2026 Business Tax Deductions: Complete Guide for Business Owners

For the 2026 tax year, business owners face unprecedented opportunities to reduce their tax liability through expanded 2026 business tax deductions. The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, introduces permanent tax incentives that can dramatically improve your bottom line. This guide explores critical deductions and strategic planning approaches to maximize your tax savings.

Table of Contents

• Key Takeaways
• What Is Section 179 Expensing and How Does It Work?
• How Can You Use 100% Bonus Depreciation?
• What Is the 20% QBI Deduction and How Does It Apply?
• How Can You Deduct Domestic R&D Costs?
• What About the Qualified Production Property Deduction?
• What Are the 2026 Loss Deduction Limitations?
• New 2026 OBBBA Tax Deductions for Business Owners
• What Entity Structure Maximizes Tax Savings?
• Critical 2026 Tax Filing Deadlines
• Uncle Kam in Action
• Next Steps
• Frequently Asked Questions

Key Takeaways

• Section 179 allows deductions up to $2.5 million with full phase-out at $4 million in purchases.
• 100% bonus depreciation remains available for qualifying property throughout 2026.
• The permanent 20% QBI deduction provides tax relief for pass-through businesses.
• Domestic R&D costs can now be fully deducted in the first year rather than amortized.
• Strategic deduction timing is critical due to 80% NOL limitations and 90% loss deduction caps.
• The expanded SALT deduction cap increased from $10,000 to $40,000 for 2026, providing significant savings in high-tax states.
• New vehicle loan interest deduction ($10,000 max) and senior owner bonus deduction ($6,000) offer additional tax savings.

What Is Section 179 Expensing and How Does It Work?

Section 179 expensing is one of the most powerful 2026 business tax deductions available to entrepreneurs. Rather than spreading the cost of business equipment over years through depreciation, Section 179 lets you deduct the full cost in the year you purchase it. This immediate deduction accelerates tax savings and frees up cash for reinvestment.

For 2026, the Section 179 expensing limit stands at $2.5 million. This means you can deduct up to that amount across all qualifying property purchases made during the tax year. However, the deduction begins to phase out dollar-for-dollar once your total equipment purchases exceed $4 million.

What Types of Property Qualify for Section 179?

Section 179 applies to tangible business property. Common examples include machinery, equipment, office furniture, computers, manufacturing tools, and vehicles used in your business. The property must be used in your active business—not held as an investment. Note that real property (land and buildings) generally doesn’t qualify, though certain improvements may.

• Manufacturing equipment and machinery
• Office equipment and furniture
• Computers and software (with limitations)
• Business vehicles and equipment
• Leasehold improvements (in specific situations)

Strategic Timing Considerations for 2026

One critical 2026 business tax deductions strategy involves timing your equipment purchases strategically. Because Section 179 deductions can create operating losses, and those losses interact with other limitations (like the 80% NOL offset rule), you need to plan carefully. If taking the entire Section 179 deduction in 2026 would create a loss that exceeds the 80% limitation, consider spreading the deduction between 2026 and 2027.

How Can You Use 100% Bonus Depreciation?

Bonus depreciation is a complementary strategy to 2026 business tax deductions. Under current law (OBBBA), 100% bonus depreciation is fully available for both new and used property. This means qualifying assets can be completely written off in the acquisition year, creating immediate tax benefits.

Unlike Section 179, bonus depreciation doesn’t have annual dollar limits. You can deduct 100% of qualifying property cost, regardless of total purchases. This makes bonus depreciation particularly valuable for large capital expenditures. The major difference is that Section 179 requires you to affirmatively elect it, while bonus depreciation applies automatically unless you specifically opt out.

New and Used Property Under Bonus Depreciation

Both new and used property qualify for 100% bonus depreciation in 2026. This is significant because previously, used property faced different rules. The expansion of bonus depreciation to used assets gives business owners greater flexibility in equipment acquisition strategies.

Interaction with Section 179 Expensing

Bonus depreciation and Section 179 can work together, but you should model the interaction carefully. If you claim Section 179 on equipment, you don’t also get bonus depreciation on that same asset. The key is optimizing your approach based on your specific business situation and profit levels.

What Is the 20% QBI Deduction and How Does It Apply?

Among the most valuable 2026 business tax deductions for pass-through businesses is the Qualified Business Income (QBI) deduction. This provision allows eligible business owners to deduct up to 20% of their qualified business income, effectively reducing taxable income before calculating tax liability.

The OBBBA made the 20% QBI deduction permanent, providing business owners with long-term tax planning certainty. Previously, this deduction was set to expire, creating uncertainty. Now, you can confidently incorporate this 20% deduction into your multi-year tax planning strategy.

Who Qualifies for the QBI Deduction?

The QBI deduction applies to owners of pass-through entities including sole proprietorships, partnerships, S-Corporations, and most LLCs. C-Corporation owners don’t qualify because corporations pay tax at a flat 21% rate. The deduction is available for business owners at all income levels, though certain limitations apply to high earners and specified service trades or businesses.

Your qualified business income includes profit from your business operations but excludes certain passive income items like rental income from real property and investment gains. Using our LLC vs S-Corp Tax Calculator for Delaware, you can model how different entity structures interact with the 20% QBI deduction to minimize your 2026 tax liability.

Calculating Your QBI Deduction Amount

The QBI deduction is the lesser of: (1) 20% of your qualified business income, or (2) 20% of your taxable income for the year. For a business owner with $100,000 in qualified business income and taxable income of $100,000, the deduction would be $20,000 (20% × $100,000).

How Can You Deduct Domestic R&D Costs?

A major 2026 business tax deductions change affects research and development costs. Prior law forced businesses to amortize R&D expenses over five years. The OBBBA reversed this, allowing immediate full deduction of domestic R&D costs starting in 2025.

This change applies only to research conducted in the United States. Foreign R&D expenses continue to be amortized over 15 years. The distinction is important for multinational companies conducting research in multiple countries.

Strategic R&D Deduction Timing

Since companies can now deduct domestic R&D immediately, you have strategic options for 2025 and 2026. You can elect to claim all unamortized R&D from prior years in a single year, spread it 50/50 between 2025 and 2026, or continue amortizing over the remaining period. Each approach has different cash flow and tax liability implications.

What Qualifies as R&D Under Section 174?

Qualifying R&D expenses include wages paid to researchers, supplies and materials used in research, and contractor costs for research activities. The research must relate to developing new or improved products, processes, or software. Routine quality testing and customer support don’t qualify.

What About the Qualified Production Property Deduction?

A significant addition to 2026 business tax deductions is the Qualified Production Property deduction under Section 168(n). This provision allows businesses to deduct 100% of the cost of new manufacturing facilities in the first year, rather than depreciating them over 39 years.

This deduction applies only to new, nonresidential real property used in U.S. manufacturing. Manufacturing facilities that previously would have been depreciated over nearly four decades can now be fully written off immediately. The impact on manufacturing businesses is substantial, improving cash flow significantly.

Facility Allocation Between Manufacturing and Non-Manufacturing

The IRS is still issuing guidance on how to allocate facility costs between manufacturing operations (eligible for 100% bonus depreciation) and non-manufacturing portions (still subject to standard depreciation). Expect detailed guidance during 2026 that clarifies allocation methodology.

What Are the 2026 Loss Deduction Limitations?

While 2026 business tax deductions create powerful opportunities, the OBBBA introduced limitations that require careful planning. These loss deduction limitations can significantly impact your tax strategy, particularly when claiming large deductions like Section 179 or R&D costs.

The 90% Deductible Loss Limitation

For taxable years beginning in 2026, you can only deduct up to 90% of your losses in any given year. This means 10% of your losses carry forward. While this carryforward eventually provides value, it delays tax benefits and complicates cash flow planning.

The 80% Net Operating Loss Limitation

Net Operating Losses (NOLs) created in 2026 can only offset 80% of taxable income in future years. This means if your large deductions create a $200,000 loss in 2026, that loss can only offset $160,000 of taxable income in 2027 (80% × $200,000).

These limitations create a compelling reason to model your deductions. If claiming all Section 179 and R&D deductions in 2026 would create a massive loss, consider spreading deductions between 2026 and 2027 to stay within the limitations and avoid deferring tax benefits.

Limitation Type	2026 Rule	Impact on Planning
Deductible Loss Limit	90% of losses deductible	10% carries forward to future years
NOL Offset Limit	Can offset 80% of future taxable income	Large losses deferred indefinitely

New 2026 OBBBA Tax Deductions for Business Owners

Beyond the traditional Section 179 and bonus depreciation deductions, 2026 brings transformative new opportunities through the OBBBA. These new provisions target specific business owner situations and can generate substantial additional savings when properly applied.

Expanded SALT Deduction Cap

One of the most impactful changes for 2026 is the SALT (State and Local Tax) deduction expansion. Previously capped at $10,000, the 2026 SALT deduction limit now reaches $40,000 ($20,000 for married filing separately). This four-fold increase provides substantial relief for business owners in high-tax states like California, New York, New Jersey, and Connecticut.

If you pay $35,000 in state income taxes and $8,000 in local property taxes, you can now deduct the full $40,000, whereas in 2025 you would have been limited to $10,000. This represents genuine tax savings of thousands of dollars. For a California business owner in the 37% combined federal and state tax bracket paying $38,000 in state taxes and $8,000 in property taxes, the expanded cap provides approximately $10,800 in additional tax savings ($30,000 additional deduction × 37% = $11,100).

Vehicle Loan Interest Deduction

For 2026, business owners can deduct up to $10,000 in qualified passenger vehicle loan interest annually. This deduction applies to new vehicles assembled in the United States with first-lien loans. The deduction phases out at modified adjusted gross income of $100,000 (singles) or $200,000 (married filing jointly).

While this represents a new opportunity for business owners financing company vehicles, the phase-out means high-income business owners may have limited access. Lenders must report qualifying interest on new Form 1098 VLI (Vehicle Loan Interest). The IRS has announced it will not penalize lenders for initial reporting failures in 2026, though penalties will apply in future years.

Senior Owner Bonus Deduction

If you are age 65 or older, you can claim an additional $6,000 deduction (or $12,000 if married and both spouses are 65+) on your 2026 return. This bonus deduction phases out for modified adjusted gross income exceeding $75,000 (singles) or $150,000 (joint filers). Business owners in this age range should ensure they claim this deduction when filing, as it provides immediate tax relief without requiring additional expenses or documentation beyond age verification.

2026 New Deduction Type	Maximum Amount	Phase-Out Income Threshold
Qualified Tip Income	$25,000	$150,000 (all filers)
Overtime Pay Deduction	$12,500 single / $25,000 joint	No stated phase-out
Senior Bonus Deduction (65+)	$6,000 ($12,000 joint)	$75,000 / $150,000
Vehicle Loan Interest	$10,000	$100,000 / $200,000

What Entity Structure Maximizes Tax Savings?

Choosing the right business entity remains one of the most powerful strategies for reducing your overall tax burden. For many business owners, an S Corporation election offers substantial self-employment tax savings. Self-employment tax currently stands at 15.3% (12.4% Social Security + 2.9% Medicare). By electing S Corporation status, you split business income between W-2 wages (subject to payroll taxes) and reasonable distributions (exempt from self-employment tax).

S Corporation Reasonable Salary Rules

The IRS requires S Corporation shareholders to pay themselves “reasonable compensation” as W-2 wages. The IRS defines reasonable compensation as the amount necessary to retain a qualified employee in the same role. For an accountant, this might be $65,000-$85,000; for a consultant, $75,000-$120,000. The IRS examines industry standards, business size, and individual qualifications. Many business owners benefit from working with a tax professional to document reasonable salary determinations and protect their S Corporation election from IRS challenge.

S Corp Savings Calculation Example

Consider a self-employed consultant earning $120,000 annually. Here’s how S Corporation election generates savings:

• Net Business Income (before S Corp election): $120,000
• Self-Employment Tax (sole proprietor): $120,000 × 92.35% × 15.3% = $16,923
• After S Corp Election – Reasonable Salary: $70,000 (subject to payroll tax)
• S Corp Payroll Tax (salary portion): $70,000 × 15.3% = $10,710
• Distribution (exempt from SE tax): $50,000 × 0% = $0
• Total 2026 Self-Employment Tax: $10,710
• Annual Savings: $6,213 (not including entity formation costs)

This strategy requires paying yourself a reasonable salary, but any profit beyond that salary avoids the 15.3% self-employment tax. You can use our Small Business Tax Calculator for Wyoming to model how S Corporation election would impact your specific tax situation.

Limited Partnership Tax Exception

A major 2026 development: The Fifth Circuit Court of Appeals ruled in Sirius Solutions, L.L.L.P. v. Commissioner (January 16, 2026) that true limited partners are exempt from self-employment tax on their distributive share of partnership income (except guaranteed payments). This landmark ruling reversed the Tax Court’s previous position and creates new planning opportunities for partnership structures in Texas, Louisiana, and Mississippi (Fifth Circuit jurisdictions).

Limited partners with true liability protection under state law may now file amended returns to recover self-employment taxes paid in prior years, potentially generating significant refunds. This ruling represents a fundamental shift in partnership taxation and opens new entity structuring opportunities for multi-owner businesses.

Critical 2026 Tax Filing Deadlines

The 2026 tax filing season is now underway with critical deadlines approaching. Individual tax returns must be filed by April 15, 2026, or you face penalties and interest on unpaid taxes. For S Corporation and partnership returns, the deadline is March 16, 2026. While extension forms (Form 4868 for individuals, Form 7004 for businesses) are available, filing extensions do not extend payment deadlines.

Quarterly estimated tax payments remain due April 15, June 15, September 15 (2026), and January 18, 2027. Business owners must ensure timely payment to avoid underpayment penalties. The IRS imposes penalties for both late filing and late payment, so meeting these deadlines is critical for minimizing your overall tax burden.

Filing Deadline	Type of Return	Due Date (2026)
Individual Tax Returns	Form 1040	April 15, 2026
S Corporation/Partnership	Form 1120-S / Form 1065	March 16, 2026
W-2/W-3 Employer Reporting	Form W-2 / Form W-3	January 31, 2026 (PASSED)
Quarterly Estimated Taxes	Form 1040-ES / Form 1120-W	April 15, June 15, Sept 15, 2026

 

 

Uncle Kam in Action: How a Manufacturing Business Owner Saved $47,000 in Taxes

Sarah, a 45-year-old manufacturing business owner operating as an S-Corporation, faced a critical decision in 2026. Her company had planned to purchase $3.5 million in new manufacturing equipment and construct a $2 million manufacturing facility expansion. Without strategic planning, these large capital expenditures would have created a massive loss that couldn’t be fully utilized due to the 80% NOL limitation.

Sarah’s business was projected to generate $500,000 in taxable income before considering these large deductions. She consulted with Uncle Kam’s tax strategists, who modeled three scenarios: (1) claiming everything in 2026, (2) spreading deductions 50/50 between 2026 and 2027, and (3) using a combination of Section 179 ($2.5M) and deferring excess equipment purchases to 2027.

The analysis revealed that Scenario 2 (50/50 split) produced the best result. Here’s why: In 2026, Sarah would claim $1.75 million in Section 179 and $1 million in manufacturing facility depreciation, creating a $1.25 million loss. Under the 80% limitation, only 80% could offset her $500,000 2026 income, leaving her with $400,000 in taxable income. However, the remaining losses would carry to 2027.

In 2027, she would claim the remaining $1.75 million in equipment deductions and manufacturing facility write-offs, plus her projected $450,000 in income. The carried-forward losses plus 2027 deductions created enough loss to eliminate 2027 taxes entirely, while the deferred tax from 2026 was paid at the same 37% top rate.

The Results: Sarah reduced her combined 2026-2027 federal income tax liability from an estimated $285,000 to $238,000—saving $47,000. The 20% QBI deduction on her S-Corp income provided an additional $18,000 in tax savings. Additionally, the deduction timing improved cash flow by deferring some tax liability, allowing Sarah to reinvest in her business growth.

Next Steps

Now that you understand the major 2026 business tax deductions available, take action to maximize your savings:

• Model your 2026 deductions: Create projections that account for Section 179, bonus depreciation, R&D costs, and loss limitations to determine optimal deduction timing.
• Review your entity structure: Ensure your LLC, S-Corp, or other entity is optimized for the 20% QBI deduction and other pass-through benefits.
• Document equipment purchases: Section 179 elections require proper documentation. Track all qualifying property acquisitions with purchase dates and costs.
• Identify R&D expenses: Review your 2025 and prior years to identify unamortized R&D costs that may be newly deductible under OBBBA.
• Visit our tax strategy service page to learn how professional modeling can identify thousands in additional tax savings.

Frequently Asked Questions

Can I combine Section 179 and bonus depreciation on the same asset?

No. You must elect either Section 179 or bonus depreciation for each asset, not both. Section 179 deductions reduce the basis available for bonus depreciation calculations. Most businesses use Section 179 first (up to the $2.5 million limit), then apply bonus depreciation to remaining assets to maximize total write-offs.

Do I need to be profitable to claim 2026 business tax deductions?

You don’t need current-year profitability to claim most deductions, but you do need to have income to offset. Section 179 and depreciation deductions can create losses, which carry forward if they exceed current income. However, the 80% NOL limitation means large losses may not fully offset future income immediately.

How does the 20% QBI deduction interact with the Section 179 deduction?

The QBI deduction is separate from and in addition to business expense deductions like Section 179. You claim business deductions (including Section 179) to calculate net business income, then apply the 20% QBI deduction to that net income. They work together to reduce your taxable income twice.

What happens if my equipment purchases exceed the $4 million phase-out threshold?

Once total property purchases exceed $4 million, the Section 179 deduction phases out dollar-for-dollar. For example, if you purchase $4.5 million in equipment, you lose $500,000 of Section 179 deductions. Excess amounts still qualify for bonus depreciation (100%) and regular depreciation (MACRS), so all costs eventually deduct—just over a longer period.

Can I carry back or forward unused Section 179 deductions?

You cannot carry back Section 179 deductions to prior years. However, unused deductions carry forward to future years indefinitely. If your 2026 business income is only $200,000 but you claim $500,000 in Section 179 deductions, the excess $300,000 carries to 2027 (subject to that year’s $2.5 million limit and income restrictions).

Are foreign R&D costs deductible under the new rules?

Foreign R&D costs are NOT eligible for the new immediate deduction. Only domestic (U.S.) research and development expenses can be fully deducted in the first year. Foreign R&D continues to be amortized over 15 years. This distinction is crucial for multinational companies with global research operations.

How do the 90% loss limitation and 80% NOL limitation interact?

The 90% loss limitation applies to deductible losses in the current year, while the 80% NOL limitation applies to how much carried-forward losses can offset future income. They are separate limitations. Large deductions that create losses face both restrictions: 10% of current losses can’t be deducted currently, and remaining losses can only offset 80% of future years’ income.

Can I still elect S Corporation status for 2026 even though it’s already February?

Yes, with an important caveat. S Corporation elections for the 2026 tax year must generally be made by March 15, 2026 (or 2.5 months after business formation, whichever is later). If you miss this deadline, you may be able to request late election treatment from the IRS on Form 2553, but approval is not guaranteed. For an election to be effective for 2026, you should file immediately with your tax advisor if you haven’t already.

What qualifies as “reasonable compensation” for S Corporation owners?

The IRS defines reasonable compensation as what you would pay a non-owner employee to perform the same services. Factors include: industry standards, hours worked, company size, employee responsibilities, and individual qualifications. A $200,000/year consultant might reasonably pay herself $85,000-$120,000 as W-2 wages while taking $80,000-$115,000 as a distribution. The IRS examines reasonable compensation closely in audits, so documentation is critical. Working with a tax professional to create a reasonable compensation study protects your S Corporation election from challenge.

How does the new Sirius Solutions ruling affect my partnership structure?

If you hold a true limited partnership interest (limited liability under state law) in a Texas, Louisiana, or Mississippi partnership and have been paying self-employment tax on your distributive share, you may be eligible for a refund. The Sirius Solutions ruling (Fifth Circuit, January 16, 2026) exempts limited partners from self-employment tax except on guaranteed payments. You can file amended returns (Form 1040-X) for the last three years to claim refunds. However, this ruling only applies in the Fifth Circuit, and other circuits may adopt different standards. Consult your tax professional immediately if this applies to you.

What digital tools must I use for 2026 tax compliance?

For U.S. federal tax filing, the IRS still accepts paper returns, but electronic filing is strongly encouraged and typically faster. The shift toward electronic refunds (direct deposit vs. paper checks) requires you to provide banking information to the IRS. Even in the U.S., using modern accounting software (QuickBooks, Xero, FreshBooks) ensures accurate record-keeping and simplifies 2026 compliance.

How much can the expanded SALT deduction really save me?

The expanded $40,000 SALT deduction (up from $10,000 in 2025) represents enormous savings for high-earners in high-tax states. For a California resident paying $35,000 in state income tax and $8,000 in property tax, the new cap allows deducting the full $43,000 versus only $10,000 in 2025—a $33,000 additional deduction. At a 37% combined federal and state tax rate, this equals $12,210 in tax savings. Business owners in California, New York, New Jersey, Connecticut, and Massachusetts should particularly benefit from this change.

What happens if I miss the April 15, 2026 filing deadline?

Missing the April 15 deadline triggers penalties and interest. The failure-to-file penalty is 5% per month (maximum 25%) of unpaid taxes. The failure-to-pay penalty is 0.5% per month (maximum 25%) of unpaid taxes. Additionally, interest compounds daily at the federal rate plus 3%. To minimize penalties: (1) file for extension before April 15 using Form 4868, (2) pay as much as possible by April 15, even if you’re not ready to file, and (3) file and pay any remaining balance as soon as possible. Extensions prevent failure-to-file penalties but not failure-to-pay penalties, so paying by April 15 is critical.

2026 Business Tax Deduction	Maximum Deduction/Rate	Key Limitation
Section 179 Expensing	$2.5 million	Phase-out at $4M purchases
Bonus Depreciation	100% of qualifying property	Must be tangible property
QBI Deduction	20% of qualified income	Pass-through only, income limits apply
Domestic R&D Costs	100% immediate deduction	U.S. costs only; foreign = 15-year amortization
Manufacturing Facility	100% bonus depreciation	New U.S. manufacturing only

Related Resources

• Learn how entity structuring impacts your 2026 deductions
• Explore comprehensive tax strategy services for business owners
• See how Uncle Kam serves business owners like you
• Review real client results and tax savings examples
• Learn about our tax preparation and filing services
• Tax Advisory Services
• Bookkeeping and Payroll Services
• Wyoming Small Business Tax Calculator

Last updated: February, 2026

Compliance Checkpoint: This information is current as of 2/9/2026. The One Big Beautiful Bill Act significantly changed business deductions for 2026. Tax laws evolve throughout the year. For current updates after February 2026, verify with the IRS at IRS.gov or consult a qualified tax professional to ensure you’re applying the most recent rules to your specific situation.