The 12-month rule allows cash-basis taxpayers to deduct prepaid expenses if the benefit doesn’t extend beyond 12 months past payment.

You can prepay:

Business insurance premiums
Rent (up to 12 months)
Software subscriptions
Professional memberships

Prepaying expenses in December creates deductions this year while pushing the cash outflow you’d make anyway.

Accounts Receivable Management

If you’re billing for completed work, you control when the bill goes out.

Bill in late December: Payment probably arrives in January (next year’s income)
Bill early December: Payment may arrive this year

This requires careful judgment. Don’t compromise customer relationships for tax timing. But when you have flexibility, use it strategically.

State and Local Tax Strategies

State taxes add another layer to planning. The SALT cap and PTE elections create optimization opportunities.

PTE (Pass-Through Entity) Elections

Most states now offer Pass-Through Entity tax elections that let S-Corps and partnerships pay state income tax at the entity level.

Why does this matter? Entity-level state taxes are deductible on the federal return without limitation. Individual state taxes are limited by the SALT cap ($40,000 for 2026).

For owners in high-tax states who would exceed the SALT cap, the PTE election provides federal tax savings.

Example: California business owner with $500,000 of pass-through income

State tax at ~13% = $65,000
Without PTE: Only $40,000 deductible due to SALT cap
With PTE: Full $65,000 deductible at entity level

The PTE election has nuances. Credit calculations, estimated payment requirements, and multi-state complications all need analysis. But for the right situation, it saves significant federal tax.

Multi-State Allocation

If your business operates in multiple states, income allocation rules determine where you pay state tax.

Factors typically include:

Where revenue is generated (sales factor)
Where employees work (payroll factor)
Where property is located (property factor)

Remote work has complicated this. Employees working from different states can create nexus (tax presence) in states where you previously had none.

For multi-state operations, see our multi-state partnership filing guide.

Year-End Tax Planning Moves

The best tax planning happens in October through December. By January, most doors close.

October Priorities

October is when serious planning begins.

Run income projections: Based on 9 months actual plus estimates
Identify threshold proximity: Are you near QBI phase-out? SSTB cutoffs?
Entity election deadlines: S-Corp election for next year (plan the setup)
Retirement plan setup: Solo 401(k) must be established by December 31st
Schedule planning meeting: Book time with your CPA before calendars fill

November Priorities

November is decision time.

Equipment purchases: Finalize decisions on Section 179/bonus depreciation purchases
Charitable giving: Donation strategies, donor-advised funds, appreciated stock gifts
Capital gain/loss harvesting: Review investment portfolios for tax-loss harvesting
Accounts receivable timing: Decide on December billing strategy

December Priorities

December is execution.

Retirement contributions: Max out 401(k) employee deferrals by December 31st
Section 179 purchases: Equipment must be placed in service (not just ordered)
Final payroll decisions: S-Corp salary adjustments, bonus timing
Prepay expenses: Where the 12-month rule allows
Last-chance deductions: Anything missed earlier

For a complete month-by-month breakdown, see our year-end tax planning checklist.

Real-World Example: Putting Strategies Together

Theory is nice. Here’s how these strategies combine for an actual client scenario.

Client profile:

Marketing consultant, S-Corp
$350,000 net business income
Real estate side investments (rental property)
Married filing jointly

Before planning:

Salary: $75,000 (too low, QBI wage limitation problem)
Retirement: $6,000 IRA contribution only
No Section 179 usage
No coordination between business and rental
Total tax liability: $98,000

After planning:

Salary optimized: Increased to $110,000 to support QBI wage limitation
Solo 401(k) established: $24,500 employee + $27,500 employer = $52,000 total contribution
Section 179 vehicle: $60,000 qualifying SUV purchase
Rental cost segregation: First-year depreciation acceleration
QBI deduction maximized: Wage limitation no longer binding

Results:

Taxable income reduced by $112,000
Total tax liability: $61,000
Annual savings: $37,000

The planning engagement cost $3,500. The ROI was over 1,000%.

When Tax Planning Pays for Itself

Tax planning isn’t valuable for everyone. Simple situations don’t need complex strategies.

Complexity Triggers

Tax planning delivers highest value when you have:

$150,000+ business income: More income means more savings opportunity
Multiple entities: Coordination creates optimization
Real estate investments: Depreciation, entity structure, passive/active income
Multi-state operations: Allocation and nexus planning
Approaching thresholds: Near QBI phase-out, SSTB cutoffs, or bracket boundaries

ROI Calculation

A typical planning engagement costs $2,000-$5,000 depending on complexity.

Typical first-year savings for qualifying situations: $10,000-$50,000+.

That’s a 500%+ ROI in year one. And unlike a one-time event, these strategies compound annually.

Signs You Need Help

You might need professional tax planning if:

You’re surprised by your tax bill every year
Your CPA only contacts you in March
You’ve never done a projection before December
You don’t know if your entity structure is optimal
You’re not maximizing retirement contributions
You operate in multiple states without clear allocation

If any of these apply, a planning conversation could identify significant savings.

Frequently Asked Questions

What is the best tax strategy for small business owners in 2026?

The most effective combination for most small business owners is: proper entity structure (often S-Corp election for $75K+ income), retirement plan maximization (Solo 401(k) for up to $69,000 in deductions), and QBI deduction optimization. The specific mix depends on your income level, entity type, and personal situation.

How much can small business owners save through tax planning?

Typical savings range from $10,000 to $50,000 annually for businesses with $150K+ net income. The savings come through proper entity structure, retirement optimization, depreciation timing, and deduction maximization. Complexity drives opportunity.

What changed for small business taxes in 2026?

OBBBA made several major changes: QBI deduction became permanent (was expiring), Section 179 increased to $2.56M, 100% bonus depreciation was restored, SALT cap raised to $40,000, and domestic R&D expenses are immediately deductible again.

Is it too late to do tax planning for this year?

The best planning happens in October-November. December still offers opportunities for retirement contributions, equipment purchases, and timing decisions. By January, most strategies are locked in. But even late planning is better than none.

Do I need an S-Corp for tax planning?

Not necessarily. S-Corp election is one of the most powerful strategies for self-employed owners with consistent income above $75,000, but it’s not right for everyone. The decision depends on income stability, state taxes, reasonable salary requirements, and administrative complexity tolerance.

What’s the difference between tax planning and tax preparation?

Tax preparation files your return based on what already happened. Tax planning changes what happens so you owe less. Preparation is reactive and backward-looking. Planning is proactive and forward-looking. Both are necessary, but planning is where the real savings occur.

Take the Next Step

You’ve seen the strategies. Now the question is whether you’re capturing them.

Most business owners leave money on the table because nobody runs the numbers in October. They file returns in April and hope for the best. That’s not strategy. That’s guessing.

If your income has grown, your entity structure may need updating. If you’re not maximizing retirement contributions, you’re missing deductions. If you’ve never done a year-end projection, you don’t know what you’re leaving behind.

The SDO CPA approach is simple: we analyze what you’re doing, model what you could be doing, and quantify the difference. No obligation. No pressure. Just math.

Upload your last return. We’ll tell you what’s possible.

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