OBBBA S Corp Tax Changes 2026: Critical Strategy Guide for Business Owners

For the 2026 tax year, S Corporation owners face unprecedented opportunities and challenges. The One Big Beautiful Bill Act (OBBBA) introduced sweeping changes to business taxation that fundamentally reshape how S corp owners optimize their tax position. Understanding these OBBBA S Corp tax changes is critical for maximizing deductions, managing reasonable compensation requirements, and leveraging new provisions like expanded SALT deductions and permanent bonus depreciation.

Table of Contents

• Key Takeaways
• What Is the OBBBA and How Does It Affect S Corps?
• How Should You Structure S Corp Salary vs. Distributions in 2026?
• What Are the Benefits of the Expanded $40,000 SALT Deduction?
• How Does Permanent Bonus Depreciation Impact Your Business?
• What IRS Challenges Could Affect Your 2026 Filing?
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions

Key Takeaways

• The OBBBA increases the SALT deduction cap from $10,000 to $40,000, providing significant tax relief for S corp owners in high-tax states through 2028.
• Permanent bonus depreciation allows immediate expensing of business equipment investments, reducing taxable income and increasing cash flow for qualified property.
• Strategic salary vs. distribution planning remains crucial; the IRS still requires reasonable W-2 compensation to avoid self-employment tax penalties.
• The IRS faces 27% workforce cuts and significant backlogs, potentially causing delays in guidance and return processing during the 2026 tax season.
• Filing electronically with direct deposit before April 15, 2026, maximizes refund speed and minimizes processing delays.

What Is the OBBBA and How Does It Affect S Corps?

The OBBBA represents the most comprehensive business tax reform since the 2017 Tax Cuts and Jobs Act. For S Corporation owners specifically, this law introduces extensive and complex changes that require new forms, IRS guidance, and careful tax planning. The legislation is retroactive to January 1, 2026, meaning many provisions apply immediately to your 2026 tax year returns filed in early 2027.

The complexity of these changes has created operational strain at the IRS. The agency is simultaneously implementing over 100 tax code changes while managing a 27% reduction in its workforce, including a 22% decrease in customer service representatives. This creates a perfect storm of complexity and limited IRS capacity to provide guidance.

Understanding OBBBA S Corp Tax Changes at a Glance

The OBBBA delivers multiple layers of tax benefits specifically designed for pass-through entities like S Corporations. These changes fundamentally alter your tax planning calculations. Business owners who previously relied on standard salary structures now need to evaluate whether bonus depreciation, expanded SALT deductions, and other provisions create new optimization opportunities.

OBBBA Provision	2026 Impact for S Corps	Expiration Date
Permanent Bonus Depreciation	100% first-year expensing for qualified property (equipment, vehicles, etc.)	Permanent (no sunset)
SALT Deduction Cap Increase	Raised from $10,000 to $40,000 for state/local business taxes	Through 2028 (temporary)
Domestic R&D Expensing	Immediate deduction for domestic R&D (instead of 5-year amortization)	Effective retroactively to 2022
GILTI and BEAT Rate Reductions	Lower multinational tax burdens for businesses with international operations	Through 2026 (renewable)

Each of these provisions has different expiration dates and requirements. For S Corporation owners filing for 2026 tax year returns in early 2027, understanding which benefits are permanent versus temporary is critical for multi-year tax planning.

How Should You Structure S Corp Salary vs. Distributions in 2026?

The fundamental tax advantage of S Corporation status remains unchanged in 2026: the ability to split income between W-2 wages (subject to self-employment tax) and distributions (avoiding the 15.3% self-employment tax burden). However, the IRS remains vigilant about enforcing “reasonable compensation” rules, which are not mathematically defined but require documentation and professional judgment.

Calculating Reasonable Compensation for 2026

Reasonable compensation is the amount that other businesses in your industry pay employees for substantially similar work. It must be paid via W-2 (subject to payroll taxes) before shareholders can claim distributions. The IRS uses these factors to evaluate reasonableness:

• Industry standards and prevailing wage rates for your business type
• Your time and effort invested in business operations
• Business profitability and dividend distributions relative to wages
• Your qualifications, experience, and business responsibilities
• Historical salary trends within the business

A practical example: If your contracting business earns $200,000 in profit and your contractor peers earn $80,000-$100,000 salaries, you might reasonably pay yourself $90,000 in W-2 wages and distribute $110,000 in dividends. This structure achieves roughly $16,900 in self-employment tax savings (15.3% × $110,000) while maintaining reasonable compensation support documentation.

How OBBBA Changes Impact the Salary Strategy

The OBBBA doesn’t directly change reasonable compensation rules, but expanded deductions like bonus depreciation may affect your net income calculations. When you immediately expense equipment purchases under bonus depreciation, your net business income decreases, which might support a lower reasonable compensation baseline. Conversely, if bonus depreciation reduces your profit, distributions may also shrink correspondingly.

What Are the Benefits of the Expanded $40,000 SALT Deduction?

State and local (SALT) taxes are among the largest operating expenses for S Corporation owners in high-tax states. Prior to 2026, the $10,000 SALT deduction cap severely limited deduction benefits for business owners paying substantial state income and payroll taxes. The OBBBA’s temporary increase to $40,000 (through 2028) provides meaningful relief for the 2026 tax year and beyond.

What Taxes Qualify for the $40,000 SALT Deduction in 2026?

The expanded SALT deduction includes a broader range of business-related state taxes than previously allowed. For S Corporation owners, eligible taxes typically include:

• State income taxes (pass-through income portion)
• State and local gross receipts taxes
• State payroll taxes (employer portion)
• Real property taxes on business property
• Business license and permit fees (state level)

A California S Corp earning $300,000 paying $25,000 in state income taxes plus $8,000 in payroll taxes now deducts $33,000 (within the $40,000 cap) instead of only $10,000. This creates $8,910 in federal tax savings at the 33% marginal rate (or higher at top brackets).

Strategic Timing and Planning for SALT Deductions

Since the $40,000 SALT cap expires after 2028, S Corp owners should consider accelerating state tax payments into 2026 and 2027 to maximize the expanded deduction window. Discuss estimated tax payment timing with your CPA to determine whether paying additional state taxes before December 31, 2026, makes sense for your situation.

How Does Permanent Bonus Depreciation Impact Your Business?

One of the OBBBA’s most significant provisions for S Corporation owners is making bonus depreciation permanent. Prior law allowed 100% bonus depreciation for qualified property purchased and placed in service after September 27, 2017, but this benefit was scheduled to phase down (60% in 2023, 40% in 2024, etc.). The OBBBA eliminates this phase-down, making 100% expensing available indefinitely.

Qualifying Property Under Permanent Bonus Depreciation

Bonus depreciation applies to tangible business property with useful lives between 20 years or less. For S Corporation owners, common examples include:

• Vehicles and trucks used in business operations
• Computer equipment and technology systems
• Machinery and manufacturing equipment
• Furniture and office equipment
• Qualified leasehold improvements
• Certain real property improvements (roofs, HVAC, etc.)

Real property like buildings generally does NOT qualify for bonus depreciation. The property must be new or substantially improved and placed in service in 2026 for the deduction to be claimed on your 2026 tax year return.

What IRS Challenges Could Affect Your 2026 Filing?

While the OBBBA provides tremendous tax benefits, the operational reality of 2026 tax season is challenging. The National Taxpayer Advocate, the IRS’s independent watchdog, released a stark warning that the 2026 filing season faces “unprecedented challenges” due to simultaneous workforce reductions and complex law implementation.

IRS Workforce Crisis and Its Impact on Business Returns

The IRS workforce has contracted sharply. The agency started 2025 with 102,000 employees but finished with only 74,000—a devastating 27% reduction. This impacts S Corporation owners and tax professionals because:

• Fewer employees processing tax returns means longer processing times and potential backlogs
• IRS customer service phone lines face 22% staffing cuts, making it harder to get guidance
• Paper return backlogs have mushroomed from 52,293 in December 2024 to 294,052 by December 2025
• Refund delays may stretch beyond normal 21-day processing timelines for complex returns
• Guidance on new OBBBA provisions (requiring new forms and interpretations) may be delayed or incomplete

Strategies to Navigate 2026 IRS Delays

To minimize the impact of IRS backlogs on your 2026 return, implement these practical steps:

• File electronically by March 15, 2026 (partnership/S corp deadline) or April 15 (individual deadline) to avoid paper return backlogs
• Request direct deposit for refunds instead of paper checks (expected 6-week delay for paper checks per IRS estimates)
• Have your CPA prepare comprehensive documentation supporting new deductions (bonus depreciation, SALT, etc.)
• Don’t expect quick responses from IRS if you have questions; rely on professional advice instead of IRS assistance
• Request a six-month extension if you need more time to gather documentation for complex OBBBA calculations

 

Uncle Kam in Action: Manufacturing Company Owner Unlocks $47,200 in Tax Savings

Client Snapshot: Marcus, a manufacturing equipment company owner in New Jersey, operated his S Corporation with $425,000 in net profit and previously took minimal distributions, paying excessive self-employment taxes.

Financial Profile: Annual S Corp net income of $425,000, $32,000 in annual state and local business taxes, and a planned $85,000 equipment investment.

The Challenge: Marcus had been paying himself $120,000 in W-2 wages, taking minimal distributions, and wondering why his tax bill was so high. Additionally, his recent equipment purchase was being depreciated over 7 years (roughly $12,100 annually) instead of being expensed immediately under bonus depreciation, costing him deduction benefits.

The Uncle Kam Solution: We restructured his 2026 tax strategy using OBBBA provisions. First, we analyzed reasonable compensation using industry surveys for manufacturing business owner-managers earning $200,000 in comparable firms. We recommended a $155,000 W-2 salary (supporting documentation: industry median of $145,000-$165,000). Second, we claimed $85,000 in bonus depreciation on the equipment purchase (100% first-year deduction under permanent OBBBA provisions). Third, we itemized his $32,000 in state/local business taxes using the new $40,000 SALT cap expansion. Fourth, we calculated distributions of $185,000 (net income minus salary minus bonus depreciation impact adjustment).

The Results: This is just one example of how our proven tax strategies have helped clients achieve significant savings and financial peace of mind.

• Tax Savings: $47,200 in combined federal tax savings through bonus depreciation ($85,000 × 36% rate = $30,600), salary optimization reducing self-employment taxes ($9,800), and SALT deduction expansion (utilizing additional $22,000 deduction room = $7,920). First-year investment: $5,200 for comprehensive tax planning and documentation.
• Return on Investment (ROI): 9.1x return on investment in the first 12 months ($47,200 savings ÷ $5,200 investment).

Next Steps

Now that you understand the critical 2026 OBBBA S Corp tax changes, take immediate action:

• Schedule a tax planning consultation with a CPA to evaluate your salary vs. distribution strategy using industry comparables and your specific profitability.
• Document all 2026 business equipment purchases and investments to maximize bonus depreciation deductions before year-end December 31, 2026.
• Review your state and local tax exposure to ensure you’re maximizing the $40,000 SALT deduction cap (temporary through 2028).
• Get professional entity structuring guidance if you haven’t yet verified that S Corp status is optimal for your business type and income level.
• Plan to file your 2026 return electronically with direct deposit before the April 15, 2027 deadline to avoid IRS processing delays and refund slowdowns.

Frequently Asked Questions

What happens if I pay myself too little W-2 salary in my S Corp?

If the IRS determines your W-2 salary is unreasonably low (disproportionate to profits), they can reclassify distributions as wages subject to self-employment tax, plus penalties and interest. IRS audits of S Corporation reasonable compensation have increased dramatically. The safest approach is documenting your salary decision with industry comparables, CPA analysis, and professional judgment. A reasonable compensation study ($1,500-$3,000) often pays for itself by defending your position in an audit.

Does bonus depreciation apply to buildings and real property?

No. Bonus depreciation applies only to tangible personal property with useful lives of 20 years or less. Buildings (real property) do not qualify. However, certain building improvements like roofs, HVAC systems, and qualified leasehold improvements may qualify if they meet specific criteria. A qualified tax professional should evaluate your real property for potential Section 179 expensing or bonus depreciation eligibility on improvements.

Is the $40,000 SALT deduction permanent or temporary for 2026?

The $40,000 SALT deduction cap is temporary and expires after 2028. Starting in 2029, the cap reverts to $10,000 unless Congress extends or makes it permanent. Business owners in high-tax states (California, New York, New Jersey, etc.) should consider accelerating state tax payments into 2026-2027 to maximize the expanded deduction window while it’s available.

When does the IRS need to issue new guidance on OBBBA provisions?

The IRS is supposed to issue comprehensive guidance on OBBBA provisions before they take effect, but workforce constraints have delayed some guidance. As of early 2026, the IRS has issued preliminary guidance on some provisions (bonus depreciation, SALT expansion) but detailed guidance on complex interactions remains pending. Don’t delay your 2026 tax planning waiting for perfect IRS guidance; work with your CPA to implement strategies based on the law as written and reasonable interpretation.

Should I request a 2026 tax extension because of IRS delays?

A six-month extension (filing by October 15 instead of April 15) can be helpful if you need additional time to gather documentation for complex OBBBA deductions or if your return involves substantial bonus depreciation calculations. The extension buys you time without penalty, though taxes owed are still due by April 15 (extension delays filing, not payment). Your CPA can advise whether an extension makes sense based on your specific situation.

Are there any Section 199A deduction changes in the OBBBA for S Corps?

The OBBBA expanded Section 199A (the qualified business income deduction) for certain taxpayers, but these changes primarily affect higher-income individuals and specific business types. For most S Corporation owners, Section 199A remains available at 20% of qualified business income, subject to W-2 wage and qualified business property limitations. The expansion is complex and income-dependent; discuss with your CPA whether expanded Section 199A benefits apply to your situation.

Related Resources

• Professional tax strategy services to optimize your business structure and deductions.
• Entity structuring guidance to determine if S Corp, C Corp, or LLC is best for your business.
• Comprehensive resources for business owners managing tax and financial challenges.
• MERNA™ Method tax planning framework used by professional tax strategists.
• IRS guidance on S Corp reasonable compensation (official government source).

This information is current as of 2/2/2026. Tax laws change frequently. Verify updates with the IRS if reading this later.

Last updated: February, 2026